Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Review of Baumol and Gomory's book: Global Trade and Conflicting National Interests
[This review was origininally published on our old blog on July 14, 2009]
Among the relatively few economists who view the loss of American industry to foreign countries as a catastrophe in the making is Prof. Ralph Gomory, Research Professor at the Stern School of Business at New York University and President Emeritus of the Alfred P. Sloan Foundation. Prof. Gomory is no ordinary academic. His Ph. D. is in mathematics and he made his mark as Senior Vice President for Science and Technology at IBM.
He is the co-author with Prof. William Baumol, distinguished former Professor of Economics at Princeton University, of a seminal work published in 2000, Global Trade and Conflicting National Interests. In their book, they took issue with the theory of comparative advantage that explained what products nations specialize in and the gains from trade when countries specialize in producing what they do best.
They showed that countries can acquire a “comparative advantage” by specializing in any industry in which they can obtain economies of scale, a wide range of possibilities. With acquired advantages playing a decisive role, Japan could specialize in autos and the U.S. in airplanes or Japan could specialize in airplanes and the U.S. in autos. Who is first to achieve economies of scale in an industry is likely to continue specializing in that industry and potential foreign competitors have a high hurdle to overcome to compete successfully.
Their analysis, like the traditional analysis it displaced, presumes that in equilibrium, trade will be balanced. They do not discuss or analyze whether there can be chronic trade deficits such as the U.S. has been experiencing for more than two decades. Here is what they say in a footnote to chapter 6:...
Germany, Greece, the Euro, and the Gold Standard
Many commentators believe that dysfunctional Greece is the cause of Greece’s pending bankruptcy and many believe that dysfunctional USA is the cause of the USA’s pending bankruptcy. Time has run out for Greece and is running out for the USA. But the U.S. is more fortunate than Greece; its bonds are payable in U.S. dollars, issued as needed by its central bank, the Federal Reserve System. Poor Greece, its debt is payable in euros which are printed by the European central bank whose policies require Germany’s approval. And Germany does not approve profligacy.
The cause of Greece’s problems is alleged to be financial profligacy but its immediate cause is really its chronic trade deficit with Germany and the European community which causes it to run out of euros. The cause of the USA’s problem is alleged to be financial profligacy but its immediate cause is its chronic trade deficits with China, Japan, Germany, and OPEC which flood the world with dollars which the world hoards as reserves or sends to the U.S. in return for U.S. Treasury bonds and other U.S. financial assets. Unfortunately, this is not sustainable. . . .
McCain's economic advisors cost him the Presidency and may cost him his Senate seat
A February 22 interview with the Arizona Republic editorial staff (Sen. John McCain: I was misled on bailout) shows that Senator McCain still doesn’t understand that his economic advisors' lack of common sense cost him the presidential election. They made four huge mistakes.
Mistake #1, The TARP Bailout
The American people have enough common sense to recognize a give-away to Wall Street lobbyists. Yet McCain voted for TARP, suggesting that his anti-lobbyist rhetoric was phony. Dick Morris and Eileen McGann noted at the time that McCain's TARP position may have cost him the presidency.
But McCain still doesn't understand his mistake. In his interview with the Arizona Republic editorial staff, he claimed that Paulson and Bernanke misled him about how the TARP money would be spent. But he again defended his vote, citing his economic advisors:...
The Costly Obama Stimulus Is Not Working
A distinguished economist, Prof. Robert J. Barro, Harvard University, in an op-ed in the Wall St. Journal, 2-23-2010, calculated the likely contribution of the Obama stimulus package to the Gross Domestic Product (GDP) over the five year period beginning February, 2009, a year ago, and estimated the effect it would have on the GDP. He estimated an increase in the GDP of $120 billion in 2009, $180 billion in 2010, $60 billion in 2011, minus $330 billion in 2012, and minus $330 billion in 2013. Over the five year period, the sum of the effect on Consumption, Private Investment, and Net Exports is minus $900 billion. He concludes,
Thus, viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal. The fiscal stimulus package of 2009 was a mistake. It follows that an additional stimulus package in 2010 would be another mistake. ...
