Tax Reform Needs Border Tax to Work

September 13, 2017

http://www.reuters.com/article/us-usa-tax/trump-says-rich-might-pay-more-in-taxes-talks-with-democrats-idUSKCN1BO1HM

Trump and Congress are now hard at work on tax reform, promising huge cuts in both corporate and individual taxes.  How is that possible without blowing a gigantic hole in the budget and sending the national debt on a new trajectory?  Here’s how Treasury Secretary Steve Mnuchin explains it in the above-linked article:

Mnuchin told Fox the administration would use its own economic assumptions to gauge the impact of its tax cuts on the federal budget deficit and the $20 trillion national debt, a key issue in Washington’s intensifying tax debate.

“It will be revenue neutral under our growth assumptions,” Mnuchin said. The administration believes that tax cuts will lead to much faster growth than do congressional analysts or private forecasters.

“So, we can pay for these tax cuts with economic growth,” he added.

That’s absolute nonsense, and he knows it.  Yes, cutting taxes will boost economic growth, but only by the amount of the tax cut.  Suppose that the combined corporate and individual cuts result in a cut of $1 trillion per year.  If every dollar of that was spent domestically and not put into savings, then GDP (gross domestic product) would grow by $1 trillion. And let’s suppose that this is taxed at a rate of 25%.  That’s federal revenue of $0.25 trillion.  So revenue would actually decline by $0.75 trillion.  The only way for it to be revenue neutral would be if the $1 trillion tax cut mysteriously generated $4 trillion in spending.  That’s impossible.  It’s simple math.

However, there is a way to make these tax cuts revenue neutral.  Include a new source of revenue by taxing foreign exporters who are getting a free ride in the American economy.  Last week, the Commerce Department released the trade figures for the month of July.  Contrary to Trump’s promise that this “stops right here and stops right now,” the deficit in manufactured goods has actually gotten worse.  Take a look at this chart:  Manf’d Goods Balance of Trade.  The deficit in manufactured goods is now running approximately $63 billion per month, or $750 billion per year.  Exports haven’t risen one iota in six years, while imports have soared by $25 billion and are running approximately $2 trillion per year.

Now, consider what a 30% tariff (or border tax) would do.  First of all, it would drastically reduce imports  – by half, let’s say.  That means that $1 trillion of manufacturing would return to the U.S.  That’s how much the GDP would grow.  Taxed at 25%, that would be a new stream of revenue of $250 billion.  That leaves $1 trillion in imports that would be taxed at 30% – another new stream of revenue that totals $300 billion.  Add these revenue streams totalling $550 billion to the revenue generated by the increase in GDP created by the tax cut – $250 billion – and you have revenue of $800 billion – nearly off-setting the loss of revenue caused by the tax cut.

In late August, Trump reportedly told John Kelly, his chief of staff, that “I want tariffs.  Bring me some tariffs!”  Now’s the time to do it.  Roll the tariffs into the tax reform package and no senator or congressman will be willing to tell his/her constituents that “I voted to keep your taxes high because I don’t like tariffs.”  It’d be political suicide.

The time has come to make foreign manufacturers pay their fair share for access to the American market.

Advertisements

Trump: “I want tariffs. ….bring me some tariffs.”

September 1, 2017

https://www.cnbc.com/2017/08/27/trump-reportedly-demands-china-action-i-want-tariffs-and-i-want-someone-to-bring-me-some-tariffs.html

With trade negotiations with both China and Mexico bogged down in trivial minutae, it was beginning to appear that Trump’s campaign promise to impose tariffs on both was nothing more than a ploy to win votes.  After all, we’ve seen this movie dozens of times over the past decades:  endless talk about intellectual property rights, labor laws, unfair government subsidies.  The list goes on and on and, in the end, our trade deficit gets bigger and bigger while our manufacturing sector withers.

