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 Richmans' Trade and Taxes Blog



Pretend Free Trade vs. Balanced Trade -- The national debate kicked off on FoxNews yesterday
Howard Richman, 4/30/2010
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The Greek Crisis Reveals the Fatal Weakness of the Euro and the Gold Standard
Raymond Richman, 4/29/2010

The headline in the WSJ (4-28-10) reads, “Crisis Spreads in Europe, Debt Downgrades in Portugal, Greece Sow Fear of Contagion.” The same article recites  “The yield on Germany’s 10-year bond fell to 2.99%.”  The following day, the headline read “Contagion Fear Hits Spain.” What is Germany doing right that Greece, Portugal, and Spain are doing wrong? For one thing, and we believe the main thing, Germany exports more than it imports while the others import more than they export. So Germany accumulates euros and foreign exchange while the others run out of euros and foreign exchange. Since their debts are payable in euros, they become unable to service their debts. As the following table shows, Greece, Portugal, and Spain display trade deficits in 2008 and 2009, the first a more or less normal year of growth, the latter a recession year.                

           Exports and Imports, selected countries

 

(Billions of U.S. Dollars)

   
           

Country

Year

Exports

Imports

Balance

 
           

Greece

2008

29.1

93.9

-64.8

 
 

2009

21.4

64.3

-42.9

 
           

Portugal

2008

56.4

87.8

-31.4

 
 

2009

41.4

58.8

-17.4

 
           

Spain

2008

285.9

415.5

-129.6

 
 

2009

215.7

293.2

-77.5

 
           

Germany

2008

1498

1232

266

 
 

2009

1121

931

190

 

                Source: CIA, World Fact Book

The solution the article talks about is a loan of €45 billion from the EU and the IMF, a condition of which would be for Greece to tighten its belt and balance its budget averting its need to borrow. But a balanced budget is no guarantee that exports will rise and imports will fall. The U.S. enjoyed a balanced budget in 2000. Nevertheless, the trade deficits exploded....

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Tom Goergen foresees the coming financial crisis
Howard Richman, 4/29/2010

The Democrats and Republicans in Washington are getting together this week on new financial regulations. But they are ignoring the cause of the last financial crisis and of the next. Meanwhile, writing in The Pilot, a local Soutnern paper, Tom Goergen nails it:...

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Deficit Commission should address both deficits
Howard Richman, 4/27/2010

The bipartisan U.S. Deficit Commission meets for the first time today (April 27). In December it will report its recommendations to Congress. The commission is expected to recommend some combination of tax increases and spending cuts to rein in our huge government budget deficits.

But there is another deficit problem that should be addressed at the same time. Our foreign debt has been skyrocketing. On July 13, 2009, we wrote a commentary (America Sliding Into a Pit of Foreign Debt) for the American Thinker about it. We wrote:

The graph below shows the United States net foreign debt. It hit an unprecedented $3.5 trillion, 24.3% of our GDP, at the end of 2008, according to a report issued on June 26 by the Bureau of Economic Analysis. When foreign debt rises as a percentage of GDP, a country becomes less and less able to pay off debt from its income stream.

NiIP2008b.gif

Eventually, when payments to foreigners get too high, a currency crash becomes inevitable. We also wrote about this back in July:...

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China raises its tariff on some US nylon products to 96.5%
Howard Richman, 4/26/2010

The Chinese government has continued its successful policy of imposing tariffs and non-tariff barriers upon U.S.  products.

1. In 2009, the Chinese government excluded American products from its catalogs of the products that could be purchased with its consumer subsidies. Through this means and others it reduced imports from the United States despite the growth of the Chinese economy by a reported 8.7%.

2. In February, new Chinese tariffs of up to 105% on American chicken products helped the Chinese government reduce imports from the United States, despite growth in the Chinese economy by a reported 11.9%.

3. On April 13, China's Commerce Ministry announced new duties on a type of U.S. steel used in the power sector. 

4. This week, the Chinese government raised its tariffs on som U.S. nylon from 36.2% to 96.5%, The Wall Street Journal's Market Watch reported on April 22:...

