America’s hard-pressed middle class, and those below it, got yet another big reason last week to believe that Washington’s main priority continues to be shafting them economically. According to a New York Times report, the President Obama and the Federal Reserve have decided to let the dollar strengthen against foreign currencies, enable America’s competitors to increase their price competitiveness over U.S.-origin goods and services, and allow slower growing foreign economies “to seek a little more prosperity — at the expense of Americans” by selling more in U.S. and global markets.
The Times reporters didn’t quote any U.S. officials by name – but they didn’t have to. When articles like this run on the first page of the business section of one of the world’s most influential newspapers, that means that the Obama administration and the Fed wanted this message broadcast to the rest of the world.
Not that undercutting American prosperity is the U.S. government’s main goal here. In fact, the article makes clear its belief that “the American economy needs less help than the rest of the developed world and…that the United States would benefit greatly from stronger global growth.” Moreover, according to the Times account, American officials are confident that this “would be true even if, in the short term, it makes the country’s goods a little harder to sell and jobs a little harder to find.”
They’re right to point out that long-term economic gains often require some short-term sacrifice. In fact, that’s a main justification for any form of savings. (Although it’s surely revealing that none of these officials is willing to make such statements for attribution and, more important, that the entire thrust of U.S. economic policy since the financial crisis struck has been to avoid the adjustments urgently needed after years of unsustainable borrowing and consuming.)
For all these inconsistences, however, there are two even bigger problems with this American strategy. First, however badly the rest of the world is faring, it’s doubtful that the nation can afford these measures. Indeed, the wider U.S. trade deficits that America’s leaders are evidently now seeking will further slow its already subpar levels of growth and hiring – and deepen the living standards stagnation that so many Americans have suffered for decades. Worse, nearly all the costs of Washington’s approach will be paid by the manufacturing sector – which not only dominates U.S. trade flows, but which still creates many of the nation’s best-paying jobs (especially for middle-skill, middle-income Americans), and leads the U.S. economy in productivity and innovation.
Second, as implied by the inevitable damage to productivity, innovation, and wage and salary income, Washington’s new strategy is bound to increase the economy’s reliance on financial gimmickry and debt-led growth – which former Treasury Secretary and chief Obama economic advisor Larry Summers has identified as a prime feature of secular stagnation.
These disastrous results can be confidently predicted because similar decisions have produced them before – and the harm they have inflicted has been anything but short term. In 1997, the onset of the Asian-third world financial crisis suddenly interrupted an unusually long period of global growth and financial stability. Yet the United States, despite decades of trade expansion, still remained independent enough of the world economy to weather the storm. Convinced that the American economy could easily absorb some short-term trade-related losses, President Clinton resolved to help Asian and other developing economies export their way out of recession – at America’s expense.
As he explained in late 1998, “I made a decision with the full support of my entire economic team that we would do everything we could to leave America’s markets as open as possible, knowing full well that our trade deficit would increase dramatically for a year or two. I did it because I thought it was a major contribution we could make to stabilizing the global economy and the economies in Asia.”
Only the long-term gains never materiaized and, in fact, the nation and world are still suffering from the fallout. The resulting surge in the American trade gap was fueled largely by the foreign factories U.S. and other multinational companies were encouraged to build by a string of NAFTA-like offshoring-focused trade decisions and deals made and avidly sought by Mr. Clinton. The capstone was China’s admission into the World Trade Organization in 2001 (shortly after he left office).
U.S. and foreign manufacturing production and employment underwent such profound structural changes that the trade deficit’s growth was barely interrupted by a brief early 2000s U.S. recession, and rebounded to historic heights once recovery began. But American leaders decided to help American workers keep consuming despite losing jobs and income to booming net imports by inflating interlocking housing and spending bubbles – and eventually triggering a near-global economic and financial meltdown.
Nowadays, a major increase in U.S. consumption required to sustain greater net imports would depend even more heavily on debt-creation than in the much more prosperous late-1990s. Consequently, Washington’s latest “America Last” strategy is likeliest to produce an even greater threat of re-bubble-izing both the U.S. and global economies. When they burst, therefore, as with the troubled aftermath of the last financial crisis, the beleaguered American middle class will hardly be the only victim.