Congressional electionsare only weeks away. Predicting the outcome would be a fool’s errand for an economist, but not so for one key policy challenge President Obama will have to tackle during the lame-duck session of Congress. And that policy challenge? The congressional elections will enable President Obama to reaffirm his leadership on global economic issues at a time when international imbalances threaten the health of the US economy.
A comprehensive globalization agenda will have to include strengthening exports by building up manufacturing, comprehensive energy legislation, immigration policy, a comprehensive approach to building good jobs around the world, and fostering predictable exchange rates.
All this may sound daunting to tackle right after midterm elections, but here’s why the post-election period will require action and offers the president an opportunity to make some hard choices.
The elections will leave the Republican Party in disarray on key economic issues. The newly formed Republican caucus will have to figure out how to bring populists and business centrists together on issues ranging from job creation to fiscal policy and trade agreements. That will take time no matter the outcome of the elections.
Much of what needs to get done ontaxes, spending, and regulation will require bipartisan compromises. Democrats, though, won’t be able to identify those compromises until they know what their Republican colleagues actually want. This will create an opening for President Obama to frame his vision for international economic policy.
This is an issue clearly in the purview of the president. Congress abdicated much of the responsibility for international economic policy decades ago to ensure policy continuity between presidential administrations.
The Obama administration simply must address the recent surge in imports, which remind us of the currently fragile economic recovery. The US economy is now in its fourth quarter of growth.
Sharply higher imports, though, lowered the second-quarter growth 4.5 percentage points below where it would have been if imports had been flat. This was the largest negative contribution from imports since the Bureau of Economic Analysis calculated these figures, dating back to 1947. The US trade deficit has consequently grown again to a comparatively high 3.7 percent of gross domestic product.
We cannot simply wish away imports. Many imports are crucial inputs into US production. Many US businesses would have to scramble to find domestic replacements, possibly at higher prices, if these imports stopped. U.S. production would suffer. Policy consequently needs to focus on strengthening exports as quickly as possible while finding suitable solutions to lower the growth rate of US imports.
The goal is to create a comprehensive approach to the US international economic imbalances out of several parts. There first has to be an acknowledgment that a sweeping manufacturing agenda is integral to reducing the U.S. economic imbalances. After all, more than two-thirds of US exports are manufactured goods, as are more than 80 percent of US imports. Policymakers need to support more capacity building in manufacturing to develop innovative products that can be made at home, but also to reduce the dependence on foreign imports as inputs.
On the supply side—making sure that stuff gets made in the United States—policymakers will consequently have to grapple with a few thorny issues. How to make sure, for instance, that products will actually be made in the United States? US public policy often supports the creation of new products—only to see the final production occur elsewhere.
Much of US international trade also is intertwined with petroleum imports. This won’t change unless Congress passes comprehensive energy legislation. Such a legislative effort could strain international relations with oil exporting countries, many of whom are crucial allies in US national security efforts. Energy reformwill thus have to address domestic and international concerns.
Then there’s the employment factor. US manufacturers will need more workers, many of whom could come from overseas. This necessitates a tough discussion on US immigration policy.
Right now, the discussion is bifurcated: incentives for highly skilled immigrants and punitive measures for unskilled immigrants. Policymakers will have to overcome this contradiction.
One way is to embed enforceable labor standards into trade agreements, which unfortunately is a very narrow (though also necessary) path toward building a strong, global middle class.
A more comprehensive approach to building lots of well-paying, secure jobs around the world is necessary. This will require many tools and will cost money—money that would be well spent if it strengthens the economies of our trading partners and the demand for US products overseas.
But even the best laid plans for more export growth and slower import growth can be disrupted by currency exchange-rate fluctuations. The president will need to show a way to comprehensively engage with other industrialized economies, emerging economies, and international financial institutions to develop a system of reasonably predictable exchange rates around the globe. Beggar-thy-neighbor currency policies cannot continue.
President Obama will need to lay out his vision of how to tackle all of these international economic challenges—trade deficits, manufacturing capital flows, immigration, and exchange-rate fluctuations. After the congressional elections would be a good time to tell the country in no uncertain terms that the global challenges won’t go away and require some hard choices to ensure a strong, sustained recovery.
Christian E. Weller is Senior Fellow at the Center for American Progress and associate professor, Department of Public Policy and Public Affairs, at the University of Massachusetts Boston.