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Why Financial Reform Now? Why Not a Bill That Creates Jobs?
Raymond Richman, 4/23/2010

The President’s motives in offering a financial reform bill to regulate Wall Street and the banks has all the appearances of a Mein Kampf strategy for national socialism. Like burning down the Reichstag and blaming it on your political foes. Pretend that the banks and investment houses caused this recession when everyone in Washington knows it was the housing bubble that created the financial crisis, a bubble one of whose authors was Barney Frank who reported out the House version of this bill.  Taking advantage of the negative public reaction to bailouts, which actually turned out to be pretty inexpensive, the reform bill speaks of avoiding the need for bailouts in the future. Why? TARP’s toxic assets were rendered harmless at very low cost. Why not plan on repeating it during the next recession? Say, sixty years from now.

You won’t need any new taxes, no phony fund to slice up companies too big to fail. Why break them up? Make them a loan and get back your principal with interest! That is what happened during this recession.  The loans, negatively referred to as bailouts, stabilized the banking system at amazingly low cost to the taxpayers. In the future it will be at a very high cost represented by the taxes to create a fund that will have as little reality as the social security fund. The taxes will all be used as the social security fund is used, to finance government borrowing. ...

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Why we should tax interest earned by foreigners in the United States
Howard Richman, 4/22/2010

In my last commentary, I pointed out the unintended consequence of the revenue enhancing part of the HIRE Act which would cause a greater net inflow of foreign savings to the United States which would reduce American manufacturing jobs and investment.

Instead, I advocated several alternatives that would have the opposite effects, such as Congress restoring the 35% withholding tax on foreign interest earned in the United States (a tax which was withdrawn in 1984).

My alternative proposal would tax interest income just as dividend income is already taxed, with each country taxing income earned in that country.

After foreign governments reciprocate, American tax payers would pay income tax on interest earned abroad to foreign governments but get a tax credit which they could deduct from their tax liability to the American government on those interest earnings.

My proposal is fair. It gives foreigners no advantage over Americans when lending to Americans. Moreover, it recognizes the destructive nature of most financial capital inflows.

There is a simple taxation principle here. For reasons of fairness and tax efficiency, income should be taxed where it is earned. Double-taxation is avoided when your own government rebates foreign taxes.

Although I generally hold that the FairTax would be a huge step forward over our current income tax. The current FairTax bill shares a problem with our present income tax law. In other words, there should not be any exceptions to the sensible policy of part (a) of Section 905 of the FairTax bill of 2009. Part (b) should be deleted from the bill. Section 905 currently reads:,,,

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Congress passes foolish tax change that will increase US trade deficits
Howard Richman, 4/21/2010

As part of the Hiring Incentives to Restore Employment (HIRE) Act (HR 2847) signed by President Obama in March, Congress passed one of the most foolish tax changes possible, one that was designed to raise revenue, but whose unintended consequence will be higher trade deficits and fewer American manufacturing jobs.

The revenue measure (see Title V of the bill) will tax Americans who put their savings abroad in order to avoid paying American income taxes. It requires foreign banks to report the income earned by Americans. If they don't, then any income owned by the foreign banks will be subject to a 30% withholding tax on any income the banks earn in the United States. The result will be that foreign banks will report income earned by American savers abroad. The unintended consequence will be to reduce the amount of American savings that goes abroad.

The net flow of savings into a country causes trade deficits. As a result of this provision, net savings will flow into the United States, which will raise the currency exchange rate of the dollar, which will reduce American exports and increase American imports, which will reduce American manufacturing jobs and manufacturing investment.

Congress could have raised increased revenue in ways that would have reduced our trade deficits:...

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Congress Caused This Depression. Not Wall Street. Not the Banks
Raymond Richman, 4/20/2010

A bi-partisan Congress and successive Democratic and Republican administrations caused this depression. What else should one call an economic situation in which nearly 10 percent of the work force is unemployed and an additional 8.5 percent have given up looking for jobs. The administration would like you to believe that it was caused by the big investment houses on Wall Street and by the banks. The banks caved in under government threats and blackmail by ACORN and other self-appointed community groups and made the rotten loans whose defaults were responsible for this depression. Wall Street, seeing there were profits to be made, volunteered to raise the capital to convert the trillions of dollars of foolish mortgages into foolish investment vehicles. It turned out to be very profitable in the short-run but catastrophic in the long-run. But the bubble had been set in motion by Congress, not Wall Street and not the banks.

