Before Fed Chairman Ben Bernanke decides on the next interest rate cut to stimulate the economy and head off a recession, he really needs to listen to ... Ben Bernanke.
So do the Congress and the president, who have concocted a stimulus plan of their own. In recent testimony on Capitol Hill, Mr. Bernanke unwittingly made clear that the conditions needed to turn lower borrowing costs and tax rebate checks into actual growth are largely gone. The reason: Goods from abroad so thoroughly dominate the purchases of U.S. households and businesses that encouraging much more American spending no longer encourages much more American production.
As Mr. Bernanke told legislators who wondered if it matters where stimulus money is spent, "Well, you'd hope that they would spend it on things that are domestically produced so that the spending power doesn't go elsewhere."
What Mr. Bernanke meant was that buying products (or services) made in the United States creates the biggest and quickest domestic growth bang per stimulus buck because it encourages companies to ramp up output and possibly build new facilities and hire more workers. These moves in turn would create new business for supplier firms and put more money in employees' pockets -- creating still more productive opportunities and indeed a virtuous growth cycle.
American spending on imports would increase U.S. growth as well -- by stimulating the wholesale and retail and transportation and warehousing sectors. Higher profits and stock prices in these sectors would help, too, by enriching American investors. But the domestic growth boost would be more modest -- especially if companies, as is increasingly the case, invest many of the profits overseas. And these effects won't materialize nearly as quickly as most economists and politicians insist is needed to prevent a slump.
Unfortunately, this smaller stimulus bounce is inevitable -- and resulting growth will fall well short of politicians' and voters' expectations -- because import levels have grown so high for so many types of manufactured products.
Consumer goods are the types of purchases likeliest to be made with rebate or other stimulus dollars that are spent (as opposed to saved). Yet in 2006 -- the last year for which detailed data exists -- more than 61 cents out of every dollar Americans spent on such goods was spent on imports. In 1997, that figure was about 38 cents.
In many major consumer goods categories, moreover, the rates of import penetration are much higher. For example, in 2006, nearly 96 percent of the men's dress and sport shirts sold in the United States were imports. More than 90 percent of the non-athletic shoes came from overseas, along with nearly 90 percent of the women's coats, and more than 86 percent of the women's blouses.
Moreover, this trend shows no signs of stopping for two reasons. First, these surging import levels have simply overwhelmed the remaining U.S.-based producers of these goods, meaning that domestic alternatives simply no longer exist in many cases. Second, even in industries where import penetration is much lower in absolute terms, rapid growth means that the days of many competitive domestic producers are numbered.
Import penetration is less advanced in many capital goods industries -- the products that companies buy to build, equip, upgrade and expand factories and other facilities. But the levels are still high enough to undermine the domestic growth benefits of business tax breaks.
Government data indicate that, in 2006, nearly 34 cents out of every dollar spent by businesses on plant and equipment was spent on imports. In 1997, this figure was just over 21 cents. As in consumer goods, however, import penetration is much higher in many critical capital goods sectors -- which just happen to create the economy's best-paying jobs on average, lead the nation in productivity and generate most of America's productivity growth.
In 2006, for example, nearly 81 cents of every dollar U.S.-based businesses spent on machine tools purchased imports. For construction equipment, the figure was nearly 50 cents; for power generation turbines, 56 cents; and for semiconductors that archetypical industry of the future, more than 47 percent of the chips used in America in 2006 came from overseas -- up slightly from 44 percent in 1997.
Why has the import tide grown large enough to sandbag Washington's best-laid stimulus plans? Failed trade policies deserve much of the blame. Starting with the North American Free Trade Agreement in 1993, too many recent U.S. trade deals have focused too tightly on helping multinational companies move jobs and production offshore, instead of opening foreign markets to U.S. made goods.
Second, Washington has failed miserably to fight foreign predatory trade practices like currency manipulation and subsidization and dumping that hurt competitive domestic producers and their employees for reasons having nothing to do with free markets or free trade.
Yet these trade-related problems won't be fixed unless voters demand change much more effectively. And recapitalizing domestic industry to pursue the new opportunities created will take even longer.
Therefore, Americans for now may have no choice but to accept that many of the stimulus plans' benefits will leak overseas, and that near-term economic performance will be modest at very best. But it's not too early to insist that U.S. leaders start recreating the foundations for solid, healthy growth -- and stop making policy as if the global economy and the trade-related mess they created didn't exist.