Economic stimulus package can prevent recession if it's spent on American goods

Anyone who has been in a real store in the last 20 years -- a group that apparently excludes top U.S. economic policy-makers -- knows right away why the combination of tax and interest cuts proposed to stimulate the economy is going to flop.

The U.S. economy has become so overrun with imports that encouraging Americans to spend more no longer yields nearly as much growth as in years past.

Washington's stimulus plans make sense in theory. Putting more money in Americans' pockets should translate into some combination of more savings and more consumption, and the extra consumption should generate demand for more goods and services output, and eventually more hiring that could create a virtuous growth cycle. Lowering business's taxes and borrowing costs would produce similar effects.

Yet the geniuses running policy for the White House, the Congress and the Fed forgot one vital detail.

More spending generates more U.S. growth mainly if households and businesses buy goods and services made in America. It's true that when Americans buy imports, important sectors of the economy like retail and wholesale and transportation benefit. But many of the critical revenues, wages and purchases created by production leak overseas.

This drain, moreover, is greatly magnified when talking about industries that have all but vanished from the United States -- the consumer goods sectors likely to dominate stimulus-induced purchases.

In fact, in 2006, the last year for which detailed data exists, more than 61 cents out of every dollar Americans spent on consumer goods went to buy imports. In 1997, that figure was only slightly over 38 cents.

Moreover, in many major consumer goods categories, the rates of import penetration are much higher -- nearly 96 percent for men's dress and sport shirts, more than 90 percent for men's nonathletic shoes, nearly 90 percent for women's coats and more than 86 percent for women's blouses. Many of the numbers outside apparel are sky-high as well -- nearly 89 percent for luggage, 92 percent for consumer electronics products and nearly 71 percent for household vacuum cleaners.

Import penetration is less advanced in many capital goods industries -- the products that companies buy to build, equip, upgrade and expand factories and other facilities. But the levels are still high enough to undermine the domestic growth benefits of business tax breaks.

Government data indicate that, in 2006, nearly 34 cents out of every dollar spent by business on plant and equipment was spent on imports. In 1997, this figure was just over 21 cents. The lost growth opportunities represented by these capital goods imports are especially worrisome, moreover, since these sectors create the economy's best-paying jobs on average, and lead the nation in productivity growth.

Failed international trade policies deserve much of the blame. Starting with the North American Free Trade Agreement in 1993, too many recent U.S. trade deals have focused too tightly on helping multinational companies move jobs and production offshore, rather than opening foreign markets to U.S.-made goods.

And Washington has failed miserably to fight foreign predatory trade practices such as currency manipulation, subsidization and dumping that hurt competitive domestic producers and their employees for reasons having nothing to do with free markets or free trade.

Pulling the nation out of this predicament won't be easy.

Voters will have to demand economic change much more effectively. And recapitalizing domestic industry to take advantage of new opportunities created by better trade policies won't happen overnight.

Unfortunately, all too many Americans may have to resign themselves to a near-term future of sluggish growth. We can't afford to wait until the November elections to insist our elected representatives embrace a plan that rebuilds our manufacturing sector and shores up our economy with good jobs at home.

Tonelson is a research fellow at the U.S. Business & Industry Council in Washington. Linden is a media relations associate at the council.