It all began innocently enough with the passage of the Community Reinvestment Act of 1977 which required the banks to end their alleged discrimination against the poor, mostly black, residents in poor, so-called, red-lined neighborhoods. It was leftist propaganda that accused the banks of deliberately discriminating against blacks and the line was bought hook, line, and sinker by Sen. Proxmire, the bill’s sponsor, President Carter, and a know-nothing Congress. Banks, including black owned banks, as is to be expected, made fewer mortgages in economically deteriorating neighborhoods. But the act ignored reality and required banks to make loans in such areas and if they failed to do so, they would suffer penalties. ...

 

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China's temporary trade deficit largely due to stockpiling of commodities
Howard Richman, 4/18/2010

Here's an excerpt from an April 12 commentary (Unpacking China's Trade Deficit) by Rachel Ziemba from Roubini' Global Economics:...

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Geithner will Punt on China Currency
Howard Richman, 4/16/2010

Treasury Secretary Timothy Geithner is expected to make his semi-annual declaration to Congress of whether any countries are manipulating their currencies. Geithner has twice told Congress that China does not manipulate the dollar-yuan exchange rate, despite the fact that China has kept the rate fixed for the last year and half.

Geithner's report was due on April 15, but was delayed by the administration until after President Hu's visit to Washington on April 12-13 for the Nuclear Security Summit, where Hu stiffed Obama on both the exchange rate and Iran. The economic world has been wondering how the Obama administration would react.

An April 15 Voice of America story gives the first indication. Speaking to an association of American news editors. Geithner came out squarely in favor of letting China manipulate the yuan-dollar exchange rate:...

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Boston Globe spins nuclear summit as success
Howard Richman, 4/15/2010

Here is a key paragraph from their editorial:

President Barack Obama's meetings with leaders at the summit produced two encouraging moves in the direction of nuclear security. China's President Hu Jintao agreed to cooperate in crafting new, targeted U.N. sanctions on Iran. This was bad news for Ahmadinejad but good news for everyone who wants to prevent the further spread of nuclear weapons.

Here's what really happened, from a Reuters story:...

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Obama bows as Chinese President Hu stiffs him
Howard Richman, 4/14/2010

[This piece was published in the American Thiner on April 15: See: http://www.americanthinker.com/2010/04/obama_bows_while_hu_stiffs_him.html]

President Obama bowed to Chinese President Hu while they shook hands at the beginning of the April 12-13 Nuclear Security Summit in Washington. President Hu did not bow back. The rest of the summit played out the same relationship.

First, Hu rejected Obama's request that China stop using currency manipulations to steal American industry. At a press conference, President Obama tried to paper over the slight. He said,

With respect to the currency issue, President Hu and I have had a number of frank conversations. As part of the G20 process we all signed on to the notion that a rebalancing of the world economy would be important for sustained economic growth and the prevention of future crises. And China, like the United States, agreed to that framework. We believe that part of that rebalancing involves making sure that currencies are tracking roughly the market and not giving any one country an advantage over the other.

Next, Hu stiffed Obama's request for sanctions against Iran. Instead, China started shipping gasoline, giving Iran the key import that it needs. The following begins a Reuters story:

State-run Chinaoil has sold two gasoline cargoes for April delivery to Iran, industry sources said on Wednesday, stepping into a void left by fuel suppliers halting shipments under threat of U.S. sanctions.

 

By bowing to President Hu's intransigence, President Obama is announcing that he will let Hu continue to de-industrialize the United States and that he will let totalitarianism replace democracy and the free market as the world's dominant social and economic system. President Hu is refusing to adjust China's currency to the market level so that he can continue to steal American manufacturing industries. He is shipping gasoline as part of his continuing support to the world's most repressive regimes in North Korea, Burma, Sudan, and Iran....

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U.S. Trade Deficit up in February
Howard Richman, 4/13/2010

This morning, the Bureau of Economics Analysis released their preliminary trade statistics for February. Imports jumped by $2.7 billion while exports creaped up by $0.3 billion. Whenever U.S. demand begins to grow, the trade deficit rises, letting demand out, and slowing the recovery.

Our trade numbers with China do not show any progress. Although down since January 2010, the deficit was up since February 2009. Also, Chinese imports from the United States were down slightly in February 2010, as compared to January 2010. There is no evidence, here, that the Chinese government is taking down its many tariff and non-tariff barriers to U.S. products.

