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The First Step for a Sustainable Economic Recovery -- Balanced Trade
Raymond Richman, 7/5/2010

Now gather round all you Democrats and all you Republicans, and all you left and right leaning independents and all you tea party people and we’ll tell you how to quickly turn this recession into sustainable prosperity, with real jobs, millions of them. We know most of you who haven’t read our book, Trading Away Our Future (Ideal Taxes, 2008) are in a state of disbelief. How could we, three relatively unknown Ph.D.s, know what we must do when the former Chancellor of Harvard University, economist Larry Summers, and his protégé, former head of the Federal Reserve Bank of New York, Secretary of the Treasury, Timothy Geithner, and, Cristina Romer, Chairman of the President’s Council of Economic Advisers, approved the 2009 Recovery Act that budgeted the costly $787 billion economic stimulus program which created not a single net new sustainable job to date? The answer my friends is not blowing in the wind, nor even on Facebook. The answer is because the economic elite to which they belong are Keynesian and we aren’t. And they are ideologues on "free trade" and we are not.

They believe that increased government spending regardless of what it is spent on will stimulate the economy and promote a recovery.  We maintain that an increase in deficit spending will provide only a temporary stimulus which will disappear as soon as the money runs out. Lord Keynes would turn over in his urn to observe what is being done in his name.

It isn’t that the Obama economic stimulus program doesn’t create or save some jobs, especially for teachers and other government employees, ninety-nine percent of whom voted for Obama, surely a coincidence. It just has no sustainable stimulating effect, i.e., it has no multiplier. It raises GDP temporarily and the stimulus disappears as soon as the money appropriated is exhausted. Plus, they are “free trade” ideologues. We know of no economic theory that holds that free trade is beneficial to both trading partners even when it is one-sided. Free trade does work in the 50 states where the U.S. Constitution forbids the states from imposing barriers to trade and the free movement among the states of workers and capital. Free trade works only when the trading partners are subject to those conditions, which means nowhere except in the U.S.  

So what do we recommend? First, let us exercise our God-given right of self-preservation, written into the rules of the world super-government’s World Trade Organization (WTO) that states that a country experiencing chronic trade deficits with one of its trading partners has the legal right to correct the trade imbalances by imposing tariffs and other barriers on imports from that trading partner. Following are recent trade balances with China, Japan, and Germany that are leading candidates for our suggested trade policy:

Balance of Trade on Goods and Services, Selected Countries, 2006 - 2010

   

(Billions of dollars)

     
           

1st Quarter

Country

 

2006

2007

2008

2009

2010

   China

           

       Exports

65.1

77.1

86.1

86.0

26.1

       Imports

-298.0

-333.0

-348.3

-305.4

-75.1

       Balance

-232.9

-255.9

-262.3

-219.4

-49.0

             

    Japan

           

       Exports

99.2

102.5

109.1

94.0

25.9

       Imports

-175.6

-173.7

-167.9

-120.5

-33.8

       Balance

-76.4

-71.2

-58.8

-26.5

-7.9

             

    Germany

         

       Exports

61.3

74.3

82.9

68.3

17.3

       Imports

-118.1

-126.3

-132.5

-102.8

-25.4

       Balance

-56.8

-52.0

-49.7

-34.6

-8.0

Workers in manufacturing, on the average, produced goods valued at about $100,000 each in 2008. China’s trade surplus of $262 billion in 2008 thus represents a transfer of 2.6 million jobs from the U.S. to China. In 2008, our trade deficit with all countries amounted to nearly $800 billion, the equivalent of nearly 8 million workers. If we were able to put that many unemployed to work, we would have no unemployment. Instead we would have overfull employment. So what do we need to do? Just exercise our rights under international trade rules and reduce our trade deficits with those countries that year after year export to us a great deal more than they buy from us.

The $800 billion deficit in 2008 included our trade with oil-producing countries. The following table shows the trade balances of a number of countries and areas that export oil or oil products to the U.S.

Balances with oil exporters (Billions of dollars)

     
           

Mexico

 

61,282

-70,608

-59,989

-41,364

OPEC

 

99,666

-119,137

-168,189

-52,282

Brazil

 

3,271

3,965

8,747

13,719

Venezuela1

 

-25,733

-26,610

-34,784

-14,601

Canada

 

-61,110

-53,235

-60,828

-2,789

Africa, excl. S.Africa

         

Incl.Nigeria,Angola

 

-56,105

-62,102

-78,553

-33,656

           

Source BEA. 1Note that Venezuela is included in the OPEC data.

