Last week, President Obama named former Clinton advisor Gene Sperling to replace Lawrence Summers as his National Economic Advisor. So I checked out Sperling's 2005 book The Pro-Growth Progressive: An Economic Strategy for Shared Prosperity to get a feel for his position on trade.
I was dismayed that he was caught up in the free trade vs. protectionism dichotomy, not even realizing that the balanced trade position exists. He made his ignorance clear when he discussed what he considered to be all of the alternatives in the following hypothetical situation:
Imagine you are a member of Congress and are approached by a patriotic CEO of a small electronics firm in your district. She desperately wants to keep buying from U.S. suppliers, but a direct competitor has cut prices by making insulated wiring more cheaply abroad. The CEO tells you that if she continues using her U.S. wiring supplier, she will not be price competitive, will risk losing business, and may have to cut jobs. She is committed to doing everything she can to keep buying American, but asks you to sponsor legislation restricting her competitor from buying from overseas suppliers. (p.12)
He correctly analyzed the outcome of the sort of bill, like the one that President Obama and Congress tried to pass in 2010, that would punish companies that outsource:
Congress could forbid all U.S. electronics firms from outsourcing overseas, but the CEO’s competitor may then move his whole operation abroad and future start-ups may relocate in nations that allow them to search the globe for suppliers.
But the only alternative to free trade that he could conceive of was protectionism. He wrote:
(Y)ou [the Congressman] may decide it is worth it to protect the high paying jobs in your district. But other companies in your district rely on low-cost electrical inputs from other nations to stay competitive and local exporters could be hurt if other nations retaliate with quotas and higher tariffs to protect their own producers.
If he knew about the possibility of enacting a balanced trade bill, such as Warren Buffett’s 2003 tradable Import Certificates Plan, or our 2011 WTO-legal Scaled Tariff Act, he would realize that he was posing a false dichotomy. Although protectionist proposals result in fewer imports, balanced trade proposals increase American exports and reduce American imports at the same time.
Later he advocated measures to help educate workers for the changing economy, but he missed the fact that when trade is imbalanced, the jobs lost in import-competing industries are not compensated for by jobs in exporting industries. He wrote:
When I lobbied for passage of trade agreements, I often explained that when a trade opening helped one hundred companies each create or save ten jobs, no one noticed the cumulative thousand jobs. Yet when a single company laid off one thousand employees, it was often a heartbreaking news story that shook confidence and caused anxiety far beyond the laid-off workers and their families. (p. 48)
In short, Sperling failed to understand trade in 2005. Unless he has changed, our country will probably have to suffer through several more years of persistent depression before we get a President who understands what John Maynard Keynes explained in his 1936 magnum opus, The General Theory of Employment Interest and Money:
(A) favorable [trade] balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
