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9.2 The Obama Government’s Countermeasures
Facing this difficulty, the Obama administration tries to lower the unemployment rate by injecting money, expanding government spending, and expanding exports.
First, the government should inject money in to banks to relieve the crisis, expand investment, and create jobs.
Why has the U.S. unemployment rate always been high since 2009? One of the root causes is the lack of investment. To reduce unemployment, the creation of job opportunities is necessary. How- ever, if the investment is low, the question on how to create new jobs remains. One of the reasons for the low investment is that banks do not issue enough credit. The heavy blow caused by the financial crisis led to the rapid increase in non-performing loans, liq- uidity shortage, serious loss of self-owned capital, and liquidity and debt-paying crises. To protect their institution, banks have to reject credit and press for the payment of debts. The U.S. financial sys- tem suffered the most serious challenge since the Great Depression in 1930s. Five big investment banks in the U.S. suddenly collapsed.
If the main commercial banks collapsed, the U.S. economy would also follow. Therefore, the Obama administration had to save the banks.
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In May 2009, the FED was forced to declare the implementation of a large-scale asset purchase program known as the quantitative easing monetary policy. In the first round of the quantitative easing monetary policy, the FED planned to inject $1.42 trillion into the market. The second round was introduced in November 2010 with an injection of $600 billion. Irrespective of the method to inject money into commercial banks, the main idea was to issue more money in a large scale. This action stabilized the financial market and tem- porarily avoids the bankruptcy of some large commercial banks such as Citibank and Bank of America, but it did not repair the banks’
loaning function nor effectively stimulated the investment. Seemingly, reversing the downturn investment and depressing the employment market are difficult, unless a large amount of money again is injected again.
Some people wonder why the U.S. continuously increases the issuance of currency in a large scale without causing high inflation.
Is the basic principle of finance not working? The basic principle of finance states that the total output of commodities and services is determined at a particular moment and that the price level reflects the relationship between the commodity and the currency used. If the total output does not change but the currency increases signif- icantly, the price will increase to achieve a new equilibrium state, which is an irrefutable truth. The reason why a country massively increases the issuance of currency without triggering high inflation is that additional currencies remain in banks without flowing into the market. At present, because of the heavy blow caused by the financial crisis, American commercial banks have two problems: Liquidity and settlement. The U.S. government injects money into banks and, in turn, the banks solve the problems with the money. As additional currencies are not enough, the money is all absorbed by the banks;
thus, monetary liquidity in the society does not flood and the prices remain stable, which is a good thing. However, high unemployment rate lingers like a nightmare. In 2011, the American people did not complain about the prices, but they could not endure the suffer- ing being unemployed. In this case, the Obama administration had to choose between the two problems. To reduce the unemployment
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rate, it has to repair the banks’ loaning function and introduce the third easing monetary policy (QE3). The FED has repeatedly demon- strated that the possibility of introducing QE3 cannot be ruled out.
If it issues more money in a large scale again, the banks will certainly have enough money to expand credit, stimulate investment, and cre- ate new jobs. However, every coin has two sides. The move must lead to a high inflation rate. Therefore, the U.S. government must make a difficult choice between high unemployment and high inflation.
Second, the government should increase its spending to invest in public goods to create more jobs.
Some people remember Keynes during times of economic reces- sion, as the success of Keynesianism in the 1930s remains fresh in their mind. After the Second World War, Keynesianism became popular worldwide. In the 1960s, to stimulate effective demand, gov- ernments in the West continued to increase fiscal spending. The pro- portion of the government spending of the U.S., Japan, Germany, the United Kingdom, France, Italy, and Canada in the GDP increased from 31.6% in 1967 to 35% in the 1970s and then peaked at 40.4%
in 1982. When increasing government spending, the U.S. and other Western governments adopt the loose monetary policy to lower the interest rate, expand the credit, and stimulate private investment and consumption. In 1950 and 1982, the total U.S. credit increased by 15.3 times. Prices grew faster than the national economy because of the loose monetary policy. Aside from the rising oil price, a stagfla- tion situation formed with a low economic growth rate, high unem- ployment rate, and high inflation.
The core of Keynesianism is to increase government spending and stimulate the economy. However, it no longer works at present, as has been reported many times. Compared with those in the 1930s, the capital construction projects with significant economic benefits today are fewer. Traffic flow in U.S. expressways is smooth so there is no need to construct new expressways. Airports, bridges, terminals, and other public facilities are also numerous. Despite the demand for the improvement of these facilities, they have already passed the peak of basic construction. The U.S. is almost the same size as China, but the population of the latter is four times more than that of the
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former. In 2010, China had 502 airports, but those in the U.S. totaled to 15,079.1 Clearly, China can construct more airports in the future, but the U.S. does not need to construct more. As the U.S. cannot find capital construction projects with high returns, it is limited to creating jobs by expanding infrastructure investment.
Third, the government should expand its exports to create job opportunities.
The U.S. has been in the state of excessive consumption for a long time, and its household savings rate is very low. Therefore, expanding the domestic market by stimulating consumption is difficult. The U.S. government and the people concentrate on exports, hoping to increase them and expand the overseas markets to provide more jobs for Americans.