Then, a few days ago, the above-linked report appeared.  Perhaps Trump has just been giving the “globalists” one last shot at negotiating something meaningful so that, at least, they can’t say he didn’t try.  But it seems that he’s getting fed up with the lack of progress.

Reportedly, in the presence of the “globalists” on his economic team – U.S. Trade Representative Robert Lighthizer and Economic Council director Gary Cohn, among others (which perhaps included daughter Ivanka and her husband Jared Kushner?) – Trump told chief of staff John Kelly:

So, John, I want you to know, this is my view. I want tariffs. And I want someone to bring me some tariffs … I know there are some people in the room right now that are upset. I know there are some globalists in the room right now. And they don’t want them, John, they don’t want the tariffs. But I’m telling you, I want tariffs.

Do it, John!  Draw up a tariff plan.  Help President Trump implement it and our long, long nightmare of trade policy idiocy will finally be over!  Then, instead of debt ceiling and budget negotiations getting deadlocked over how to pay for everything, our congressmen will have a new problem – what to do with all the additional revenue.

Let’s not give up hope yet.


Seven Months Into Trump’s Administration, Has Anything Changed?

August 14, 2017

I’m back from a hiatus at my north woods retreat, and there’s a bit to catch up on.  For now, however, I’m wondering what has really changed in terms of the economy since Trump took office seven months ago.  Let me begin by sharing a recent experience.

My wife and I stopped into a small restaurant in Boulder Junction, Wisconsin for dinner one evening earlier this week.  Boulder Junction is a tiny town in Vilas County in northern Wisconsin, a popular vacation area frequented mostly by folks from Chicago and Milwaukee.  A polite Asian lady, speaking broken English, seated us and told us the waitress would take our order shortly.  Upon ordering, the waitress assured us that our order would be prepared as we had requested.  It wasn’t.  When we complained, the waitress – without even offering to make it right – apologized and explained that there was a “language barrier” in the kitchen.  A language barrier in Boulder Junction!  I couldn’t believe it.

Another old lodge that we visit for dinner is staffed with waiters and waitresses from Lithuania.  They just can’t find reliable help in the north woods of Wisconsin, they explain.  However, another restaurant just up the road seems to have no problem.

I know what’s going on here.  These little businesses don’t have the wherewithal to recruit foreign laborers.  So how do they get them?  While I can’t provide proof, I’m certain that the Chamber of Commerce is importing foreign labor and pushing them on these businesses, or making them available at rates so cheap that these businesses don’t even have to bother with trying to hire locally.  So, when it comes to Trump’s promises to stop these kinds of practices, there’s no evidence that anything has changed.

Changing gears, the Commerce Department released the June trade figures last week.  Here’s a chart that shows the balance of trade in manufactured goods:  Manf’d Goods Balance of Trade.  As you can see, it continues on the same downhill trajectory that it’s been on throughout the Obama administration.  In fact, in the 2nd quarter of 2017, the deficit in manufactured goods set a new record of $185.6 billion.  In other words, contrary to Trump’s inaugural vow that:

“… rusted out factories scattered like tombstones … stops right here and stops right now!”

matters have actually gotten worse.  While the Trump administration is currently involved in renegotiating NAFTA and in negotiations with the Chinese, and the U.S. negotiators are reportedly taking a much harder line in these negotiations, I’m very pessimistic that any improvement in our balance of trade will result.  Why?  Because there’s nothing to negotiate.  The ONLY thing that will make a difference in America’s favor is tariffs, something that no nation would agree to in “negotiations.”  Anything they will agree to will be totally unenforceable and any attempts to enforce them would be met with whining and, more importantly, a cut-off in funding of candidates unless they pressure the Trump administration to back off of enforcement actions.  These same kinds of negotiations have been tried and have failed for decades.  Most recently, Obama’s deal with South Korea, which he hailed as a “big win for American workers,” has actually proven to be a disaster.