Earlier this week (Trade Deficit Burdens Economic Recovery). University of Maryland economist Peter Morici calculated just how much the growing trade deficit was holding down U.S. growth. He wrote:...

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The FairTax Solution
Howard Richman, 4/12/2010

Every year, Congress makes the personal income tax more complicated and time-consuming. Why not replace our entire tax system with the FairTax, a national sales tax with a prebate? Five huge problems would be solved:...

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Smoot-Hawley did not cause the Great Depression
Howard Richman, 4/11/2010

Ian Fletcher, author of Free Trade Doesn't Work: What Should Replace it and Why? had an excellent commentary in the Americnan Thinker on Friday (Protectionism Did Not Cause the Great Recession). Here's how he begins:

The debate over free trade is riddled with myth after myth. One that keeps resurfacing, no matter how many times it is discredited, is the idea that protectionism caused the Great Depression. One occasionally even hears that this same protectionism -- specifically, the Smoot-Hawley tariff of 1930 -- was responsible in significant part for World War Two! This is nonsense dreamed up for propaganda purposes by free traders, and it can easily be debunked.

Let's start by reminding ourselves of a basic fact: The Depression's cause was monetary. The Federal Reserve had allowed the money supply to balloon excessively during the late 1920s, causing it to pile up in the stock market as a bubble. The Fed then panicked, miscalculated, and let the money supply collapse by a third by 1933, depriving the economy of the liquidity it needed to breathe. Trade had nothing to do with it.

The Smoot-Hawley tariff was simply too small a policy change to have so large an effect as triggering a depression. For a start, it applied to only about one-third of America's trade: about 1.3 percent of our GDP. One point three percent! America's average tariff on goods subject to tariff went from 44.6 to 53.2 percent -- not a very big jump at all. America's tariffs were higher in almost every year from 1821 to 1914. Our tariffs went up in 1861, 1864, 1890, and 1922 without producing global depressions, and the great recessions of 1873 and 1893 spread worldwide without needing the help of any tariff increases.

He is entirely correct. Those who have studied the depression agree. Christina Romer, now Chair of President Obama's Council of Economic advisors, summarized their consensus in her Encyclopedia Britanica entry about the Great Depression:...

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The Greek and the American Financial Crises -- Similarities and Differences.
Raymond Richman, 4/8/2010

Greece is experiencing a monetary crisis. It is incapable of servicing her debt which is payable in euros. It faces defaulting. No one mentions the true cause of  its difficulties, the trade deficits with other euro countries,  particularly Germany.  It has to pay for its imports in euros. In 2009, Greece’s trade deficit with Germany amounted to €4.81 billion. Other euro countries are having similar difficulties balancing their trade with Germany. In 2009, Italy’s trade deficit with Germany amounted to €11.4 billion; Portugal, €2.62 billion; and Spain, €12 billion. We mention these countries because analysts have suggested that they are beginning to face the same problem that Greece faces, a scarcity of euros.

Greece faces the problem that many countries experienced under the gold standard, a scarcity of legal tender to service their debt. Were the U.S. on the gold standard, it, too, would face a scarcity of gold that would threaten its economic stability.

The problem is that the European countries, with the exception of the United Kingdom, Norway, and Sweden, are on the euro standard. ...

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Obama adopts Bush's losing strategy in Afghanistan
Raymond Richman, 4/7/2010

[co-authored with Howard Richman]

Do we want to win the war against Al Qaida, which is winnable, or fight a war on drugs that cannot be won? We won the war in a blitzkrieg in Afghanistan in 2002 with the help of a people that welcomed us as liberators. We drove the little that remained of the Taliban army out of Afghanistan. The Taliban had ceased to be an organized force.

Why were we welcomed in the Afghan countryside as liberators? The Taliban were hated in the countryside because their religious leaders banned the cultivation of the opium poppy in 2000, a disaster for the Afghan farmers whose chief crop was the poppy.

But after the victory, President Bush made a huge mistake. In order to keep our troops occupied, he began a moral crusade against opium, urging the farmers to grow other products. What nonsense as it turned out! We destroyed their crops of poppy where we could. The resurging Taliban offered them protection to continue growing poppies, the chief cash crop of Afghanistan, and, as a result, regained power over the Afghanistan countryside.

