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The Bush Foreign Aid Package

The big bet on tax cuts has always been a question of timing.

The idea was that the cuts would kick in, and the growth would start, at the latest, in time for jobs to be plentiful come Election Day. The danger was government crowding-out private lending, but that was considered something for the second term. If the first part of the bet is lost, if there’s no growth, the second part is the Democrats’ problem.

So where is the growth? It’s in India, Singapore, and China. The big tax cut has been turned into foreign aid.

Had these cuts come along in the late 1980s the danger would have been obvious. The economic threat of Japan was on everyone's mind. Someone, probably a prominent Republican, would have pointed out that unless there were some control over where the tax cut was spent, it might just go East.

No one seems to have considered that question this time. Corporations are using the benefits of their tax cuts -- the renewed investment it causes -- to accelerate their export of jobs to China and India. Manufacturing jobs are going to China, white-collar jobs are going to India.

How could this happen? One reason is the maturity of the current technology cycle. When technology change is accelerating you need to be near the center in order to get the benefits. So Indian and Chinese engineers came to America.

But, thanks in part to patent and copyright lawyers, who have helped slow innovation, and thanks in part to where we are the current cycle (we're adapting to the Internet, not creating it) there is no longer that pressing need to be near the center. You can wait for Indian programmers to be trained. You can wait for the ship from China to come in. The savings are so great that this makes sense.

So whether directly (as in the case of Intel, which is moving more of its chip-making capacity to China) or indirectly (in the case of hundreds of big companies moving their software development to India), high-cost American labor is being replaced. The benefits of the tax cut only accelerate a trend that was there already.

Could this have been prevented? Yes. The easiest way to prevent it would have been to put the money into Big Science, say a race to Mars. The tax cuts could have gone directly to domestic investment funds -- put the money here and the benefits are tax-free.

Yes, that would have mean the government picking winners. But the government always picks winners, even when it's explicitly not picking winners.

When the government says, we won't pick winners, the government cedes the selection of winners to the open market. Right now the open market is saying that India and China (and Singapore and Malaysia) are winners.

American workers are losers. They won't like that come Election Day, assuming Democrats have the courage to point it out.

Posted by Danablankenhorn at August 11, 2003 11:54 AM