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 Richmans' Trade and Taxes Blog



Boeckh Nails It, but Opposes the Solution
Howard Richman, 8/30/2010

J. Anthony Boeckh nailed it (Increasing Risks). The world economy is heading downhill because of the failure to rebalance trade. His graphs clarify. His investment recommendations seem sound. If his 2010 book is as perceptive (The Great Reflation) then it is well worth buying. Here is his summary of how mercantilism is sapping U.S. growth at the moment:

Effectively, the surplus countries [e.g., China, Germany, Japan, etc.] are stealing growth from the deficit countries [e.g., the United States, Greece, Portugal, etc.] and not allowing them to adjust to external and internal disequilibrium. In the U.S., this can be seen most clearly by the simultaneous rise in the savings rate, the trade deficit and the deterioration in labor market data. When the natural forces of the adjustment process to economic disequilibrium are blocked, political tension must necessarily increase. In an election year, you can expect vulnerable politicians to act.

Boeckh fears that U.S. policy makers choose his "third option":...

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Reducing the Trade Deficits Is Essential for Economic Recovery
Raymond Richman, 8/28/2010

There was bad news on Friday, August 27,  with the release of updated figures for economic output in the second quarter of 2010. The Bureau of Economic Analysis correctly presented the data. It reported:

The deceleration in real GDP in the second quarter primarily reflected a sharp acceleration in imports [my emphasis] and a sharp deceleration in private inventory investment that were partly offset by an upturn in resistential fixed investment, an acceleration in nonresidential fixed investment, an upturn in state and local government spending, and an acceleration in federal government spending.

No one. journalist or economist or government official mentioned the sharp acceleration in imports to which the BEA refers and which appears in the first paragraph of the BEA report. The fact appears to be that our leaders, our political and academic elite, are so committed to “free trade” that everyone is afraid to call attention to the disaster in the making, to the deficits that are de-industrializing the U.S. and have cost millions of good-paying jobs.

The reader may be unaware, because it is mentioned so rarely, that exports and imports are part of the Gross Domestic Product.  The formula is...

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The Housing Bust Redux
Jesse Richman, 8/26/2010

When housing numbers were released on Tuesday and Wednesday for July, the picture they painted of the housing market was pretty bleak.  Sales volume tanked, inventory increased.  The only surprising aspect of the associated news stories was that they noted economists had predicted substantially smaller declines.  If we believe that long-run housing prices are shaped by supply (houses on the market) and demand (income and population growth), the recent drop should come as no surprise.

During the housing bubble demand for housing soared, fueled by unrealistic expectations of continued hyper-growth-stock returns from a traditionally stodgy investment that in the long term keeps up with inflation and little more.  Now consumers have learned...

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Scott Paul: The Onshoring Trend is Phony
Howard Richman, 8/25/2010

Writing in the Huffington Post on August 20 (The Onshoring Trend is Phony), Scott Paul pointed out:

On Friday August 6th, no less an authority than the president himself heralded a USA Today front page story headlined: "Some manufacturing heads back to USA." I watched CNBC that morning -- the July unemployment figures were just out -- and its anchors also trumpeted the news. So did the House Democratic leadership, which viewed the headline as a positive development and vindication of its recent focus on manufacturing. I don't blame any of these folks for trying to squeeze the good news out of an otherwise horrible day of economic news, but it turns out that exactly the opposite is happening,

Turns out they were all misinformed. Actual hard data released by the Federal Reserve Bank of Philadelphia today shows that onshoring, in fact, has declined over the past two years. Only 4.5 percent of manufacturers surveyed indicated that they had brought work back to the U.S. since the beginning of the year, compared to 6.2 percent in a survey two years ago. On the other hand, offshoring continues at a higher, though slightly diminished, pace: 9.7 percent of companies indicated that they had offshored work, compared to 11.1 percent two years ago....

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Comments: 1


Economists Don't Know How to Recover From the Recession
Raymond Richman, 8/24/2010

In an Op-ed in the Pittsburgh Tribune Review on 8-17-2010 (Obama's Reverse Progres), Kevin Hassett, director of economic policy studies of the American Enterprise Institute and senior economic adviser to Sen. George McCain in the latter’s 2008 election campaign, brings into question whether a Republican majority in the Congress would do any better than Pres. Obama  in dealing with this recession. He demonstrates the bankruptcy of economists of both parties in dealing with the recession. He asserts that Pres. Obama’s “massive intervention” to rescue General Motors and Chrysler is anachronistic. Manufacturing is, in his view, “no more valuable than other types of output.” He writes: “Manufacturing has been on a decline as a share of national output for decades, part of the evolution of the U.S. economy.”  His notion that a decline of U.S. manufacturing as a share of GDP is “normal” and to be expected is almost universally held among economists. But the rapid rate of decline of manufacturing  during recent decades is not normal at all. It is a result of mercantilist practices of some of our trading partners and the failure of Democratic and Republican administrations to pursue policies that would bring our international trade in goods and services into balance.