In the meantime, the “new normal” economy that emerged during the Obama administration, in the wake of the Great Recession, goes on.  GDP growth remains stuck in the 1-2% range, wages are stagnant and job growth (when viewed in the context of the “100,000 jobs is the new zero” economy) is anemic at best.  The economy is being kept afloat by deficit spending (up 10% so far this year), a once-again growth in credit and an inflated stock market.  The illusion of good times isn’t going to last.

I’m growing impatient with the Trump administration’s dithering on these issues.  Can you tell?


Low Wages Play Little Role in Trade Imbalances

July 20, 2017

In my previous two posts in which we examined the lists of America’s worst trade deficits and best trade surpluses in manufactured goods, it seemed clear that low wages were not a factor.  Many of our worst trade deficits were with wealthy nations like Germany, Ireland, Switzerland, Denmark, France, Japan and South Korea.  The list of our best trade surpluses was also dominated by wealthy nations.

Let’s take a closer look at the issue.  If we sort a list of nations by purchasing power parity, or “PPP” – a factor roughly analogous to wages, and divide them equally into five groups, ranging from the wealthiest nations to the poorest, here’s what we find:

  • Among the 33 wealthiest nations, whose PPP ranged from $129,700 (Qatar) to $34,400 (Cyprus) in 2016, the U.S. had a trade deficit in manufactured goods with 15 of them.
  • Among the next 33 nations, whose PPP ranged from $33,200 (Czech Republic) to $16,500 (Iraq), the U.S. had a trade deficit with 13 of them.
  • Among the next 33 nations, whose PPP ranged from $16,100 (Costa Rica) to $8,200 (Ukraine), the U.S. had a trade deficit with 10 of them.  China is near the top of this group.
  • Among the next-to-last poorest group, whose PPP ranged from $8,200 (Belize) to $3,100 (Lesotho), the U.S. had a trade deficit with 13 of them.
  • Among the very poorest nations, whose PPP ranged from $3,100 (Tanzania) to $400 (Somalia), the U.S. had a trade deficit with only 4 of them.

So if low wages cause trade deficits, why aren’t our trade deficits concentrated among the poorest nations instead of that group actually representing the fewest deficits by far.  And why does the richest group of nations include the most (and some of the biggest) deficits?

There’s no denying the fact that, among the poorest nations, the U.S. had a deficit in manufactured goods with 17 of them.  Included in that group are Vietnam and India.  But both rank among the top 25 nations with the fastest growing PPP (146% and 145% relative to the U.S., respectively) over the past ten years.  Since incomes are rising so fast in those countries, then if low wages are a factor in driving trade imbalances, shouldn’t our deficits with those countries be declining?  They’re not.  Quite the opposite is happening.  Our deficits with both have exploded over the past ten years, by 349% with Vietnam and 250% with India.  Our trade deficit is making them wealthier.

It’s difficult to argue that low wages play no role whatsoever.  Mexico is an obvious example of where American companies are setting up shop there, just across the border, for no other purpose than to save on labor.  Everything made there comes back into the U.S.  Virtually none of those products are sold into the Mexican market.  While many of the other manufacturing operations built in other countries like China are put there primarily in pursuit of those markets, that’s not the case with Mexico.  And mysteriously, the increased demand for labor in Mexico doesn’t seem to do much to raise wages there.  Mexico is being used as a virtual slave labor camp and, by all appearances, there must be some collusion between American companies and the Mexican government to keep it that way.

Aside from the glaring example of Mexico, low wages play no role whatsoever in creating our massive trade imbalance in manufactured goods, as proven by the fact that the vast majority of our worst trade imbalances are with wealthy nations.  Instead, trade imbalances are caused by high population densities that make our trading partners incapable of consuming products anywhere close to their productive capacity.


America’s Best Trading Partners in 2016

July 12, 2017

In my previous post we found that the list of America’s worst trade partners in 2016 – those with whom the U.S. has the biggest trade deficit in manufactured goods – in terms of both total dollars and in per capita terms – was dominated by nations whose population densities were far above the world median.  Only two of the twenty worst nations had population densities below the world median.

