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 Richmans' Trade and Taxes Blog

Paul Craig Roberts: Balance Trade and Budgets Now or Dollar Crash Soon
Howard Richman, 8/18/2010

Paul Craig Roberts, head of policy at the Department of Treasury under Reagan, predicted an upcoming dollar crash in an August 16 commentary (The Ecstacy of Empire). He began: "The United States is running out of time to get its budget and trade deficits under control." He goes on to describe the upcoming dollar crash if this is not done:

The collapse of the dollar will drive up the prices of imports and offshored goods on which Americans are dependent. Wal-Mart shoppers will think they have mistakenly gone into Neiman Marcus.

Domestic prices will also explode as a growing money supply chases the supply of goods and services still made in America by Americans.

The dollar as reserve currency cannot survive the conflagration. When the dollar goes the US cannot finance its trade deficit. Therefore, imports will fall sharply, thus adding to domestic inflation and, as the US is energy import-dependent, there will be transportation disruptions that will disrupt work and grocery store deliveries.

Panic will be the order of the day.

Will farms will be raided? Will those trapped in cities resort to riots and looting?

Part of Roberts' solution is to bring U.S. troops home now. The other part is to switch our tax system to a value-added tax which has two tax rates, depending upon where the value is added. If the value is added abroad, the rate is higher. He wrote:

The only way that the US will again have an economy is by bringing back the offshored jobs. The loss of these jobs impoverished Americans while producing oversized gains for Wall Street, shareholders, and corporate executives. These jobs can be brought home where they belong by taxing corporations according to where value is added to their product. If value is added to their goods and services in China, corporations would have a high tax rate. If value is added to their goods and services in the US, corporations would have a low tax rate.

This change in corporate taxation would offset the cheap foreign labor that has sucked jobs out of America, and it would rebuild the ladders of upward mobility that made America an opportunity society.

Assuming that his value-added tax proposal would apply equally to all goods produced abroad, whether by American or foreign corporations, his proposal would not cause American corporations to move their headquarters abroad. If that is the case, then his proposal is actually a tariff in disguise. There would just be one difference between our scaled tariff proposal and Roberts' value-added proposal: The scaled tariff would only apply to products produced in mercantilist countries, while his value-added tax proposal would apply to goods produced abroad, no matter the country.

Roberts has contributed a new idea here. One which could work. However it still needs to be fleshed out:

• If the high value-added tax rate does not apply to goods produced by foreigners that are sold in the United States, it would cause American corporations to move abroad and would actually make our current situation worse than it is now.
• If it high value-added tax rate does apply to goods produced by foreigners that are sold in the United States (as well as goods produced abroad by American corporations), then it is a tariff in disguise, and could be considered by our policy makers as an alternative to the scaled tariff.

Essentially, Roberts is arguing that we can either balance trade now through tariffs or we can wait a short while for the dollar crash that would balance trade the hard way.

Roberts has proposed a new sort of tariff, perhaps made more palatable by calling it a value-added tax with two tax rates. The big advantage of our tariff proposal over Roberts' proposal is that our proposal scales the tariff rate to the size of our trade deficits with the mercantilist countries, which gets them to take down their barriers to our products, while Roberts' proposal would likely lead to counter-tariffs.