As Hassett notes, “Manufacturing as a share of U.S. gross domestic product has fallen from about 28 percent in 1950 to about 11 percent in 2009.”  But as a share of U.S. household consumption, it has not fallen at all as the following table shows:...

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Greg Richards: "We must be much more aggressive with mercantilist countries in enforcing the rules of the road so that we protect out production and technology."
Howard Richman, 8/24/2010

In the August 22 American Thinker, Greg Richards (Conviction Conservatives and the American Renaissance) argues that conservatives must reexamine America's trade policy. Here is a selection:

In economics, we have to reassess one of the most firmly held views in academic economics, and that is the value of free trade -- or perhaps not free trade per se, but trade as we find it. Going back to the 1970s, Japan was successful with its export-led growth model, which was a mercantilist model. Yes, it is true that this model means that the mercantilist country is offering us cheap goods in return for "only" our paper....

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Barr McClellan: "Malaise has returned"
Howard Richman, 8/22/2010

In an article in the August 22 Foreign Policy Journal (Open Trade Season: Ten Steps for Job Creation), Barr McClellan advocates balanced trade as the way to restore U.S. economic growth. McClellan is the former personal lawyer of LBJ and the co-author of Made in the USA: Corporate Greed, Tax Laws and the Exportation of America's Future. Here is his realistic assessment of where the economy is right now:

The impact of so-called free trade and its huge imbalances has been in business and jobs. After two years of grants and incentives, the economy is dead, there are no jobs, unemployment is over 9% and malaise has returned.

He advocates a ten step program to bring more jobs to the United States. Tariffs only figure in one of his steps:...

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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:...

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Krugman: "We're in a world in which mercantilism works"
Howard Richman, 8/17/2010

The New York Times had an August 15 editorial (Return of the Killer Trade Deficits) which parallels the commentary that my father, son and I wrote for the August 16 American Thinker. The Times looked at the U.S. June trade numbers released last week and noted that the exploding U.S. trade deficits are an alarming trend. While we were concerned with the ramifications upon the American economy, the Times was only concerned with the effect upon the world economy. Here is a selection from their editorial:

(T)rade statistics released last week indicate that American consumers are sucking in large quantities of imports as spending recovers, while weak demand in the rest of the world is crimping American exports.

Meanwhile, China is mopping up demand everywhere you look with its artificially cheap supply of goods. Germany, the world’s other exporting power, is cutting its budget and relying on foreign demand to drive its economic rebound. This isn’t sustainable.

The Times is pretending that the U.S. problem is also the world's problem. What nonsense! A U.S. trade deficit is a one sided problem. Our trade deficits hurt us. The resulting trade surpluses in Europe and China help them. The Times advocates more of what the Obama administration has already been doing -- talk, talk, and more talk -- while they oppose anything that would work. Here is what they say about tariffs:...

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Obama Fiddles while Economy Falters - We're published in the American Thinker this morning
Howard Richman, 8/16/2010

Here's how we begin:

The Economic Times of India called the latest U.S. trade data, released August 11, a "grim set of trade figures." In June, the U.S. trade deficit rose by $7.9 billion or 19 percent to $49.9 billion. Meanwhile growth of the U.S. economy was faltering from 3.7% during the first quarter to 2.4% during the second. The two are related. The rising trade deficits have been causing demand to leak abroad out of the American economy, causing growth to slow. The graph below shows the monthly trade deficit since President Obama took office:

Instead of tackling the main problem of the economy, the high unemployment rate of more than 9%, the Obama administration wasted its first year in office pursuing a chimera called National Health Care and followed that up by wasting six months of additional time and money creating a new giant bureaucracy to regulate the banking industry to prevent a possible collapse of the banking system when we have not even emerged from the current collapse yet.

If instead, President Obama had balanced trade, the U.S. would have gained enough jobs to produce an additional $49.9 billion worth of goods per month. With each U.S. manufacturing worker producing approximately $10,000 worth of product each month, this production would have employed about 5 million more manufacturing workers, not to mention additional jobs from workers constructing the new factories and not to mention the jobs providing services to the newly employed manufacturing workers....