Pfizer moving R&D from Connecticut to China
Pfizer may be the first American company to respond to China's demand that they move their R&D to China in order to do business with the Chinese government. The following is an excerpt from an article (Western Firms move R&D and other Assets to China) in the February 25 issue of China Daily:...
New York-based Pfizer said last month it's expanding R&D operations in Wuhan, China. At the same time, it's closing a big R&D center in New London, Conn., and consolidating research at its Groton, Conn., lab. Pfizer is also sharply expanding its R&D facility in Shanghai and raising drug output in Dalian, in Liaoning Province....
Obama giving US R&D to China - we're published in today's American Thinker
Here's how we begin:
The United States and China are involved in a trade war, the outcome of which will determine who gets America's remaining manufacturing industries and research and development centers. The Chinese are actively fighting; President Obama is actively talking.
The Chinese government fired a huge broadside in December when it issued new rules requiring that American corporations doing business in China move their research and development centers and patents to China as a condition for selling goods and services to the Chinese government.
Nineteen trade groups that represent America's largest corporations responded with a January 29 letter to several U.S. government officials. Here is a selection:
You can read the rest at:
A Review of W. Raymond Mills "Managing ForeignTrade"
We have published a working paper by W. Raymond Mills (Managing Foreign Trade, Ideal Taxes Association, Working Paper #2, February 23, 2010). He begins with this insightful paragraph.
It is ironic that the man-on-the-street in any town in Ohio has a better understanding of the harm done to the U.S. economy by the trade deficit than do the experts who study the problem. The ordinary citizen knows that goods manufactured overseas and sold in the U.S. reduce output among U.S. manufacturing firms. The ordinary citizen knows that unbalanced trade – more imports than exports – means that foreign producers are, on net (using Greenspanese) displacing and replacing U.S. firms and U.S. manufacturing jobs.
It is a mystery how our leaders in Washington could observe the damage being done to U.S. industry during the past thirty years without taking counter-action. It is no mystery to one who has studied economics. Economists have gone from embracing the principle of comparative advantage, first enunciated by David Ricardo in the second decade of the 19th century, to concluding , that trade under all conditions was beneficial to the trading partners, a non-sequitur. Every example of the benefits of trade from David Ricardo to Paul Krugman shows trade to be in balance, just as in barter, with each exchanging a basket of goods it values more for a basket of goods it values less. While this suggested that free trade, an absence of tariffs and other barriers to trade, would be beneficial to all trading partners, the only conclusion warranted was that balanced trade was beneficial to all trading partners. Nothing in economic theory suggests that one side practicing free trade would result in trade beneficial to all parties. The book we authored, Trading Away Our Future (Ideal Taxes, 2008), argued that our trading partners were not practicing free trade and that balanced trade, not free trade, was the first principle of international trade....
IMF figuring out capital inflows; U.S. still clueless
The International Monetary Fund is beginning to figure out that capital inflows are destructive. Alan Rappeport of the Financial Times reported on February 22 that the International Monetary Fund now favors letting underdeveloped countries limit the financial capital flowing into their countries.
Their new position recognizes that the inflow of financial capital strengthens the currency of the country receiving a net inflow, thus hurting that country's industries in world competition, The resulting trade deficit, in turn, leads to a financial crash....
Review of: Ha-Joon Chang, Bad Samaritans:The Myth of Free Trade
Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism (New York, Bloomsbury Press, 2008)
If you are a skeptic and believe economics cannot be a science, or if you are a Marxist, or just hate America or capitalism, or you believe your country’s backwardness is all the fault of the Americans and Europeans, or all of the above, this is the book for you. The author attacks what he describes as neo-liberal economic beliefs, the principal belief being the advantages of “free trade”. He describes himself as an economist but not a “neo-liberal” economist. If he is not a neo-liberal economist, what kind of economist is he? Neo-liberal is not an economic term but a political one, like calling economists by the policies they recommend. You are a Keynesian or non-Keynesian, a Marxist, a neo-classicist, a free trader, or, God-forbid, a protectionist in a rich country. The author’s thesis is that it is all right to be a protectionist in a poor country....
