Obama's Plan A Failed, But Plan B Looks Promising

by: Howard Richman

President Obama's Plan A tested the proposition that you can fix an economic crisis caused by too much borrowing from abroad, by borrowing more money from abroad. So far it hasn't worked.

The latest unemployment numbers are out, showing that the jobs created by his Recovery Act are largely imaginary. The blue line shows the projected unemployment rate at the inception of the plan. The red squares show the actual unemployment rate which just rose from 9.8% in September to 10.2% in October.

The employment numbers in the manufacturing sector continued their steady decline, as manufacturing shed 61,000 more jobs in October as shown in the graph below:

These falling manufacturing employment numbers come despite the fall of the dollar vs. the European and Japanese currencies, perhaps because China continues to peg its currency to the dollar, and many Asian countries have resumed their currency manipulations so as not to lose market share to China.

Plan B is Balanced Trade

Meanwhile, there is hope on the horizon. Balanced trade is precisely the remedy required for a trade deficit economy whose consumers are too deeply in debt to keep spending beyond their incomes.

The G-20 leaders are finally addressing the trade imbalances that are preventing recovery from the Great Recession. This weekend, the G-20 finance ministers will meet in St. Andrews, Scotland. According to Reuters, they are "expected to focus on a framework to foster future balanced trade."

This is an excellent development. The only problem is the word "future" in the above statement. It may take lots of time for the world to negotiate the framework that could lead to balanced trade. And the question remains whether or not the Asian countries will cooperate and whether the West will have the fortitude to take coordinated actions if they refuse.

Treasury Secretary Geithner could show that he means business. He could begin to balance trade now, without waiting for a framework for balanced trade to be negotiated. All he would have to do is tell the Asian countries that they had better start balancing trade with us by taking down their barriers to our exports and ending their currency manipulations, or we will start limiting our imports from them to the level of their imports from us. Such a policy would be in perfect accordance with WTO rules which state:

(NYSE:A)ny contracting party, in order to safeguard its external financial position and its balance of payments, may restrict the quantity or value of merchandise permitted to be imported.

If we were to implement this policy, not only would U.S. manufacturing employment immediately turn around, but the new business investment that we would get in our manufacturing sector would pull the U.S. economy right out of the Great Recession.

Not only that, the Asian countries would be forced to stop suppressing their people's consumption, including their consumption of imports. The result would be a much higher standard of living for the people of Asia.

Disclosure: No Positions