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Dan Drezner gives Obama an "F" for his trade agenda
Howard Richman, 8/8/2010

We are not the only ones disappointed with the Obama administration's trade policy. Writing at ForeignPolicy.com, Daniel Drezner (How I would grade Obama's Foreign Policy to Date) gives Obama an "F" on trade, writing:

3) Trade: Blech. Let me repeat that -- blech. I understand that the administration is on barren political terrain when dealing with this issue. Still, the phrase "Obama administration's trade agenda" is pretty much a contradiction in terms at this point. The Doha round is dead, and the only trade issue that has the support of policy principals is the National Export Initiative -- and you know what I think about that. Unlike the other three issues, the administration hasn't even bothered to put much effort onto this one -- though the recent pledge to get the Korea-U.S. Free Trade Agreement (KORUS) ratified is promising. GRADE: F 

He separates balancing global demand from trade policy, though they are really the same thing, and gives Obama a "D" for that, though I don't see the reason for such a high grade:

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U.S. Growth Slows Due to Trade Deficit -- we were published in the American Thinker this morning
Howard Richman, 8/7/2010

Here's how we begin:

No private sector tire repairman would keep pumping up a flat tire again and again without patching the leak, but that is exactly what our governing class keeps trying. The Obama administration and the Democratic Congress have been pumping the economic tire without patching the trade deficit leak for a year and a half now.

The preliminary data for second quarter GDP, released on Friday (July 30) by the Bureau of Economic Analysis (BEA), show U.S. economic growth slowing from a 3.7% rate in the first quarter to a 2.4% rate in the second quarter. But the details were even worse. A full 1.0% of that 2.4% was due to produced goods that went unsold due to lack of demand. In fact, demand for American products rose at a paltry annual rate of just 1.4%!

The U.S. economy has now been depressed for a full two and a half years, ever since the fourth quarter of 2007. And with the current growth rate amounting to a paltry 1.4%, the near term prospects do not look good at all. The United States is clearly locked in a persistent recession with little prospect for recovery at any time soon.

We then discuss the Obama administration's mistakes and present our Scaled Tariff plan. We conclude:

This plan would be opposed by misinformed progressives who have been claiming that that the Smoot-Hawley tariff made the Great Depression deeper than it would have been. But those who have studied the Great Depression know that this is not true. For example, in her Encyclopedia Britannica entry about the Great Depression, Council of Economic Advisors Chair Christina Romer wrote: "Scholars now believe that these [protectionist] policies may have reduced trade somewhat, but were not a significant cause of the Depression in the large industrial producers."

Despite their bad reputation, tariffs are actually as traditional as apple pie. They were the main source of federal government revenue from our country's founding until Woodrow Wilson enacted the progressive income tax. Their main drawback is that they can be used to protect one or another politically-powerful industry, at the expense of other industries. But the scaled tariff would be an across-the-board tariff. It would not pick winners and losers. It would not only boost production by those Americans who compete with imports, but it would also increase American exports.

Its only drawback is that it would reduce the loans we are receiving from the currency-manipulation governments, resulting in higher U.S. interest rates, making it more expensive for the federal government to borrow. The higher interest rates would encourage Americans to save. And the federal government could reduce interest rates by moving toward a tax system that leaves household savings and undistributed business profits untaxed.

The greatly increased investment opportunities would increase business investment, despite the higher interest rates. The result would be a rapidly expanding private sector and an expanding GDP....

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Cato Institute's Richard W. Rahn only sees 2 alternatives for reviving economy
Howard Richman, 8/4/2010

In his August 3 commentary about the latest GDP figures in the Washington Times (Evidence and Denial) Richard W. Rahn was quite accurate about the economic dreamworld that the Democrats are living in. He writes:

Last Friday, it was reported that economic growth was only 2.4 percent in the second quarter of this year - far below what the Obama administration had forecast. Yet the administration and its supporters continue to be in denial about the fact that their policies are not working. Psychologists refer to the refusal to change one's mind when confronted with contrary evidence as cognitive dissonance.

But he misses the fact that the Republican establishment is living in a dreamworld also If he were to look closely at the second quarter numbers, he would have discovered that the rising trade deficits caused GDP to fall. Obama’s failure to deal the trade deficits is sinking his presidency....

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We are in the persistent depression predicted by Keynes
Howard Richman, 8/3/2010

U. of Maryland economist Peter Morici's analysis of Friday's 2nd Quarter GDP report is just about identical to mine. He calculates that demand for American products only grew by 1.3% in the second quarter, while I calculate 1.4%. He calculates that the trade deficit sapped 2.8% from growth, while I calculate 2.7%. According to both of us, the trade deficit is causing the economic recovery to stall.

Morici is more precise than me in his predictions. He expects a double-dip recession starting in November. He writes:

Unless spending picks up (and indicators are that is not happening), once businesses stop piling up unsold goods, layoffs will outnumber hires, unemployment will rise with a vengeance, and the economy will head into a second dip. That will not likely happen until after the election. It will show up in fourth-quarter data.

Neither Morici nor I deserve all that much credit. We are simply reading the current statistics in order to determine what is happening today. John Maynard Keynes predicted this persistent depression back in 1936 in the chapter about mercantilism and its victims from his book The General Theory of Employment Interest and Money, writing:...

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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]