Reagan Is Off on Wrong Campaign : The Real Need Is for Trade Reform, Not Tax Reform

Senate Republican leader Bob Dole remarked the other day that “the President keeps proving to us that his Administration doesn’t have a trade policy.”

The Kansas Republican’s comment was sparked by President Reagan’s refusal to protect the U.S. shoe industry from foreign competitors. However, his purpose was not to give aid and comfort to narrow protectionist interests, but to goad the President into rethinking his easy-going attitude toward the whole trade issue.

Reagan, almost alone among major politicians in Washington, is convinced that the biggest problem facing the American people is the need for tax reform. As of today he begins a barnstorming campaign to build public support for his tax package.

It would be nice if he could tackle the trade crisis, which is much more immediate and important, with the same energy and enthusiasm.

The dismal march of economic news should be enough to scare anybody.

Every cloud is supposed to have a silver lining, and in the case of the economy it’s the inflation rate, which is down to a satisfying 2 1/2%. But the bad news far outweighs the good.

The economy grew at a rate of only 1.1% in the first half of this year. The Administration still professes to believe that the growth rate for all of 1985 will be 3%, but nobody takes the estimate seriously.

To quote Robert Ortner, chief economist for the Commerce Department: “We are not exactly off and running into the second half. We seem to be off and crawling.”

Practically everybody agrees that the foreign-trade deficit, still running at an annual rate of $150 billion despite a slight improvement in July, has become a major drag on the economy. (Experts say that each $1 billion of the trade deficit costs the American economy 25,000 jobs.)

Free-trade purists argue that jobs lost in manufacturing are being offset by new jobs in service industries--things like banking, insurance, advertising, computer services and retailing. Strictly speaking, it’s true. But the situation isn’t that simple.

Let’s take a quote from Ronald Reagan and turn it on its head.

Restrictions on shoe imports, he said, would have cost the consumer almost $3 billion a year in higher prices. No doubt it’s true. It’s also true, as the President said, that “if our trading partners cannot sell shoes in the United States, many will not then be able to buy U.S. exports.”

But, Mr. President, where will the U.S. consumer get the money to buy shoes from Brazil or South Korea, cameras and autos from Japan, oil from Saudi Arabia and wine from France if manufacturing jobs in this country continue to evaporate?

On the average, jobs in service industries pay less than manufacturing jobs. A dollar spent for a product manufactured here generates $1.34 in domestic spending--roughly twice the lift provided by the same dollar spent for services.

Even more important, the service industries themselves cannot long prosper without a healthy manufacturing base. And U.S. producers’ share of the world market is eroding not only in autos, steel, textiles and other traditional industries but also in agriculture and various high-tech industries where we were supposed to be strong.

Nevertheless, the country is reasonably prosperous, so the natural question that arises is: If we’re so dumb, why aren’t we poor?

The answer should be obvious to anyone who ever got in over his head with credit-card charges. You can live like a king for a long time without making ends meet, but the day of reckoning comes.

America is living off money borrowed from other countries. If you don’t mind mortgaging the country to foreigners, that is a tolerable situation as long as the credit window remains open. But will it?

Economist Michael K. Evans, noting that the President is unwilling to raise taxes and Congress is unable or unwilling to cut spending, says that the federal budget deficit may balloon to an annual rate of $300 billion by 1987.

This means that we will need to attract even more savings and investments in the U.S. economy from abroad. But the combination of sluggish U.S. economic growth and faster expansion elsewhere stands to dampen the enthusiasm of foreign investors for bringing their money here.

The pressure to find the money that we need will lead either to re-ignition of inflation or to high interest rates that will discourage consumer borrowing and throttle job-creating economic growth in both the manufacturing and the service sectors.

Reagan is right: Old-fashioned protectionism is not the best solution. But a growing number of businessmen and economists are convinced that it’s time to stop pretending that the “free market,” as it now operates, will cure what ails us.

Priority No. 1 should be to bring the huge budget deficit under control, thereby relieving the strain on credit resources and the reliance on unreliable foreign investors. In the real world this means a tax increase. But Reagan is even less interested in raising taxes than congressional Democrats are in cutting spending.

It would also help to restructure the tax system to encourage investment in a more productive and prosperous America. But the Administration’s tax-reform plan won’t really do that.

Finally, there is a need to stop prattling on about free trade and recognize that today’s international trading system is hardly free, and that it works against the United States in ways that Adam Smith never foresaw.

Our natural advantage lies in scientific and technological know-how, which can be utilized as well in low-wage countries of Asia and Latin America. If we cut every American’s paycheck in half, we could not match the low production costs of countries that have the combined advantage of our technology and their low wage rates.

It isn’t clear what the answer is, although some constructive ideas are being discussed in Congress along with outright protectionist proposals. But it is clear that the President and his chief associates have not even begun to give the problem the attention that it deserves.

Really, fellows, let tax reform go for now, and worry about the real needs of the American people.