China's not selling. China's Buying
Recently, the Chinese government sold some of its U.S. Treasury Bonds, but the dollar-yuan peg hasn't budged. This means that the Chinese government is continuing to pour Chinese savings into U.S. financial assets at the rate of about $400 billion per year.
In order to understand Chinese policy, it is necessary to understand that the Chinese government buys U.S. bonds as part of its mercantilist strategy to keep the dollar high and the yuan low, so that Chinese industries steal market share from American industries and so that China gets America's manufacturing and research and development jobs.
The Chinese government knows that American assets are a lousy investment. It is obvious that the dollar will eventually fall by at least 25% vs. the Chinese yuan. Moreover, the People's Bank of China has had to actively suppress domestic consumption by raising bank reserve requirements in order to get the yuan needed to buy dollars without causing inflation.
A commentary by Brian Miller from today's Globe and Mail explains that when China has been selling U.S. Treasury Bonds, it has been shifting its assets from visible accounts into hidden ones. Here is a selection:...
US Companies Required to move Research Centers to China
On January 29, nineteen trade groups including the U.S. Chamber of Commerce and the National Association of Manufacturers sent a letter to U.S. government officials about China's new requirement that they move their research and development centers to China as a condition for doing business with the Chinese government. Here is a selection:
Of most immediate concern are new rules issued by the Chinese government in November to establish a national catalogue of products to receive significant preferences for govenrment procurement. Among the criteria for eligibility for the catalogue is that the products contain intellectual property that is developed and owned in China and that any associated trademarks are originally registered in China. This represents an unprecedented use of domestic intellectual property as a market-access condition and makes it nearly impossible for the products of American companies to qualify unless they are prepared to establish Chinese brands and transfer their research and development of new products to China.
These organizations concluded their letter with the following request:...
A commentary by Kendra Marr in The Politico (White House takes tougher tone with China) reports Peterson Institute for International Economics Senior Fellow Nicholas R. Lardy saying that the Obama administration's "tougher tone" with China is mainly for public consumption:
For now, however, these moves are just “trying to head off critics in Congress who think the administration is lying down in front of the Chinese,” Lardy said.
The Peterson Institute may have inside knowledge about the Obama Administration's trade rhetoric. Just after President Obama was elected, Senior Fellow Gary Hufbauer correctly told Reuters:...
Ralph Gomory: Does America Need Manufacturing?
Ralph E. Gomory is a former Senior Vice President for Science and Technology at IBM and the former President of the Alfred P. Sloan foundation. He is also the author of a mathematical theorem that bears his name.
"Playing Chicken with China" - we're published in today's American Thinker
Here's how we begin:
There is a game of chicken being played on trade policy with China, with potentially severe consequences for the world. China's response to U.S. and European efforts to constrain its mercantilist policies is to threaten an escalating trade war in which some or all parties may lose. To win, the U.S. must transform the game.
Recently, China announced that it was imposing tariffs of up to 105.4 percent on U.S. chicken exports. One of the products in dispute is apparently chicken feet. Because these are sold for ten times as much in China as in the U.S., China accuses U.S. chicken producers of dumping chicken feet below cost in the Chinese market. China had earlier imposed tariffs on American nylon products after the Obama administration imposed tariffs on Chinese tires, authorized by China's agreement with the United States when it entered the World Trade Organization. The chicken tariffs were announced after the U.S. offended China by selling weapons to Taiwan, which it claims as Chinese territory.
Given the substance of the current dispute with China, it is ironic that the "game of chicken" (a long-studied model of conflict) offers insights into how the U.S. should proceed. In this game, two players must decide between aggressive and cooperative strategies. Mutual selection of cooperative strategies provides reasonably good payoffs for both. But a player is better off selecting an aggressive strategy when faced with an opponent who cooperates. In this situation, the cooperator suffers. However, the cooperator does not necessarily benefit from switching to an aggressive strategy as well. If both players select the aggressive strategy, both suffer enormous losses....
And here is how we conclude:...