So what about the other end of the spectrum – the nations with whom the U.S. enjoyed trade surpluses in manufactured goods in 2016?  If there is a relationship between population density and trade imbalance, we should see the opposite effect – that the list is dominated by nations with low population densities.  Here’s the list of America’s twenty biggest trade surpluses in manufactured goods in 2016:  Top 20 Surpluses, 2016

It isn’t as clear as you might expect, and here’s why.  The fact that all oil around the globe is priced in U.S. dollars makes oil exporters float to the top of the list, regardless of population density.  Those nations with whom the U.S. has a trade deficit in oil are high-lighted in yellow.  Of these twenty nations, eleven were net exporters of oil to the U.S.  Why does this matter?  Because American dollars, aside from being legal tender for purchasing oil anywhere in the world, can only be used as legal tender in the U.S.  That means that all those “petro-dollars” have to be used to buy something from the U.S. – primarily two things:  U.S. government bonds and products made in the U.S.  While eleven net oil exporters appear on this list, only one appeared on the list of our top twenty worst trade deficits – Mexico.

Still, the population density effect is in play, even among these net oil exporters.  Believe it or not, Canada (not Saudi Arabia or some other Middle Eastern country) is our biggest source of imported oil.  With Canada, our trade surplus in manufactured goods is bigger than our deficit in oil by about $6 billion per year.  With Saudia Arabia, trade in oil and manufactured goods was almost perfectly balanced.  The same with New Zealand.  With Norway, our surplus in manufactured goods exceeded the deficit in oil by over $3 billion.

In addition, there are two very densely populated nations that appear on this list who are not oil exporters – the Netherlands and Belgium.  There’s a reason for this also.  Both are tiny European nations who happen to share the only deep water port on the Atlantic coast of Europe.  They use this to their advantage, buying American exports and then re-selling them to the rest of Europe.  Taken as a whole, the trade deficit with the European Union in 2016 was $138 billion, which would rank it 2nd on the list of our worst trade deficits, just after China.  The population density of the EU is 310 people per square mile – a little less than China.  And, in per capita terms, our trade deficit in manufactured goods with the EU was $274, a little worse than China.

Now let’s look at a list of our top twenty trade surpluses in per capita terms in 2016:  Top 20 Per Capita Surpluses, 2016.  This results in some small nations floating up onto the list:  Brunei (an oil exporter), Iceland, Belize, Guyana (an oil exporter), the Falkland Islands, Suriname, Oman and Equatorial Guinea (the latter two also being net oil exporters).  But in terms of population density, both lists are pretty similar.  The average population density of the nations on both lists are 213 people per square mile and 197, respectively.  Compare that to the lists of nations with whom we have the largest trade deficits where the population densities were 729 (our largest deficits in dollar terms) and 522 (our largest deficits in per capita terms).  But let’s look at those lists another way.  Let’s calculate the overall population density (the total population divided by the total land area) for the nations with whom we had the twenty largest per capita trade deficits vs. the nations with whom we had the twenty largest per capita surpluses.  Those figures are 372 people per square mile vs. 20 people per square mile.

Oh, and by the way, look at the purchasing power parity of both lists.  They’re remarkably the same.  Clearly, wealth (or wages) play no role in determining the balance of trade whatsoever.

The data couldn’t be more clear.  While other factors may come into play in trade, their effects are dwarfed by the role of population density in determining the balance of trade.  Free trade with densely populated nations is almost assured to yield terrible results for the U.S. – a huge trade deficit in manufactured goods, the loss of manufacturing jobs, and the ruination of the manufacturing sector of our economy.  Because of the role of over-crowding in eroding per capita consumption, those nations consume little but are very bit as productive.  So they come to the trade table with a bloated labor force hungry for work, and a wilted market, unable to consume our exports in equal measure.  Free trade with more sparsely populated nations, on the other hand, is likely to yield the opposite result.  Any trade policy that doesn’t use tariffs to maintain a balance of trade with densely populated nations is doomed to failure, as decades of America’s free trade policy has proven.

