Trade and jobs – why make it so hard?
Sometimes it seems like policymakers think that points are given for degree of difficulty. The Washington Post reports a number of policies are being considered by the Obama administration to “reward companies that choose to bring jobs home” and eliminate tax breaks “for companies that are moving jobs overseas.”
The impulse behind these ideas seems fine to me – the U.S. economy continues to “leak” too much demand to the rest of the world in the form of chronic trade deficits.
But, as the article notes, designing tax-based solutions to this problem will be quite complex and would take huge amounts of money to actually move the dial on this problem.*
If only there was a policy solution that was simple, could happen even without a gridlocked Congress, and would actually move the dial on the problem of large trade deficits dragging on growth.
But there is! Allow the dollar to fall in value sufficiently to move the trade deficit much closer to balance. Currently the biggest impediment to this happening is the policy of major U.S. trading partners (China is the linchpin) of managing the value of their currency to keep it from rising against the dollar – this results in Chinese exports gaining cost-advantages in both the U.S. and third-country markets where Chinese-produced goods compete against U.S.-produced ones.
Presumably this issue came up in Treasury Secretary Tim Geithner’s meeting with Chinese leaders yesterday, but this issue has “come up” between the U.S. and China for a decade with no movement. As Joe Gagnon and Gary Hufbauer have pointed out, however, there is no need to wait for China on this one – the U.S. could solve this currency management unilaterally.
Engineering a decline in the dollar’s value costs taxpayers nothing, can be done without moving through a gridlocked Congress, would actually provide significant help to the job market in coming years, and requires no Byzantine redesign of the tax code.
So, yes, one probably shouldn’t bet on it happening.
*Yes, there are ways that features of the U.S. tax code provide some incentive for production abroad rather than at home – and these should be removed. But this is surely a second- or even third-order driver of trade flows, at best.