ABC News on Green Stimulus Jobs Going to China
Restore American Jobs and Do It Quickly
The world economic crisis is in danger of turning into Great Depression II. The economic stimulus package, the Troubled Asset Relief Program. cash grants to households, subsidies like "Klunkers", subsidies to home remodelling,to wind turbines and solar panels, and cash grants to households by both Pres. GW Bush and Pres, Obama have had little effect and unemployment continues to increase. The first step, and it is urgent that we do it, is to bring our foreign trade into balance. Our trade deficit in goods reached over $800 billion in 2008, the equivalent of 8 million U.S. jobs.
We have built up huge trade deficits with Germany, Japan, and China, countries embarked on an import-substitution (protective tariffs) strategy and an export-based strategy of development (building products for export), employing barriers to imports and subsidies to exports. Economists have a term for this -- mercantilism. Communist China when it saw the success of free markets in its agricultural sector, liberalized its manufacturing sector, too, permitting multi-nationals, in partnership with Chinese firms, to build factories and adopted the same mercantilist strategy. The mercantilist strategy of protective tariffs and export subsidies succeeded in converting the U.S. by the mid-1980s from the world’s leading creditor nation to the world’s leading debtor nation. This was the result of the growing trade deficits of the U.S. with each of these countries.
The traditional mechanism for correcting trade deficits and bringing trade into balance...
Bernanke starting to raise interest rates
Bloomberg.com reports (Fed in Talks With Money Market Funds to Help Drain $1 Trillion) that Federal Reserve chairman Ben Bernanke is planning to sell $1 trillion worth of short term US Treasury Bonds to money market funds. The Fed would take the money it gets from selling those bonds out of the monetary base and, in effect, burn it.
There are two things that can be deduced from this story:
For the last two years (since Bush's stimulus package in February 2008), Bernanke has been, in effect, printing money in order to buy Fannie Mae, Freddie Mac, and US Treasury Bonds. He has been doing so to keep U.S. interest rates low.
Now he appears to be changing course. U.S. interest rates should start rising, and this could have the following effects upon the economy:...
No growth in US goods exports to China in 2009
According to preliminary trade statistics released by the Bureau of Economic Analysis on February 10, U.S. goods exports to China shrunk by a miniscule .002% in 2009 while U.S. goods imports from China shank by a massive 12.2%. These statistics reflect the relative growth rates of the two economies, as shown in the following table:...
Obama's Failing China Strategy
James Morrissey, Washington Correspondent for Textile World had a very interesting February 9 report about Obama's China strategy:
At a meeting with the Senate Democratic Policy Committee, the president said, "We must get much tougher about enforcement of existing trade rules, putting constant pressure on China and other countries to open their markets in reciprocal ways."
Obama specifically mentioned currency manipulation, saying, "One of the challenges that we've got to get much tougher about is currency rates and how they match up to make sure that our goods are not artificially inflated and their goods are not artificially deflated in price." He said such actions place the United States at "a huge competitive disadvantage."...
The Democratic Senators seem content to follow Obama's, leadership, but Republican Senator Grassley is urging stronger action. Morrissey reports:...
Summers says everything is fine in our China relationship
Just before China announced plans to slap tariffs of 43.1%-105.4% on American chicken parts, President Obama's chief economic advisor Lawrence Summers told Judy Woodruff that everything was fine in our China relationship. Business Week reported:
Summers downplayed friction between the U.S. and China, including charges that a recent computer attack targeting Google Inc. came from China. The relationship between the two nations is resilient enough to withstand occasional dust-ups, he said.
But nothing has been fine in our economic relationship with China for the entire decade of the 2000s. Over that decade China engaged in massive currency interventions in the dollar-yuan market so it could minimize imports and maximize exports. Many of the other Asian countries did the same. As a result, the U.S. lost 5.7 million manufacturing jobs, as compared to just 0.5 million lost during the previous decade.
Unfortunately, Summers is a slow learner. So far, his education has cost the United States over a million manufacturing jobs and has cost the Democratic Party two Gubernatorial seats and a Senate seat. During the next three years, his education will probably cost his boss's party the Presidency, the House and the Senate.
But there is still hope that he can learn. His statements at the annual summit of world economic leaders in Davos Switzerland at the end of January show some progress. The Financial Times had two reports about his comments. One was from Martin Wolf:...
