An economic stimulus for China
By Howard Richman, Raymond Richman, and Jesse Richman
On January 17 at hearings of the U.S. House Budget Committee, Rep. Allyson Schwartz asked Federal Reserve Chairman Bernanke whether it matters how American consumers spend the proposed stimulus package rebate. He replied, "Well, you'd hope that they would spend it on things that are domestically produced so that the spending power doesn't go elsewhere."
Under the $150 billion stimulus package, announced jointly on January 24 by President Bush and congressional leaders, households will be given about $103 billion in tax rebates, businesses will be given about $43 billion for quick write-downs of their investment expenses, and the remainder will go to improve the availability of mortgage loans.
At the Presidential debate that evening, Gov. Huckabee nailed the problem with the stimulus proposal on the head when he quipped, "We'll probably end up borrowing this 150 billion dollars from the Chinese and when we get those rebate checks most people are going to go out and buy stuff that has been imported from China. I have to wonder, whose economy is going to be stimulated the most by the package?"
Huckabee is correct. One of the likely outcomes of the tax rebates will be a large increase in U.S. purchases of consumer goods from China and other Pacific Rim countries. One of the likely outcomes of the rapid write-downs for investments will be new or improved U.S. factories in China and other Pacific Rim countries. U.S. businesses have learned that if they invest in U.S. production, the Pacific Rim countries will likely drive them out of business, as they have been doing to one industry after another for two decades.
Even though the U.S. trade deficit improved over the last two years with the European and Latin American countries, it has continued to expand rapidly with the Pacific Rim countries (especially China) whose currency manipulations violate Article IV of the International Monetary Fund agreement which requires that countries "avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members." So far, the United States government has done nothing to stop these currency manipulations.
In our forthcoming book, Trading Away Our Future, we lay out a way for the United States to respond. We would announce to all the countries that have been accumulating dollar reserves in order to run a trade surplus with the United States, that, beginning in 2008, their surplus on goods and services with the United States will have to be reduced by twenty percent per year. This announcement should be made as part of the stimulus package.
The countries that have been accumulating dollar reserves may respond to this challenge by planning to increase their imports from us, to reduce their exports to us, or some combination of both. Failure to meet this annual goal would result in our imposition of a requirement, beginning in 2009, that all imports from the offending country would require an Import Certificate (IC) purchased from the US Treasury Department or other designated agency of the federal government. (The US Treasury Department has experience in auctioning off its own obligations; much the same process would be involved in auctioning off import certificates.)
Prospective importers from countries that fail to reduce their deficits in timely fashion would have to apply for an IC and follow the Treasury's instructions. Over a period of five years, the U.S. Treasury Department would steadily reduce the amount of available ICs so that the targeted country's trade exports to the United States would be no higher than 5% above their imports from the United States in 2013.
We recommend that the proceeds from selling the ICs be placed in an off-budget fund that the U.S. Treasury would use to buy foreign currencies and foreign financial assets, putting money into the hands of foreign consumers, especially the consumers of the countries that have been accumulating dollars. These currency reserves could also be sold by the U.S. Treasury whenever the dollar is declining too rapidly in foreign exchange markets.
The Pacific Rim countries should be stimulating their consumer spending for U.S. products, not relying upon the U.S. to stimulate consumer spending for their products. If they knew we were serious about bringing our trade deficits under control, China (who deliberately keeps its consumers poor and sells to America instead) would eliminate its tariffs upon American automobiles and automobile parts. Instead of buying American companies, it would start buying American cars.
Manufacturing businesses will not invest in the United States until the U.S. government shows that it can and will bring the trade deficits under control. The Pacific Rim countries will not stimulate their consumption of American products until they know that they have to do so. For these reasons, the stimulus package will not work unless it addresses the trade deficits.
Dr. Howard Richman, Dr. Raymond Richman, and Dr. Jesse Richman are co-authors of Ideal Tax Association's forthcoming book, Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it's Too Late.