According to the goals set forth by Mr. Obama in the State of the Union address in January 2010, the U.S. government announced the National Export Initiatives in March 2010 known as the export redoubling plan (hereinafter referred to as the Plan). The Plan focuses on the revitalization of the manufacturing industry, the restoration of the momentum of economic growth, and the increase in job opportunities after completing financialization. According to the Plan, the U.S. should increase its exports from $1.57 trillion in 2010 to $3.14 trillion in five years to create two million jobs for the Americans.
The U.S. has always regarded itself as a free market, and its government rarely publishes economic plans with specific objectives.
This action is unusual, as the Plan was not only directly led by the U.S. president directly but the export promotion cabinet was also set up for the president to be directly responsible. The cabinet was com- posed of many important economic departments and external depart- ments in the U.S., such as the state council, departments of com- merce and agriculture, state, ministry of commerce, the ministry of agriculture, trade and development agency, import and export bank, small business administration, and so on. In September 2010, the export promotion cabinet submitted the National Export Initiatives,
1Data on the airports are taken from CIA,World Factbook, 2012.
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which has the following objectives: (1) implementer-industrialization to improve the export ability of the manufacturing industry; (2) help small and medium enterprise in the U.S. to expand their exports and enhance their international competitiveness; (3) help the U.S. enter- prises lock up, establish, and win in the emerging markets through finance, publicity, and other measures; and (4) expand the bilateral and multilateral trade negotiations and reduce trade barriers.
In general, the effect of the Plan was satisfactory. According to the data of the American Bureau of Statistics, the total exports of U.S. goods and services increased to $1.84 trillion in 2010, with an annual growth rate of 17%. At the start of 2011, U.S. exports contin- ued to grow. They amounted to $127 billion in April 2011 and then increased sharply to $174.9 billion in May 2011, hitting a new record.
Compared with the total export volume of $125.6 billion in May 2009, its total export volume increased by 39% in two years. Unlike in the same period of last year, among the exports in the first five months of 2011, industrial materials exports increased significantly up to 31.7%. Agricultural products exports increased by 26.5%, car by 18.1%, capital goods by 11.7%, consumer goods by 6.1%, and the others by 5.9%. Among them, the manufactured goods exports were
$392.5 billion, accounting for 45.8% of the total value of commodity exports, which is $856.9 billion, and then they increased by 12.5%
over the previous year. Clearly, the export growth was favorable in reducing the U.S. trade deficit and promoting its economic growth.
In these two aspects, the Plan obtained significant effects. However, the other goal of the Plan, which was the most important one, that is, increasing job opportunities, did not achieve the ideal result.
The 2011 National Export Strategy published by the U.S. Depart- ment of Commerce point-sout that exports were $1.84 trillion in 2010, up by 17% over 2009, and they provided nine million jobs to the Americans, most of whom were from the manufacturing industry.
The manufacturing exports accounted for 80% of total U.S. exports.
High-tech products exports were one of the pillars of the U.S. Plan.
In January and May 2011, the high-tech exports totaled $13.8 bil- lion, up by 5.3% over the same period of last year, with the weapons exports increasing most significantly as high as 43.2%. The total
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exports of agricultural and oil products and products related to raw materials increased significantly because of the rising prices of global commodities. Compared with the exports of agriculture and indus- trial material industry, the traditional manufacturing exports grew slowly. In some industries, the exports were even reduced. For exam- ple, the ship manufacturing industry exports fell by 66.7% in 2011 compared with that in 2010 and the exports of civilian aircraft and semiconductors dropped by 2.5% and 3.2%, respectively. The exports of biological science and technology, nuclear technology, and electron- ics also showed negative growth trend.2
Certainly, some Americans are optimistic. Harold Sirkin, the part- ner of Boston Consulting Group, made a speech in February 2012, stating that the U.S. was likely to transfer some manufacturing jobs back. Outside the U.S., the wage level in China’s coastal regions grows by 15% every year. Aside from RMB appreciation, the price advantage of “Made in China” is diminishing. In the U.S., because of the high unemployment rate, the average wage is reduced and is the role of trade unions is weakening. Thus, the manufacturing indus- try in the southern states, which has a low wage level, is growing steadily. As a result, the American labor force is gradually restor- ing its competitiveness. Moreover, some American companies are considering transferring some manufacturing industries back to the U.S. because of the increasing cost of transportation, longer delivery time, and growing consciousness of intellectual property protection.
Despite the higher wage in the U.S., the labor productivity of many industrial departments in the country is 3.4 times higher than that in China. According to Sirkin, in industries where the labor cost accounts for 25% of the total cost, China’s cost advantage will fall by 10% in 2015. In this case, the production of household appli- ances, color TV, computer equipment, furniture, machinery, plastic products, rubber products, and others may be transferred to the U.S.
Clearly, Sirkin’s view makes sense. If China’s populism spreads, the significant increase in the wages of manufacturing works will certainly
2From Ma (2011), the Evaluation of the U.S. Export Redoubling Plan (2010–2014), Strategy Observation of CBN Research, No. 13.
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weaken its own competitiveness and give a large number of jobs to other countries. If the RMB exchange rate rises sharply, it will also lose a large number of orders. Things always change. There is no fixed advantage or fixed disadvantage in international competition.