Tsongas's Plan for Prosperity

PAUL TSONGAS, former senator from Massachusetts and hopeful economic saviour of the good ol' U.S. of A., will officially kick off his quest for the Oval Office next week in his home town of Lowell.

"The ideal situation for me is to have the field by myself for two months," said Tsongas last week. "At some point I need to have the others in there because I need to have my ideas play off their ideas."

I'm sure he hopes there'll be no one to challenge his ideas for the next couple of months. He does have some good ones, and deserves credit for them. But even though he couches them in conciliatory rhetoric, many of his plans smack of the same xenophobic economic isolationism that American politicians tend to gravitate towards in bleak economic times.

For example, his 83-page campaign thesis, long on rhetoric and short on analysis, is entitled "A Call to Economic Arms: The New American Mandate." Central to his economic proposals is the assumption that U.S. workers have been hurt by what he sees as a drastic decline in the manufacturing sector. "America is up for sale," Tsongas said recently. "All the blood, sweat and tears of our forebearers on the auction block."

Thus Tsongas--or his campaign manager, more probably--thinks that the way to play to the traditionally Democratic blue collar workers who've voted Republican in the last three elections is to say Tsongas is an "economic Paul Revere." "Today our economic enemies are our political friends. The war they wage is in the marketplace, not on the battlefield," Tsongas writes. "Overall productivity grew at over 3 percent a year from 1960 to 1973 but has risen by only 1 percent a year since then."

Unfortunately for Tsongas, this sort of narrow view of foreign investment ignores the real benefits the U.S. has realized from the increased capital that foreign business poured into the country in the last 10 years. Businesses only invest in a country if they believe they're going to be able to profit. Thus foreign investment is not an indicator so much of American decline as of the continued confidence that foreign investors have had in our ability to produce. This benefits workers and consumers.

Moreover, as much as some liberals wish to ignore it, the productivity of the U.S. manufacturing sector increased dramatically during the 1980s. And in the economy at large, between 1982 and 1989, productivity increased by at least 1.7 percent a year. When job growth in these years is compared with the earlier period, though, one realizes that job growth was a full percentage point higher in the 1980s. Finally, Tsongas shouldn't blame the economic problems of the 1970s on Presidents Reagan and Bush, as the "since 1973" statistic implies.

IN ADDITION to disparaging foreign investment, Tsongas also blames what he sees as the U.S.'s economic decline partly on investors who have put their money into foreign firms. These investors, he says, have "no concern for the common wealth."

Why blame American investors for putting money into foreign firms if those firms are doing better than American firms? Investment by American firms will eventually benefit the American economy, and will eventually find its way back to the U.S. Tsongas seems, however, to think that this investment is a lack of "economic patriotism."

It's much more complex than that, however. Currently, the tax system in the U.S. provides tax relief for mortgages, thus increasing the amount homebuyers can borrow. This raises capital costs and decreases savings. The tax system also encourages the conversion of equity into debt on the corporate side, providing an incentive for businesses to--you guesses it--make short-term profits by selling off their investments in the U.S. and investing abroad.

He raises the right questions, but he's still fuzzy on the answers.

Tsongas also brings up, time and again, the hackneyed idea that because of the Trade Deficit, the U.S. is headed into economic decline. First of all, the Trade Deficit is lower than it's been since the early 1980s. Then again, there are some economists who think that the Trade Deficit really means very little.

What the Trade Deficit measures is how many goods the country is taking in over what it is exporting. When American consumers are able to buy more products, the Trade Deficit goes up. In times of prosperity, like the 1980s, the Trade Deficit tends to increase. Rhetoric about waging war over exports ignores that imports benefit consumers.

Finally, on the muddled economics side, Tsongas makes one error that's just too amusing to pass up. "Conservation also means higher gasoline prices," he writes, in his "Economic Call to Arms." But conservation decreases consumption, doesn't it? And that lowers demand? So the price should go down, as it did in the 1980s, with the introduction of more fuel-efficient automobiles. Ouch.

CHEAP SHOTS ASIDE, however, Tsongas does have a number of non-xenophobic economic ideas which deserve to be taken seriously. But for them to be proven workable, he needs to cut out some of his fancy words and provide a few more concrete proposals.

First, while he harps about "industrial policy" without presenting many concrete positions, Tsongas does realize that something needs to be done about a tax structure that encourages short-term investment at the expense of long-term investment. But aside from saying that the capital gains tax rate should be reduced for "long-term investments in corporate America," he fails to get more specific.

In relation to technological advancement, Tsongas says he wants to encourage businesses to reinvest in research and development. A tax credit for R & D is, he believes, the way to go. But again, he doesn't say how much or define what types of R & D would be covered. Would it cover only "cutting edge" technology, or could new yo-yo development qualify?

Another of Tsongas's proposed incentives to increase R & D is the relaxation of antitrust laws to provide for a greater freedom in joint ventures. This idea has been a long time in reaching popular politics, but many free market economists have been advocating it for years. Such a plan would allow businesses with little extra capital but a few great ideas to join with their wealthier brethren to compete in the international marketplace.

Even though Tsongas has many unsound economic ideas, he does bring up a number of questions that obviously need to be raised. With the economic integration of Western Europe on the horizon, we have to think seriously about how to help businesses compete in the global economy.

Despite the gains of the last decade, there are serious problems facing American businesses today which may hamper them in the years to come. Whether they should be addressed with the full-blown "industrial policy" Tsongas advocates or not is another question. But at least he's off and running.