Richard Duncan is currently chief economist at Blackhorse Asset Management. He has worked or served as a consultant for ABN\AMRO in London, the World Bank in Washington, Capel Securities and Salomon Brothers in Bangkok, and for the IMF in Thailand during the Asian Crisis of the late 1990s. His previous book, The Dollar Crisis: Causes, Consequences, Cures, published by John Wiley (Asia) in 2003, dealt with the instabilities that the “dollar standard” that Pres. Nixon inaugurated by going off the gold-exchange standard in 1971 caused in the world economy. Capital flows to the Asian Tigers led to hyperinflation of financial assets and real estate, bubbles that could not be sustained, and caused the Asian Crisis. The capital flows from China, Germany, and Japan by their reinvestment of their trade surpluses in the U.S. produced the American stock market and real estate bubbles which he confidently predicted were unsustainable and that the disequilibrium must eventually result in plunging the world into the “most severe downturn since the Great Depression.” Events proved him right.
The current book goes into great detail of the forces at work. Duncan’s description of the causes of the current crisis, the New Depression as he calls it, makes this almost a great book. But, as a Keynesian, his prescription for emerging from the depression is misguided economically and politically.
Chinese Government and Obama are Playing Chicken
In the game of chicken two cars barrel down a road headed toward each other. The game ends when one or the other veers off, or they crash. Well, right now, Obama and the Chinese government are playing chicken, and which one wins will determine the future of the American economy and his presidency.
On February 5, the Chinese government initiated the game when it announced plans...
Is the U.S. Economy Growing?
With great fanfare, government officials and stock market pundits reported that real U.S. Gross Domestic Product in the fourth quarter of 2009 grew $182 billion or 1.4 percent compared with the third quarter. Were this rate to continue for three additional quarters, the rate of increase during the year would be 5.7 percent. Hence the reported annual rate was roughly 5.7%, obtained by multiplying the quarterly growth by 4. The 5.7 percent annual rate assumes that the economy will continue to grow during the next three quarters at 1.4 percent per quarter.
Examining the data casts doubt that the economy will grow at all...
CUNY professor Judith Stein is the author of the forthcoming Yale University Press book, Pivotal Decade: How the United States Traded Factories for Finance in the Seventies. In a commentary in the February 4 Philsadephia Inquirer she compares Obama's policy today with that of the United States back then. Here's her basic argument:
Green jobs are surely needed. But green Democrats simply echo the Atari Democrats of the 1980s, who concluded that traditional manufacturing was disposable and high technology was the wave of the future. During this era, the young Barack Obama attempted - and failed - to find jobs for displaced steelworkers in Chicago.
She cites some interesting statistics about solar panel manufacturing:...
Kenneth R. Davis: Buffett Plan is "long overdue"
On January 31 in the Huffington Post, Kenneth R. Davis urged Arianna Huffington to endorse the Buffett Plan for balancing trade, saying it was long overdue. Under that plan, exporters get Import Certificates (allowing the same amount of imports) that they sell to importers. As a result, the plan subsidizes exports and limits imports, balancing trade.
Davis' claims for the plan's good effects on the US economy were not exaggerated:
The effect of the Buffett Plan would be far greater and longer lasting than the short term fixes that are being debated, like infrastructure repair or one-time hiring tax credits. And the Plan is self-financing from fees for import certificates. There'd be no need for more government deficit spending. Business will expand, jobs grow and our trade deficits and national debt will be gradually eliminated -- all good news for the middle class.
His claims for the plan's effects on world trade were also accurate:...
Peter Morici's Currency Conversion Tax to End Mercantilism
There are several proposals on the table which would end the destructive mercantilist attacks that are de-industrializing the U.S. economy. If one of these proposals were adopted by the U.S. government, China and the other mercantilists would have to buy American products with the money they earned from imports, instead of just using that money to buy American assets.
One of the most innovative of these proposals is the currency conversion tax proposed by U. of Maryland economist Peter Morici, former chief economist at the USTR. Here is how he described his proposal in Congressional testimony before the House Committee on Foreign Affairs on March 12, 2009:...
Journal of Economic Literature:
Atlantic Economic Journal: