Prospects for American Recovery: Cutting Spending Isn't Enough

There is a word missing from the “solutions” offered by both Democrats and Republicans to the searing economic crisis visited upon America by a combination of craven financial speculators, complacent regulators, feckless politicians and not a little bit of greed amongst many borrowers.

That word is “sell.”

It is only in the selling of surplus manufactures – as Adam Smith taught us – that new income enters the economic system, with the corollary effect of demonstrating, maintaining and advancing the institutional and operations frameworks for national competitiveness.

So we must ask ourselves, what is America selling to the world?

The answer is, apparently, not much. It is critical that since the rise of countries such as China beginning in 1975, more recently India and now South Korea, the American political and commercial establishment have seemed frozen in their understanding of the meaning of China’s rise in particular and its implications for America’s manufacturing decline.

In the politics of the question, Republicans generally argue for cuts in spending, whilst Democrats insist that increased spending and new taxes – either targeted or benign – are a proper way forward. Both are wrong. A credible economist, whilst he or she may be committed to low taxes in principle (as I am, genetically), does not immediately fly to tax cut solutions, unless high taxes are the specific impediment to business development, competitiveness or growth.

Oftentimes, tax cut evangelists cite President John F. Kennedy’s 1960 tax cuts and the impact those cuts had on economic expansion.

However, the “positive” impact of the Kennedy tax cuts was because high taxes was the specific “pent up” cog in the wheel works preventing economic growth.

On the Democratic side, the demand for increases in taxes – however targeted or benign – seems unscrupulously insidious in the midst of an economic collapse born of a financial crisis. In my view, even payroll tax relief and infrastructure spending are little more than freshwater in a mirage.

If there is an intention to put America right, spending discipline is certainly necessary because confidence must be given to the markets and economic partners around the world. But if Americans are serious about correcting the increasing downward economic spiral, American manufacturers must be able to and begin to sell their products to the world.

If one reasons backwards from a commitment to an export-led economic solution, one will have addressed the structural impediments in the national economy that induce and sustain economic decline. That is to say, an export-led solution means taxes are low or at least competitive. It means also that facilitation infrastructure is sound and efficient and it must mean that the American worker is educated, skilled and productive in comparison to the rest of the world.

The fact is if you cut taxes and spending to the bone, it will do nothing to correct the current lack of growth because none of it brings new income into the system. To the extent that the government wishes to “prime the pump” by putting cash into the system, it should concern itself with whatever is necessary to lay irons on the export-led track. If we look at the best performing economies in the world – China, South Korea, India, Brazil, Germany – we find that they have mastered the combination of education and skills development, which begets innovation and competitive production quality, which begets streamlined, efficient infrastructure, which begets international orders, leading to exports and thus new income.

There is a caveat; of the countries cited above, only Germany may serve as a true example for the US since it is a democracy with transparent, uncorrupted institutions. For instance, Americans will never be open to mistreating their own people the same way China would or, in some respects, Brazil. As such, wage levels and labor markets in general in such places are incongruent exemplars for America if it is to remain America. The solution to America’s current economic problem is competitiveness. Germany’s approach, specifically training of the labor forces, robust trade agreements, and increased exports is more compelling in this respect and is a third move beyond mere spending cuts or tax raising, if we care at all for intellectual honesty on this question.

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