Geithner's Tax Troubles Give Obama a Chance to Get It Right

Timothy L. Geithner, President-elect Obama's choice for Treasury, has a problem. He is not only a free-trade ideologue but he also failed to pay some of his taxes. The Senate hearing on his nomination, originally scheduled for today, was just postponed for a week, perhaps to give Obama time to find a replacement. If Obama were to pick a balanced-trader like Warren Buffett for Treasury, then America would immediately start to boom. Unfortunately, Obama has chosen to continue Bush's economic policy of stimulating the economy without balancing trade. This plan has failed twice and is about to fail a third time:

1. February's $150 billion stimulus package actually hurt the economy because borrowing from abroad to finance stimulus packages causes the dollar to strengthen which causes American products to be more expensive in world markets which causes US manufacturers to lose market share in world markets. Although temporary jobs were created by the stimulus package, permanent jobs were lost in US manufacturing.
2. October's $850 billion Wall Street bailout and stimulus package actually hurt the economy because borrowing from abroad to finance stimulus packages causes the dollar to strengthen which causes American products to be more expensive in world markets which causes US manufacturers to lose market share in world markets. Although temporary jobs were created by the stimulus package, permanent jobs were lost in US manufacturing.
3. Obama's $1 trillion stimulus package will actually hurt the economy because borrowing from abroad to finance stimulus packages will cause the dollar to strengthen which will cause American products to be more expensive in world markets which will cause US manufacturers to lose market share in world markets. Although temporary jobs will be created by the stimulus package, permanent jobs will be lost in US manufacturing.

This is not rocket science. Doing the same thing again and again when it hasn't been working and expecting a different result is just dumb

The irony is that Obama campaigned on a program of "change." He claimed that he would do something about Chinese trade manipulations. He correctly claimed that McCain would just continue to repeat Bush's mistakes. Then as soon as he got elected, Obama decided to continue Bush's strategy!

Meanwhile, Republican commentators still don't have the faintest idea why Bush failed and why the Republicans have now lost the Presidency, the House, and the Senate. For example, in the commentary W's Mistakes: Ten that Hurt his Presidency, Richard Lowry attributes Bush's problems to lousy management style. Not one of the mistakes mentioned has anything to do with economics.

In a May 15 commentary, we summarized Bush's economic mistakes with the following words:

There are four major Republican economic ideas. Two of them work and two of them don't. Unfortunately, President Bush chose the two that don't work, and that is the reason for the current U.S. economic stagnation. These two Republican economic ideas work:

1. Reduce the size of U.S. government.

2. Cut business taxes.

These two Republican economic ideas don't work:

1. Cut capital gains taxes.

2. Welcome foreign investment that costs jobs.

It's time for America to start learning from its mistakes. There's no reason why Obama should be continuing Bush's disastrous strategy. Timothy Geithner's tax troubles give Obama a chance to get it right.

Comments

[Oh-Boy:]

So here we have a commentator, who looks back, and with retrospective prescience, explains "why Bush failed" and we have "the current U.S. economic stagnation." And he reduces it to two reasons, no less, expressible in ten words!

The fact that Japan, Europe and the rest of industrialized and semi-industrialized mankind share this "stagnation" seems to have eluded the writer.

Jan 15 10:32 AM

[CJJ:]

SA headlines are a joke.

Jan 15 10:33 AM

[Naguy:]

Although I agree with the general premise of this article that the Stimulus isnt necessarily going to work, I don't understand how you can claim that "...borrowing from abroad to finance stimulus packages causes the dollar to strengthen ...". Can you explain?

When the national debt is at 10 trillion and growing, how can *more* borrowing strengthen the dollar?? The dollar rally is happening because Europe, UK and the rest of the world is worse off. Once these economies start turning around we should see a strong reversal in the dollar.

Jan 15 10:51 AM

[anarchist:]

I think you guys are missing the point of the article which is Geithner represents more of the same failed Bush programs and here is a chance for Obama to make a better choice. Buffett might be a better choice and I would be pleased to see him take the Treasury position but my guess is that, like Bush, Obama will twist arms and make concessions to get Geithner on-board.

Jan 15 11:06 AM

[bearfund:]

Give me a break. I'm all for a rethink on Geithner (and will continue to maintain that Rep. Ron Paul (R-TX) is the only credible choice) but saying that your preferred pick would cause an instant boom is ridiculous. It's even more ridiculous to say that borrowing abroad causes the dollar to strengthen. That would be true if the Treasury were issuring, say, euro-denominated bonds and then selling the euros for dollars. There is no reason to believe that either the current or next administration will do so (the impact on the dollar of the Fed's swap agreements is a bit murkier but almost certainly has a net weakening effect on the dollar). And Treasury doesn't really have much to do with trade policy, other than perhaps trying to cope with whatever forex effects it has.

I'm afraid that these obvious errors make it even more difficult to take the rest of your protectionist babble seriously. And speaking of learning from past mistakes, I'm surprised you've made no mention of Smoot-Hawley, a piece of legislation introduced by a couple of your intellectual forebears. Since you probably haven't heard of it, I'll give you the 10,000-foot summary: it was a disaster. You can Google it for more.

Jan 15 11:12 AM

[DW:]

"balanced-trader"

who gets to decide what the balance is?

Jan 15 11:55 AM

[johnthebears:]

WARREN BUFFETT! GIVE US A BREAK?

Have you looked at his record the last year? He makes a lot of mistakes that you don't hear about. He is a big-time gambler with puts and calls that made him a huge fortune, but that does not mean he has answers to the current market crisis.