         

We purchase petroleum from Brazil but as one can see from the table, we have a  trade surplus with Brazil. We should not levy a tariff on petroleum or its products from Brazil. Likewise, we may not want to levy a tax on oil from Mexico and Canada, either, because they are included with us in the North American Free Trade Area (NAFTA). But there is no reason why we should not tax imported crude oil and petroleum products from countries with which we are experiencing chronic trade deficits. Consumers may protest but the benefits to American workers far outweigh the burden of higher prices.  

An advantage of a tariff as a device to balance trade compared with exchange rate changes is that tariffs will produce many billions of revenue while the transition is being made to a balanced budget. The announcement accompanying the initial tariff of say, 10 to 25 percent, will indicate that the rate will be increased periodically if necessary until trade with the targeted country becomes reasonably balanced.

The initial rate will serve as notice to China and OPEC and the others, that the industrial sector of the U.S. economy is going to grow, not wither away, that we are embarking on our own import substitution strategy. Either they remove barriers to our exports or we will produce those goods at home. We are in a position to produce in our factories currently all sorts of goods that we are importing including autos and auto parts imported from Germany and Japan, and other goods still being made here that are close substitutes for goods we are importing from the trade surplus countries.

The tariffs may affect tax revenues positively during the transition but also because of its positive effect on sustainable U.S. economic growth. Economic growth has always caused revenues to grow faster than the rate of economic growth. That is because of the elasticity of our tax system. It is common knowledge that corporate and personal income tax revenues grow faster that the rate at which the economy grows. It was the principal reason we balanced the federal budget in 2000 while recovering from the 1991recession.  While we shall be levying the tariffs not to raise revenue but to increase industrial employment, revenue will increase as a result of the recovery of our industrial sector.

We already have the administration in place to collect tariff revenues. No new bureaucracy will need to be created. So why haven’t the geniuses in Washington  exercised our rights under the WTO rules? First, they fear that the countries affected might retaliate (oh,dear!) by cutting imports from us. But they have much more to lose by that than we do. We’ll just raise the tariffs some more, to, say 30 percent. They would not be buying from us if they could get our goods cheaper anywhere else. But more important, our businesses would start producing some of the goods we’ve been importing and grow employment. We have more to gain than to lose.

Nobel-prize winning economist Paul Krugman rejected the “retaliation” argument in recommending that the U.S. impose a 25% across-the-board tariff on imports from China until it allows its currency to fluctuate freely. This is a flagrant interference with a country’s sovereign right to determine its own monetary policy and, given the WTO rules, unnecessary.  Besides we do not believe that revaluation will balance our trade with China. Prof. Paul Krugman is relying on free market theory that if the exchange rate were at its “correct” level, imports from China would be more expensive to Americans and we would import less while our manufactured goods would be cheaper to Chinese and they would import more. We do not share his optimism that a realistic exchange rate would bring trade into reasonable balance. A revaluation of a country’s currency by no means gives any assurance that they will import more from us. China as a totalitarian regime has too many informal controls that it uses to limit imports. To import from us, the Chinese importer needs dollars and a permit. The government decides what imports will be allowed.

Besides China is pursuing two development strategies simultaneously, an import substitution strategy and an export based strategy, i.e., it is deliberately restricting imports while it builds the factories to produce the goods it is currently importing. And while our pollyannas believe China exports to increase its imports, its real purpose is political, to de-industrialize its principal capitalist enemy that supports an independent Chinese regime in Tai-wan and seeks independence for Tibet,

Americans who object to our imposing a tariff on Chinese goods call attention to the Smoot-Hawley tariff of 1930 which some economists blame for worsening the depression. It did not take effect until 1932 when the depression was well under way, and unlike our proposal applied to specific products wherever produced not to imports from a single country as our proposal does. It thus injured countries with which we had a trade surplus.

The tariff we recommend would apply only to countries maintaining a trade surplus with us year after year by hook or by crook. It would not affect our trade with Brazil, for example, with which we are experiencing a trade surplus. It would have effects similar to a revaluation of the currency but only with respect to the countries targeted. Imports from, say China, would become more expensive to Americans. To get the tariff reduced all China would need to do is end its barriers

It will have costs. Higher prices for gasoline the brighter side of which is that it will stimulate the use of electric cars and hybrids and stimulate the use of natural gas especially for heavy vehicles such as trucks and buses, and in chemical processing as a substitute for oil, as T. Boone Pickens has been  advocating for years. Those Americans enjoying a free ride, i.e., those who are unaffected by foreign competition like government employees, university professors, including economists,  stock market traders, service employees and other s producing services for the domestic market, will pay more for goods imported from China. But the benefits are huge gains in employment especially if we take other measures which will be discussed in a follow-up soon.  

One of the measures we shall recommend is abolition of the Corporate Income Tax! Yikes, I can hear the groans. That is cutting taxes on the rich, right? Wrong. The greatest burden of the Corporate Income Tax falls on the poor. Read all about it. Coming soon! We need to abolish the tax to create millions of good jobs in a real economic recovery not a phony one as advocated by Summers, Geithner, and Romer and their employer Barack Hussein Obama.

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Comment by XOXO, 7/8/2010:

Gentlemen, the diagnosis is correct.  The prescription dosage will do no harm.   But, Your patient doesn't want to hear the bad news.   The public will search out any authority who will tell them exactly they want to hear. (I.E. That Budget and Trade and Leadership deficits don't matter.)

The tough part is figuring out a safe way for the US Congress to market the necessary legislation to the average American.  Too often that means fear mongering.

  


Comment by Justin Hohn, 7/9/2010:

I find this analysis lacking in several regards.  Firstly, it all but assumes that higher employment is the ultimate goal of US economic policy (several of the items of the proposal tout increased employment).  However, employment as a goal of trade policy is species at best, dangerous at worst.  One could instantly increase employment by simply banning farm machinery.  Overnight, there would be more jobs than workers.  But is this sound?  Clearly not, for the proper goal of economic policy is increased productivity, primarily the creation of capital and its aggregation in the population of the nation enacting the policy.  After all, rather than mere work, the ideal economic outcome is prosperity with minimal effort.  Highest return with lowest investment or expenditure is another way to phrase it.

The higher prices on gasoline et al are far from being the brighter side of your policy-- they recommend against it.  These higher prices represent a decrease in the purchasing power of the US consumer.  When they spend more on gas, they have less for other items-- some of which are still made in the US.  Vacations might be reduced-- which might affect Disney, for example.  So it goes-- higher energy prices have no benefit to the US consumer.

Your claim of "benefit" to the consumer presupposes that greener technology (which is self-evidently less economical) is an outcome worth forcing the US Consumer to pay for.  If the technology is so desireable, why must it be subsidized?  Why must market manipulations like your tariff be used to force green technology to be adopted?  While the higher fuel prices for fuel might be a "bright side" for the Green movement that wishes less freedom for the US consumer, it is most definitely NOT a bright side for the US consumer trying to increase his purchasing power, economic output, or standard of living.

While the Keynesians are ruining this country's economic viability, the tariff you propose is not a step towards renewal or revitalizion of total economic output.  Rather, it's an approach that says "we *must* reinforce our manufacturing sector, no matter the cost!"-- and that cost is reduced economic output and national wealth.

Your analysis would be more robust if you couched the argument in terms of why the reduction in national economic output could be a desireable outcome, or at what cost is is worthwhile to subsidize American manufacturing.  I suppose you find American crop subsidies also worthwhile?

Finally, the tariff on Chinese goods would hurt American businesses that have joint ventures in the country.

The only "benefit" of such a tariff would be to ignorant politicians claiming to help out the little guy while stabbing him in the back-- like they normally do.

Response to this comment by Justin Hohn, 7/9/2010:
Please pardon my typo of "specious" and others..
Response to this comment by W. Raymond Mills, 8/3/2010:
I respond only to your argument that tariffs as proposed will reduce nation economic output.  You do not have a good argument for your position.   You argue that the tariff will reduce U.S. consumption.  Consumption is not the same as production.   You do not show how reduced consumption of imports will reduce U.S. production.  Cmmon sense would say that less money spent on imports (because their price is higher) more money available to be spent on U.S. production. We can agree that wages must be paid to workers to produce output.  If the output is created overseas, the wages are paid overseas.  If reduced consumption of imports changes the ratio of U.S. produced goods to goods produced ovrseas, U.S. Gross Domestic Product is increased, not decreased.  


Comment by San Jose Jay, 9/13/2010:

Sirs:

We have accumulated over $14 trillion in debt due to trade imbalances, with no end in sight.  In the age of fiat-based trading, outside of inflation inside the exporting country, or deflation in ours, either of which takes a massive amount of accumulated imbalance to trigger, there is no balancing mechanism other than tariffs.  The claim of course is that tariffs on imports will increase the cost of goods to consumers.  As you are aware, this is counter to the law of price and demand; by enabling and/or increasing domestic competition, the cost to consumers actually decreases.




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  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

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