We’ll look at even more data from 2016 in upcoming posts.  Stay tuned.

 


Population Density Drives Trade Imbalances Again in 2016

June 26, 2017

I’ve finished my analysis of trade in manufactured goods for 2016 and, as expected once again, the news isn’t good.  The overall deficit in manufactured goods soared to yet another new record in 2016 of $680 billion, beating the previous record set one year earlier by $32 billion.  A thorough, country-by-country analysis of the data reveals one overriding factor that’s driving this deficit- population density.  Since the signing of the Global Agreement on Tariffs and Trade in 1947, the U.S. has systematically lowered barriers to its market for all countries, as required by that treaty and by the World Trade Organization that it spawned.  But that policy has yielded vastly different results.  While the U.S. enjoyed a surplus in manufactured goods of $34 billion with the half of nations with population densities below the world median, it was clobbered with a deficit of $704 billion with the other half of nations – those with population densities above the median.  Same number of nations.  Starkly different results.

Check out this chart:  Deficits Above & Below Median Pop Density.  First, some explanation of the data is in order.  I studied our trade data for 165 nations and separated out those product codes that represent manufactured products.  That’s no easy task.  There are hundreds of product codes.  While the Bureau of Economic Analysis makes it easy to track what’s happening with “goods” in general, that includes such things as oil, gas and agricultural products – goods that aren’t manufactured.  You’d think that they’d be interested in tracking manufactured products, given the level of political rancor on that subject, but they don’t.  The only way to arrive at that data is to sift it out, product code by product code.  Subtracting imports from exports, I was able to determine the balance of trade in manufactured goods for each.  I then sorted the data by the population density of each nation and divided these 165 nations evenly into two groups:  those 83 nations with a population density greater than the median (which, in 2016, was 191 people per square mile, up from 184 in 2015) and those 82 nations with a population density below the median.  I then totaled our balance of trade for each group.

As you can see, in 2016, our balance of trade in manufactured goods with the less densely populated half of nations was once again a surplus, but a smaller surplus of $34 billion.  This is down from $74 billion in 2015, is the third consecutive decline, and has fallen by almost 80% from the record high of $153 billion in 2011.  Why?  As the manufacturing sector of our economy is steadily eroded by huge trade deficits, we simply have fewer products to offer for sale to other nations.  Exports fell by $44 billion in 2016.  (Remember Obama’s pledge to double exports?  What a laugh.)

Conversely, our balance of trade in manufactured goods with the more densely populated half of nations was a huge deficit of $704 billion, down slightly from the record level of $722 billion in 2015.

Some observations about these two groups of nations are in order.  Though these nations are divided evenly around the median population density, the division is quite uneven with respect to population and land surface area.  The more densely populated nations represent almost 77% of the world’s population (not including the U.S.), but only about 24% of the world’s land mass (again, not including the U.S.).

Think about that.  With the people living in 76% of the world’s land mass, the U.S. enjoyed a surplus of trade of $34 billion in manufactured products.  But with the rest of the world – an area less than a third in size – the U.S. was clobbered with a $704 billion deficit!  Population density is the determining factor.  It’s not low wages.  The average purchasing power parity (or “PPP,” a factor roughly analogous to wages) of the densely populated half of nations – those with whom we have the huge deficit – is almost $20,000.  The average PPP of the less densely populated nations with whom we enjoy a trade surplus was about $18,000.  Wealthy nations were just as likely to appear among the deficit nations as among the surplus nations.

Nor is the other popular scapegoat – “currency manipulation” – a factor.  Nearly every currency in the world weakened against the dollar in 2016.  (Only 19 nations experienced an increase in the value of their currency.)  Among the 19 nations whose currencies rose, we had a deficit in manufactured goods with 8, and a surplus with 11.  On average, the deficits worsened by 115%, driven by a huge increase with Madagascar.  Remove that anomaly and the deficits actually declined by an average of 8.4% – in line with the currency theory.  Among the 11 nations with whom we had a surplus, the surpluses improved on average by 14% – again, in line with the currency theory.

However, among the 85 nations who experienced a decline in their currency vs the dollar, we had deficits with 27 of them.  On average, those deficits fell by 13.4% – exactly the opposite of what the currency theory would predict.  Among the remaining nations with whom we had a surplus, the surplus rose by an average of 33% – again, exactly the opposite of what currency theory predicts.

Therefore, we can conclude that our trade deficit in manufactured goods behaved exactly the opposite of what the “currency theory” would predict 80% of the time.  Why?  As noted earlier, most currencies fell vs the dollar last year.  This happened because the U.S. economy was in better shape than the rest of the world, at least in the minds of investors.  That’s what determines currency valuations.  Not manipulation.  Currency valuation has almost nothing to do with trade imbalances.  It affects the profitability of companies operating in different countries, but rarely makes any difference in the balance of trade.

This is absolute proof positive that trade imbalances in manufactured goods are driven by population density and almost nothing else.  Any trade policies that don’t take this factor into account are doomed to failure as evidenced by the destruction of the manufacturing sector of America’s economy.  The only remedy that offers any hope of turning this situation around is tariffs (or a “border tax,” as the Trump administration likes to call it).  Preferably, such tariffs would target only high population density nations like Japan, Germany, China, South Korea and a host of others.  Why apply tariffs to low density countries with whom we enjoy surpluses and anger them unnecessarily?

Trump was elected due in large part to his promises to tear up NAFTA and withdraw from the World Trade Organization and begin imposing a “border tax.”  It’s time to follow through on those promises while we still have a shred of a manufacturing sector left to build upon.

 


Trade Deficit in Manufactured Products Hits Record in April

June 2, 2017

The Department of Commerce released the April figures for international trade in goods and services this morning, and the trade deficit rose again to its worst reading since January – $47.6 billion.  Imports were up and exports were down.  But you can’t even find the worst news in the report – the deficit in manufactured goods.  The Commerce Department doesn’t even bother to calculate it.  But I do.  By subtracting from the overall deficit the figures for services, foods, feeds, beverages and petroleum products, you can arrive at a pretty good estimation of trade in manufactured goods.  The news is bad.  The deficit in manufactured products rose to $63.4 billion, beating the previous record set in March, 2015 by $0.1 billion.  Imports rose to a record level and exports fell to their lowest level in five months.  Here’s a chart:  Manf’d Goods Balance of Trade.  As you can see, the deficit in manufactured goods continues to worsen at the same pace that it has since 2010, more than doubling in seven years.

Separately this morning, the Bureau of Labor Statistics released a weak employment report for the month of May.  Unemployment dropped, but thanks only to the old “mysteriously vanishing labor force” trick used so often during the Obama administration.  The employment level actually fell by 133,000 workers.  An accurate reading of unemployment would have had it actually worsening by two tenths of a percent.  Manufacturing employment fell yet again by another 1,000 jobs.  No surprise, in light of what’s happening with the trade deficit.  Add this data to the extremely weak first quarter GDP and you have a picture of an economy that’s stalled and might be on the brink of something worse.

So President Trump now owns the worst performance in manufactured goods of any president.  He vowed to “Make America Great Again.” The first step in that process is to stop it from getting worse.  That hasn’t happened yet.  Talk and optimism will only carry you so far.  There’s been little action.  There’s no border tax.  NAFTA still stands.  Jobs are still heading to China and Mexico.

To be fair, it’s still early in his administration, and the Republican congress has done nothing either.  But I fear that the opportunity to “make America great again” is being frittered away.