I don't think anyone has an answer or strategy that will prevent near depression conditions.

Jan 15 12:19 PM

[winslow:]

If you would have heard the Hannity and Gingrich interview on Monday, you would have lost all remaining faith in the Republicans. Being a Republican, I came away with the feeling they were the reckless liberal left, against any type of establishment. They espoused all the answers needed to correct the problems and laid blame...........gentle... at this point in the economy, we all need to work to together to get out of this quagmire. We have seen the demise of the Republican Party. Debate, not finger point.

Jan 15 12:29 PM

[otbricki:]

Warren Buffet would not work. Neither would Ron Paul. They are celebrities and politicians not macro economics wizards. However the idea of reducing the size of government is one that is never really wrong. Government doesn't produce, at best it merely redistributes. At worst it takes from the poor and fritters it away, and at the same time stifles growth.

The thing about cutting taxes is that you are looking at the wrong side of the equation. Your taxes are exactly equal to what government spends. Not one nickel more or less. Some times those taxes are deferred by borrowing or buried in inflation. The only way to really reduce them is to reduce the size of government. This is something that the Republicans have totally failed at with their incredibly stupid supply side mantra.

There is no such thing as good government. There is only benign government or bad government.

Jan 15 12:59 PM

[James Levy:]

Just what exactly is a ¨Balanced Trader¨? I suppose the author would have the wise government employees and incorruptible Senadors decide the rules for ¨balanced trade¨? I can´t believe we are reaching the point where otherwise intelligent people actually advocate a managed trade policy, when free trade has given such enormous benefits to both the emerging countries and to the United States.

We are well on our way to becoming an reencarnation of the U.S.S.R.
God Save the Republic.

Jan 15 01:19 PM

[Mike Hydes:]

During the election cycle I was a proponent of senator McCain and I urged his team to promote Steve Forbes as the new secretary of the treasury.

I would promote Mr. Forbes to the incomming president as well, actually a Forbes addition would truly complete the "Dream Team" in every facete.

Michael Bloomberg could do as well but Forbes is the most suitable at this juncture. Besides the markets would shoot to the moon on a Forbes nomination.

Flat Tax anyone?

Jan 15 01:20 PM

[Timothy Swift:]

Geithner is a tax cheat. We now know this. Its what we don't know that troubles me. Madoff was a former regulator. Its what wasn't known about him that cost investors $50 bln. Just imagine if he ran the Treasury.

That aside...

I'll put American workers against any foreign competitor. Just reduce the corporate tax burden equal to the average of the industrilized world and we'll see how trade works.

As for the 4 republican economic policies cited... it's about freedom and liberty, not necessarily economic policy. Reducing the burden of Government on individuals ensures their respective freedoms and as a consequence economic growth through individual efforts is a by product everyone benefits from. Although Republicans are impotent to the point where no one understands what they stand for who knows now.

Income taxes, cap gains taxes etc haven't always been taxed. Maybe we need to go back to a simpler time... There is so much in the genius of the Keep-It-Simple-Stupid principle.

Jan 15 01:48 PM

[DR7767:]

I don't believe the rest of the world is worse off. What happens is that a lot of capital is taken back to the US by the funds and exchanging back to USD strengthen the demand and makes it stronger, this together with the borrowing abroad makes the USD artificially too strong.
The worse thing in it, is that the rest of the world products will be again more attractive and import will be stronger. US exports will go down and no relief to the recession will be achieved.

On Jan 15 10:51 AM Naguy wrote:

> Although I agree with the general premise of this article that the
> Stimulus isnt necessarily going to work, I don't understand how you
> can claim that "...borrowing from abroad to finance stimulus packages
> causes the dollar to strengthen ...". Can you explain?
>
> When the national debt is at 10 trillion and growing, how can *more*
> borrowing strengthen the dollar?? The dollar rally is happening because
> Europe, UK and the rest of the world is worse off. Once these economies
> start turning around we should see a strong reversal in the dollar.

Jan 15 02:01 PM

[A. Koke:]

Free Trade is OK. US gains from it. But Geithner has to go. No way. He has not shown he has any creativity in how we are going to solve our problems. He helped create it.

Jan 15 02:18 PM

[Socialism c...:]

The two that don't work are unfounded assertions. Let the author show us the evidence for these claims. Put up or shut up. Tax cuts have always worked...including cap gains. ALL confiscatory taxation is an abomination of the principle of private property rights, and the Founders found such to be anathema!!

Jan 15 02:54 PM

[Rong:]

DUMP HIM
Geithner needs to go; this is no way for a new administration to begin. It is past time that tax cheats be prosecuted. Some where out there among our three million populations there is a better choice.

Jan 16 07:43 AM

[notsosmart:]

are there no competent honest ethical public servants left.the musical chairs of these scammers is killing this country.

Jan 16 04:09 PM

[Howard Richman:]

Several commenters asked why borrowing from abroad strengthens the dollar. When a country borrows from abroad, the currencies borrowed have to be converted into dollars. As a result there is more demand for dollars in currency markets which drives up the price of the dollar.

Several commenters asked what a balanced trader was and how Warren Buffett was a balanced trader. Check out our commentary on Warren Buffett's Import Certificates plan:

www.enterstageright.co...

Howard Richman
tradeandtaxes.blogspot...

Jan 17 07:43 AM

[Kunst:]

"borrowing from abroad to finance stimulus packages causes the dollar to strengthen"

Huh? Like the more I borrow, the higher my credit rating goes?

Jan 19 01:15 AM