On October 26, 2009, while President Obama was determining his Afghanistan policy, we wrote a commentary, published by Enter Stage Right, which urged him not to repeat Bush's mistakes. We wrote:

Have we lost the war? Probably. Can we win it? Perhaps. We would have to declare that we shall no longer interfere with the cultivation of poppy in Afghanistan. To show we are serious, we should encourage the Afghan government to legalize the cultivation of poppy. It should tax poppies and opium as the Taliban have been doing. And to do it right, we ought to legalize drugs in the U.S. as well.

Let us recognize the fact that prohibition did not work with alcohol and has not worked with cocaine, marijuana, or heroin. Instead of wasting money as we have been doing for decades, we shall gain revenues instead. We shall gain friends instead of making enemies abroad as we have been doing.

We believe the war against the Taliban and al-Qaida is unwinnable as long as the drug war continues in Afghanistan.

But President Obama, decided to continue President Bush's losing crusade against opium. He attacked Afghanistan's President Hamid Karzai, with whom we were allied, for not joining the U.S. war against the Afghanistan farmer. Here's a selection from an April 7 commentary by Tony Blankley detaling Obama's attacks against Karzai:...

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Obama halts US drilling in Chukchi Sea
Howard Richman, 4/7/2010

Investor's Business Daily has been following the story. In a May 29, 2009, editorial they reported:

Back in July, when IBD first interviewed the then-little-known governor, Palin emphasized developing Alaska's Chukchi Sea resources. Under those icy waters, it was then believed, was enough oil and gas to supply America for a decade.

"It's a very nonsensical position we're in right now," Palin told us. "(We) ask the Saudis to ramp up production of crude oil so that hungry markets in America can be fed, (and) your sister state in Alaska has those resources."

At the time, it was thought that Chukchi's waters northwest of Alaska's landmass held 30 billion cubic feet of natural gas.

Today, Science magazine reports that the U.S. Geological Survey now finds it holds more than anyone thought — 1.6 quadrillion, or 1600 trillion cubic feet of undiscovered gas, or 30% of the world's supply and 83 billion barrels of undiscovered oil, 4% of the global conventional resources.

That's enough U.S. energy to achieve self-sufficiency and never worry about it as a national security question again....

 

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Charleston Post Courier editorial advocates Buffett's Import Certificates to balance trade
Howard Richman, 4/6/2010

Here's a selection from their excellent editorial:

Now the politics look improved for a response to China's currency game, in part because China has openly rebuffed President Obama's efforts to address the trade imbalance and toughen sanctions in Iran and North Korea....

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NPR explains Chinese currency manipulation
Howard Richman, 4/4/2010

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Obama punts on Chinese currency manipulation
Howard Richman, 4/3/2010

The international New York Times reports that the President Obama's Treasury Department will not declare China to be a currency manipulator before Chinese President Hu's visit in April. Here's a selection from the story:

For now, the United States is setting aside the most potentially divisive issue, deferring a decision on whether to accuse China of manipulating its currency, the renminbi, until well after Mr. Hu’s visit, according to a senior administration official. That decision, the official said, reflects a judgment that threatening China is not the best way to persuade it to allow the renminbi to appreciate against the dollar. 

Meanwhile there is a bypartisan coalition in Congress who make take action, whether Obama does or not. Public Citizen reports:...

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Good joke in today's American Thinker
Howard Richman, 4/2/2010

The following joke introduces a commentary by Harold Witkov:

A lifelong Democrat runs into a lifelong Republican, and they begin to debate the just-passed health care bill:...

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China's multiple barriers to American products
Howard Richman, 4/1/2010

The latest statistics released on March 18 by the BEA show that for every $1 that the United States bought from China in 2009, the Chinese government only let its people buy 28¢ of American products. Although the Chinese economy was growing by 8.7%, the Chinese government managed to shrink Chinese imports of American goods and services.

The 2010 National Trade Estimate (NTE) released on March 31 by the Office of the United States Trade Representative explains how the Chinese government kept out American products. Although the report ignored China's currency manipulations, which raise the cost of all American goods and services in China by somewhere between 25-40%, it still found plenty to talk about. Currency exchange rate manipulation is only one of the many ways that the Chinese government keeps out American products. The report focused upon the Chinese government's expert use of tariff and non-tariff barriers....

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    Wikipedia:

  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [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....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]