Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Dramatic Changes Needed to Recover From This Depression, Not Earmarks
Raymond Richman, 5/29/2010
Pres. Obama’s economic stimulus plan which the president signed on Feb. 17, 2009, known as the American Recovery and Reinvestment Act of 2009 paid out as of 5/21/2010, $398.7 billion or 50.7 percent of the amount appropriated. This, to be sure, is not a great administrative accomplishment. As the following table shows, $162.7 billion or 20.7% consisted officially of tax benefits, 13.6% contract, grants, and loans, and 16.4 % entitlements. These expenditures produced no permanent jobs. Most of the administration’s activities during its first year gave unjustified priority to the Obama health care program and mortgage relief. The current economic crisis requires dramatic changes to create the conditions for economic growth. The stimulus program does not even appear to be designed to create any permanent jobs at all. ...
The Euro: This Marriage Can't Be Saved -- We're published in American Thinker this morning
Howard Richman, 5/29/2010
Here's how we begin:
At the time of the euro's launch in January 1999, Milton Friedman declared that the euro would not survive the first major European economic recession. He believed that the member nations would pursue their own fiscal policies, which would be inconsistent with a common monetary standard. The debt crisis in Greece shows just how right he was.If the Southern European governments comply with "Le Tarpe's" requirement that they move their bloated government budgets toward balance in order to get loans, then their fall in government spending and increased taxes will move their economies into recession. If they don't comply with those conditions, then the effect will be even more pronounced. They will immediately have to balance their budgets, because few lenders will lend money to a government that is about to default....
Evans-Pritchard: Summers call for yet another stimulus package is a tacit admission that the economy is losing thrust
Howard Richman, 5/27/2010
Ambrose Evans Pritchard writes:
Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to "grit its teeth" and approve a fresh fiscal boost of $200bn to keep growth on track. "We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on," he said....
AFL-CIO's Trumka asks Obama for stronger action on China
Howard Richman, 5/27/2010
The AFL-CIO may be changing course. Back in November 2008, AFL-CIO policy director Thea Lee approved President-elect Obama's plan to ignore the trade deficits. She told Reuters: “Starting at home will be the key to unlocking any forward movement on the trade agenda.”
Back then, there were 13.1 million workers employed in American manufacturing. Now there are only 11.6 million. Now, AFL-CIO President Richard Trumka is starting to get restive. TradeReform.org reports the text of his May 3 letter to President Obama. In that letter, he comes out strongly against China's currency manipulations:
I wanted to let you know that the AFL-CIO intends to consult with our coalition partners and take steps to refile our Section 301 case on currency manipulation if the Chinese government does not act to reverse the undervaluation of the yuan in the next several months. Going forward, market forces must be allowed to determine the exchange rate between the United States and China - not systematic and one-sided intervention....
But he is not especially concerned with the loss of 1.5 million more American manufacturing jobs. His main concern is the welfare of Chinese workers. His strongest words object to President Obama's acquiescence to the Chinese government's suppression of workers' rights:...
Congress Is Responsible For This Recession; Not the Banks, Not Wall Street
Raymond Richman, 5/25/2010
The Senate and House are investigating the Banks and Wall Street for causing this recession but they should be investigating themselves. Every Congress and every President since James Earl Carter, who signed the original Community Reinvestment Act (CRA) of 1977, bear responsibility for this recession. The act was a government intrusion in private sector banking where it had no right to be. It also involved two government-sponsored enterprises, Fannie Mae and Freddie Mac, which, when created, were stated to be independent of the government but which had to be bailed out as total losses.
The close involvement of the U.S. government in making it very easy to obtain a mortgage led Wall Street and Lombard Street and banks all over the world to believe all our mortgages were government insured. The bipartisan support for the CRA, Fannie Mae, and Freddy Mac was also misleading; it gave the impression that Republicans and Democrats would, when push came to shove, save investors in those government-sponsored mortgages. In any case, the consequence was the housing bubble whose collapse ushered in the most serious financial crisis and economic recession since the Great Depression.
In the sixties, leftist agitators and a few academics claimed that the banks were red-lining black neighborhoods, i.e., they were not making proportionately as many loans to households in those neighborhoods as they were in white neighborhoods. Indeed, fewer loans per inhabitant were being made in such neighborhoods. But the conclusion that this evidenced racial discrimination was spurious. Fewer loans are made to poorer households than richer regardless of the location of their residence. Unfortunately, then as now, a higher percentage of black households were poor. If the federal government wanted poor households who were unable to qualify for mortgages to own houses, all it needed to do was to guarantee them as they did with FHA and GI bill mortgages. No new bureaucracy needed to be created. ...
Michael Pettis predicts Europe will be moving toward a trade surplus
Howard Richman, 5/23/2010
In a May 19 blog posting about the internal deate within China over whether or not to let their currency strengthen v. the dollar, Michael Pettis predicted a huge movement in Europe toward trade surplus. His reasoning is impeccable....
Senate punts on Volcker Rule
Howard Richman, 5/21/2010
Having learned nothing from the BP oil spill, partly caused by a failure of government regulators to require testing of deep-sea shut-off valves, the United States Senate just passed a financial reform bill which relies upon the intelligence and incorruptibility of government regulators.
What was actually needed was the Volcker Rule, proposed by Obama's competent economic advisor, former Fed Chairman Paul Volcker. That rule would have broken up "too big to fail" banks so that they would no longer be too big. The UK Guardian has a summary of the bill. Here's what it says about the Volcker Rule:...
Wishful Thinking on House Prices and the Economy
Howard Richman, 5/20/2010
A nursery rhyme goes, "If wishes were horses, then beggers would ride." The wishful thinking of beggers continues to dominate American policy making circles as was apparent in two predictions made yesterday, one made by housing market experts and the other by the Federal Reserve:
Prediction 1: House Prices will soon be off to the races again
The above graph from the businessinsider.com website shows the Case-Shiller index of inflation-adjusted sale-and-resale prices of the same homes. To its credit, Business Insider is skeptical of the expected rise in house prices shown by the dashed line. It reports:
Rand Paul's victory in Kentucky puts the Federal Reserve on notice
Howard Richman, 5/19/2010
On May 18, in a victory over the Republican establishment, Rand Paul, son of the Federal Reserve's chief opponent in the U.S. Congress, won the Republican Senatorial primary in Kentucky. He and his father object to the important roles being played by the Federal Reserve in the American economy.
It's time for the Federal Reserve to clean up its act. The Federal Reserve under Greenspan and Bernanke has been blowing it big time. The United States is mired in economic stagnation due to the loss of a large part of its manufacturing sector from 1998 through the present. Even worse, the solution endorsed and enacted by the Federal Reserve has been a corrupt bailout of the big banks.
The Pauls want to take the United States back to Andrew Jackson's closing of the Federal Reserve's predecessor which, when combined with a return to a strict gold standard, caused such a constriction in the U.S. money supply that a depression ensued which lasted from 1837 to 1844. The Pauls would throw the baby out with the bathwater. The Federal Reserve has important roles to play:...
Tea Party's Contract from America endorses tax reform such as the FairTax
Howard Richman, 5/17/2010
The Tea Party Patriot's Contract from America endorses tax reform, such as the FairTax. Here's the relevant plank:
Enact Fundamental Tax ReformAdopt a simple fair single-rate tax system by scapping the internal revenue code and replacing it with one that is no longer than 4,543 words -- the length of the original constitution.
Meanwhile, the FairTax has become an issue in the congressional race, tomorrow, to fill Congressman Murtha's seat. John Kraushaar at Politico.com (FairTax spurs the campaign rhetoric) reports:...
"Le Tarpe" will not work any better than did TARP
Howard Richman, 5/16/2010
A foolish decision is haunting both North America and Europe. I refer to the decision by the American and European elites to bail-out their big banks without addressing the underlying cause of the financial crisis, the trade deficits. The fact is that trade-deficit countries accumulate debt in return for mercantilist-produced baubles. The result of the bail-outs was an immense transfer of bad debts from banking sectors to governments. The result of the continuing trade deficits is that the underlying debt problem will continue to grow.
In America, the transfer of bad debts from banks to governments was first realized with the $700 billion TARP bill, and was followed up with the Federal Reserve buying $1 trillion of soon-to-be-worthless mortgage-backed securities and the U.S. government subsidizing purchases of used residences.
In Europe, the decision to transfer bad debts from banks to governments is playing out now with the $1 trillion rescue plan known as "Le Tarpe," for the banks that have loaned money to Europe's three most heavily indebted trade-deficit governments. It will continue with the upcoming purchases by the European Central Bank of junk-bonds issued by Greece.
As a result of ignoring Asian and German mercantilism, trade-deficit countries on both continents will be mired in the perpetual depression which, Keynes predicted, comes to countries that permit trade deficits. Specifically, in his magnum opus (The General Theory of Employment Interest and Money) Keynes pointed out:
A favorable [trade] balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)
Just as the Great Depression did not alleviate until policy makers figured out that governments need to maintain a growing money supply, the current stagnation in Europe and North America will not end until American and European policy makers figure out that governments need to maintain relatively balanced trade. Unfortunately, most American economists, including President Obama's advisors, are such free-trade ideologues that they are still impervious to this reality.
But not all American economists are free-trade ideologues. Peter Navarro is one of the first of our premier economists to see where all of this is going. In an excellent May 15 commentary, he laid out a realistic case that the euro may be dead and that gold is probably the best investment at the moment because we are heading toward a "de facto" gold standard. He succinctly explained why the euro bail out will fail:...
Book Review of Ian Fletcher's Important Book Attacking Free Trade
Raymond Richman, 5/14/2010
Ian Fletcher, Free Trade Doesn’t Work: What Should Replace it and Why (Washington, D.C.: U.S. Industrial and Business Council, 2010)
Edward Luttwak, Senior Fellow at the Center for Strategic and International Studies, writes in the Foreword “it is hard to imagine how America can rebuild its manufacturing and rebalance its trade, without repudiating free trade –to some carefully chosen extent. If nothing else, the need to neutralize foreign mercantilism demands this.” Ian Fletcher in this book proceeds to demolish the myth perpetrated and perpetuated by economists that “free trade” is good and protectionism is harmful. This is a must read book. It covers more ground than our book, Trading Away Our Future (Ideal Taxes Assn., 2008). We disagree with some of his arguments but applaud his attack on free trade which has cost the U.S. millions of industrial jobs, caused wages to stagnate, worsened the distribution of income, and contgributed to the current economic crisis.
His introduction is entitled, “Why We Can’t Trust the Economists.” While admitting that all trade deficits are not bad, he castigates the huge U.S. trade deficits of 2006, 2007, and 2008 as obviously a critical problem and yet “Americans remain afraid to do anything about it.” Economists have made protectionism a dirty word and “so we remain paralyzed in the face of the crisis.” On the other hand, the trade deficits were not created by accident. “Foreign governments treat trade as war and use every trick in the book—legal and illegal under international agreements—to grab their industries a competitive advantage.”...
The global warmers' shell fish hoax
Howard Richman, 5/14/2010
About a month ago I was watching a network morning news program, and there was Sigourney Weaver being interviewed by a network interviewer. She was explaining the latest global warming scare. It's already happening, she was saying. The build up of carbon dioxide in the atmosphere was causing a build-up of carbolic acid in the ocean. All the shell fish were going to die.
It was like those experiments you can do, when you put an egg shell in vinegar, and the acid eats away at the egg shell until it dissolves. She gave the earth, something like 50 years.
She had recently narrated a documentary (Acid Test: The Global Challege of Ocean Acidification), and thus knew all about the topic. I waited for the interviewer to bring out someone to present the other side, somebody to challenge her statements, But no.
Instead, he asked her why other people didn't agree with her. Then he accepted her explanation that the skeptics were just unwilling to accept scientific truth. That might not be exactly what she said, but it was something like that.
I was skeptical. I knew about the theory that has already displaced the carbon-dioxide-causes-climate-change theory among most physicists. Just watch this lecture by Jasper Kirkby at the Cern, Europe's premier scientific institution, and you will know about it, too:...
One or more members will have to exit the euro zone to restore competitiveness
Howard Richman, 5/12/2010
In his April 29 posting on this blog (The Greek Crisis Reveals the Fatal Weakness of the Euro and Gold Standard), my father pointed out that the euro fix ignores the underlying cause of the crisis, the trade deficits in Greece, Portugal and Spain.
Nouriel Roubini apparently understands this dimension of the crisis. In an interview with Bloomberg, he repeatedly predicted that within the next several years, one or more members of the euro zone would have to withdraw in order to restore their competitiveness. Here's the interview:
Trade Deficit up again in March
Howard Richman, 5/12/2010
This morning, the BEA issued its preliminary estimate of our March 2010 trade statistics. Our trade deficit climbed again, led by a growing trade deficit with Europe. Overall, our trade deficit rose from $39.4 billion in February to $40.4 billion in March. Meanwhile our trade deficit with the European Union rose from $5.3 billion in February to $7.1 billion in April, probably as a result of the dollar rising v. the euro....
China uses industrial policy is to keep out US products
Howard Richman, 5/11/2010
Alan Tonelsen of American Economic Alert pairs a revealing set of quotes in a May 10 blog posting (Obama Administration's China Trade Brain-Locke):
"We believe increasing our exports to China - not limiting our imports from China - is the best way to address the trade deficit.”–Secretary of Commerce Gary Locke, May 4, 2010
The United States is concerned "about China's increasing use of industrial policies that may restrict market access and discriminate against foreign goods and services”–Secretary of Commerce Gary Locke, May 4, 2010
The Washington Post had a good article about China's industrial policy on May 7 (China's industrial policy is bigger concern than yuan, U.S. executives say). Here's a selection:...
Construction Employment has first uptick since June 2007
Howard Richman, 5/9/2010
Construction employment has been declining ever since the house price bubble burst in 2006. The following graph shows the US Construction Employment statistics (on a seasonally-adjusted basis) from Friday's employment report:
US Manufacturing Employment is Rising
Howard Richman, 5/7/2010
The latest employment statistics for April, just released, show U.S. Manufacturing employment continuing to rebound. The following is the graph:
Auctioning Import Certificates is consistent with WTO rules
Howard Richman, 5/4/2010
Import Certificates, whether across-the-board or targeted toward the currency-manipulating countries, would provide the most effective way to solve America's trade deficits. Warren Buffett first proposed this method to balance trade in a Fortune Magazine article. He wrote:
We would achieve this balance by issuing what I will call Import Certificates (ICs) to all U.S. exporters in an amount equal to the dollar value of their exports. Each exporter would, in turn, sell the ICs to parties – either exporters abroad or importers here – wanting to get goods into the U.S. To import $1 million of goods, for example, an importer would need ICs that were the byproduct of $1 million of exports. The inevitable result: trade balance.
In Trading Away the Future (2008), my father, son, and I endorsed Buffett's plan, while at the same time endorsing a more limited plan as being more consistent with WTO rules. We wrote:
Our plan differs from Buffett’s plan in that we would have the Department of Treasury auction the Import Certificates, rather than have the Import Certificates issued directly to exporters. Also, the certificates would just be targeted to individual dollar mercantilist countries, as evidenced by their excessive amounts of dollar reserves....
Our plan has the advantage that it is much more modest. It could more clearly be instituted without violating World Trade Organization rules since it would only impose import certificates upon countries having a large trade surplus with us. Article 12 of the Uruguay Round GATT agreement specifically lets countries running a threatening overall trade deficit restrict imports from any country with whom they are running a trade deficit. Our plan would simply enforce the International Monetary Fund agreement that countries should not manipulate their currency values. The result would be a more balanced playing field under the current rules of international trade.
In an Economic Policy Institute December 2009 working paper (#288) (Addressing Balance of Payments Difficulties Under World Trade Organization Rules) Terrence P. Stewart and Elizabeth J. Drake of the Law Offices of Stewart and Stewart, agreed with our conclusion that auctioning the Import Certificates would be more consistent with WTO rules than distributing them to exporters. Specifically:...
The UN's hopeless war against Afghan opium - We're published today by Enter Stage Right
Howard Richman, 5/3/2010
Our commentary begins:
On September 11, 2001, al-Qaida, then sheltered by the Taliban rulers of Afghanistan, bombed the World Trade Center and the Pentagon. In response, during the winter of 2001-2002, we attacked Afghanistan, driving al-Qaida and their Taliban protectors out of the country. The Taliban had ceased to be an organized force. We had won!
American troops had been welcomed as liberators in the Afghan countryside because the Taliban had banned the cultivation of the opium poppy in 2001, a disaster for the Afghan farmers whose chief crop was the poppy. The graph shows the 2001 drop-off in Afghan opium production.
As the supply went down, the price of opium poppies skyrocketed. According to the United Nations Office of Drugs and Crime (UNODC):..
An abrupt decline of illicit opium poppy cultivation was recorded in Afghanistan in 2001, following the ban imposed by the Taliban regime in its last year in power. Despite the existence of significant stocks of opiates accumulated during previous years of bumper harvests, the beginning of a heroin shortage became apparent on some European markets by the end of 2001. Furthermore, the absence of the usual harvest in Afghanistan in spring 2001 and the subsequent depletion of stocks pushed opium prices upwards to unprecedented levels in the country (prices increased by a factor of 10), creating a powerful incentive for farmers to plant the 2002 crop. (p. 3)
There is an important economic lesson here. You can't stop an addictive drug by interdicting its supply. Addicts will demand the drug, no matter what the price. If you want to reduce consumption, you have to cut demand, not supply.
After the U.S. victory, the UN was anxious to prevent the resumption of opium planting. In February 2002, the UNODC (then called UNODCCP) conducted a quick survey which revealed the resumption of opium planting. That's when President Bush snatched defeat from the jaws of victory. With UN bureaucrats cheering from the sidelines, he used American troops to conduct an unsuccessful eradication campaign which turned the countryside against both American troops and UN surveyors, as the UNODC noted:...
Obama administration is impoverishing the U.S. middle class
Howard Richman, 5/2/2010
On Friday, the BEA reported its preliminary report of U.S. GDP during the first quarter of 2010. One thing that struck me, when looking at the statistics, is that the U.S. trade deficits are coming back strong. The following is the quarterly trade deficit (reported on an annualized basis):
I expect the trade deficit for the first quarter to be revised downward after the March data is reported, because of China's decision to buy lots of commodities that month, instead of running a trade surplus. But, I expect that the U.S. trade deficits will be $50 billion higher when the second quarter statistics are reported.
University of Maryland economist Peter Morici's take on the statisitics (This Recovery is Anti-Middle Class) is that the recovery from the recession is quite weak and that it won't benefit the U.S. middle class. He wrote:...
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- Dramatic Changes Needed to Recover From This Depression, Not Earmarks
- The Euro: This Marriage Can't Be Saved -- We're published in American Thinker this morning
- Evans-Pritchard: Summers call for yet another stimulus package is a tacit admission that the economy is losing thrust
- AFL-CIO's Trumka asks Obama for stronger action on China
- Congress Is Responsible For This Recession; Not the Banks, Not Wall Street
- Michael Pettis predicts Europe will be moving toward a trade surplus
- Senate punts on Volcker Rule
- Wishful Thinking on House Prices and the Economy
- Rand Paul's victory in Kentucky puts the Federal Reserve on notice
- Tea Party's Contract from America endorses tax reform such as the FairTax
- "Le Tarpe" will not work any better than did TARP
- Book Review of Ian Fletcher's Important Book Attacking Free Trade
- The global warmers' shell fish hoax
- One or more members will have to exit the euro zone to restore competitiveness
- Trade Deficit up again in March
- China uses industrial policy is to keep out US products
- Construction Employment has first uptick since June 2007
- US Manufacturing Employment is Rising
- Auctioning Import Certificates is consistent with WTO rules
- The UN's hopeless war against Afghan opium - We're published today by Enter Stage Right
- Obama administration is impoverishing the U.S. middle class
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