For a strong economy you need four ingredients: low taxes, low regulation, free trade, and a sound currency.
The first only needs an explanation to the extent that the amount of taxation is relevant to global competition and to the change. An increase or decrease in taxes will impact spending and investing behavior, but even a stable tax policy can have impact if the rest of the world is changing. Our corporate tax rate is high, not because we raised it but because the rest of the world lowered theirs.
It is extremely unpopular to even hint that we need lower regulation. Few sound economists would advocate no regulation, but regulations should be clear, effective, and minimal. Clearly much of our regulation, especially in the financial sector, has been misguided, counter productive, and ineffective, but better regulation does not mean more regulation.
Sound currency is directly related to economic productivity and government spending. The world will not tolerate the currency of a country that recklessly inflates and borrows their way out of problems. A sound currency means that a country must live within its means.
Free trade has resurfaced as an issue in President Obama’s administration with domestic industry’s call for ‘buy American’ clauses in the infrastructure portion of the stimulus package.
China, Europe, and Canada have already registered complaints about this trend. Such policies may cause counter measures from our trading partners that would restrict the global markets for American manufactured goods, at a time when we need it the most.
Most scholars of the Great Depression fault the Smoot Hawley Tariff of 1930 for making the Depression much worse that it would have otherwise been. This restrictionist tariff caused severe financial hardship in Japan and elsewhere and at least partially paved the way to WW II. It did not help our economy either; the stock market continued to sink as unemployment soared after its passage.
As the world’s premier consumer we can not ignore our impact on world economies. Calls for import restriction, whether called “Buy American” or any other policy name, are dangerous to our economy and to our global neighbors.
President Clinton led both parties to pass NAFTA over many loud objections. Objection to NAFTA was the centerpiece of Ross Perot’s campaign. President Obama has indicated he may also be opposed to trade restrictions. He may have to struggle with the leadership of his own party to overcome the lobbying of domestic manufacturers seeking government protection, but this struggle is worth the fight.
Our leaders in both parties can not ignore our interdependency in a global economy. We cannot effectively address our domestic economic problems, no matter how severe, in a vacuum.