How to Make Sure the Stimulus Stimulates Our Economy, Not China's

President-elect Barack Obama and the incoming Congress seem poised to pass a massive economic rescue package filled with the public spending that progressives have been pushing for years. That's great news, and they are going to need all of our help passing the package over the inevitable obstruction efforts by conservatives.

But as the debate over the rescue package begins, I suggest you read Businessweek's cover story [1] this week. It looks at "How much of Obama's mammoth fiscal stimulus will "leak" abroad, creating jobs in China, Germany, or Mexico rather than the U.S?" It's an important read, and a critical issue that explains why progressive trade policies must be part of a broader economic development strategy.

The article implicitly smacks down the right-wing frame that says tax cuts to boost consumer spending is the best way to rescue our economy, noting that the right kind of public spending better ensures the money remains in our country:

What about spending on infrastructure, health-care modernization, and green technology? All these tend to produce less leakage overseas than consumer spending. But even jobs in these areas have a tendency to slip over the border unless carefully constrained. Spending on infrastructure such as rail transit is more likely to create domestic jobs, in part because it is already covered by federal legislation that mandates a certain level of purchases of U.S.-made goods.

For example, new public transit vehicles generally must have 60% domestic content and be assembled in the U.S. Electric streetcars—a mass transit option to cut pollution that's favored by cities such as Denver and Salt Lake City—would likely be imported from other countries if it weren't for the "Buy American" requirements attached to federal funding.

The "Buy American" laws have been around in federal procurement since the Great Depression, and they embody one of the founding principles of the broader trade policy reforms that progressives have been pushing for a while now: Namely, that when our government spends public dollars, we should do our best to make sure those dollars stay in our country.

The first problem is that many of our trade policies have subsequently pre-empted or weakened these key Buy American statutes (for instance, subjecting some of them to court challenges in international tribunals on the grounds that they violate "free trade" principles). The second and even bigger problem is epitomized in the article's note that "Paying someone to better insulate a home will clearly create a domestic job. But how much of the insulation will come from China, a major producer?" That's a good question, and it speaks to a trade policy that has decimated America's core manufacturing capacity.

Our own economic policies have created an incentive for corporations to eliminate manufacturing industries here at home and troll the world for the cheapest labor, worst human rights conditions and most lax environmental laws. Not surprisingly, that race to the bottom has crushed our manufacturing industries - ie. those that make stuff - and therefore it becomes harder and harder to make sure spending on said "stuff" like infrastructure projects stays here.

So, while fixing the NAFTA trade model and reforming the WTO may at first glance seem insignificant, it is anything but - it will be a decisive factor in making sure all of the efforts over the next many years to fix and sustain our economy aren't done in vain.

The good news is that in floating fair-trade advocate Rep. Xavier Becerra (D-CA) for U.S. Trade Representative [2], the Obama team is suggesting it understands the significance of trade reforms in an overall economic strategy. The more troubling news is highlighted by the Wall Street Journal [3] today, which notes that top experts who study job outsourcing have noted that "Almost every member of the economic advisory board who has worked in business has been involved in significant outsourcing actions." These observers are subsequently voicing "worry that [he] may de-emphasize his commitment to get business to stop sending jobs offshore."

The concerns are certainly valid - personnel always plays some role in policy. But as I wrote in a column [4] a few weeks ago, emergency circumstances can radically change the thinking of even the most Establishment actors, and with Obama pledging to create 2.5 million jobs, he now has a political incentive to use every means at his disposal - including trade policy reform - to reach that promised goal.

The fact is, you can't have an effective industrial policy without a trade policy that supports it. Leveling the trade playing field with better labor/environmental standards, better trade enforcement, and an end to the provisions undermining Buy American laws will in the long run be a major factor determining whether American taxpayer dollars truly rescue our economy, or head overseas.