Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Growing Trade Deficit continues U.S. Depression
A depression continues until real GDP surpasses pre-depression levels and keeps rising. The United States did not climb out of the Great Depression until 1939, though it almost climbed out in 1937 as shown in the graph below:
Similarly, the United States is still locked in the Great Recession and will not be out of it until it surpasses the level Real GDP reached in the fourth quarter of 2007, as shown in the graph below:
The preliminary results for Real GDP for the third quarter of 2010, just released on October 29, show why the American economy is staying in the Great Recession. The growth in real GDP was just 2.0% due to the growing trade deficit subtracting a full 2.0% from GDP growth. The components of GDP growth were the following:
As can be seen from the table, consumption spending contributed 1.8% to GDP growth and inventories, perhaps due to businesses stocking up on commodities, contributed 1.4% to growth, while the trade deficit subtracted 2.0% from U.S. economic growth. If not for the growing trade deficit, U.S. economic growth would have been 4.0%....
Sound Monetary Policy Is Necessary But More Is Needed
David Wessel of the Wall Street Journal, in its edition of 10-28-2010, asks what the late Prof. Milton Friedman, the leading monetarist and proponent of free enterprise of the Chicago school, would think of Federal Reserve Chairman Bernanke’s “imminent move to print hundreds of billions of dollars to buy more Treasury bonds to put more money into the economy.” He put the question to one of Friedman’s eminent students, Prof. Robert Lucas. As a former student of Prof. Friedman, I found myself in agreement with their description of Friedman’s views on monetary policy. But to suggest that Friedman would have approved Bernanke’s policy for Quantitative Easing (QE2) is wrong. Much more needs to be done before monetary policy can make a real contribution to economic recovery.
Moreover, the notion expressed at the beginning of the article that “We can be sure (that Keynes) … would advise “more government spending to spur U.S. economic growth” assumes that he would have learned nothing from the recession of 1936-37 which demonstrated that government spending has no multiplier effect at all and which is confirmed by our experience with Pres. Obama’s 2009 Recovery Act. Spending $800 billion dollars has given a small temporary boost to income and employment as the data for 2009-10 confirm.
As the article points out, Friedman did not trust central bankers and blamed the Fed for the severity of the Great Depression and its cause. Friedman also warned against “erratic swings” in the money supply, which has indeed been swinging erratically lately, as shown by the black line in the graph below. The red line shows the change in M1, which is controlled by the Federal Reserve through open market purchases of short-term US Treasury Notes. The Federal Reserve uses its control over M1 to affect M2, a broader measure of the Money Supply. Right now, the Federal Reserve is growing M1 quite rapidly in order to bring up M2 growth, possibly to the 8% range, which will likely cause inflation to rise. This is erratic alright...
Achieving Reasonably Balanced Trade Is an Act of Self Preservation
US Treasury Secretary Geithner, in a letter addressed to the G20 member nations, called for the G20 at its forthcoming meeting in Korea to set targets limiting current account surpluses. He described these targets as necessary to ensure the “orderly rebalancing of global demand”. He also wanted the G20 members to bar its members from engaging in deliberate currency devaluation as a way to boost exports at the expense of other nations. The finance ministers in their meeting preparatory to the official G20 meeting debated these proposals and agreed only to recommend barring the use of devaluation as a tactic to gain a trade surplus.
Geithner said countries were interfering with the free flow of goods and services, both on the demand side and the supply side. Yes, even the U.S. does that. We oppose unrestricted immigration and we impose some tariffs and quotas. Only money and capital is free to enter the U.S. What he said was clear and what he meant was China.
Why was Geithner being so divorced from reality at the meeting of finance ministers of the G-20 as to urge the G-20 to set China’s exchange rate for the yuan with the rest of the world? At the same time, the G20 would be setting the exchange value of all countries, the U.S. dollar, the euro, the Japanese yen. But what about the other conditions necessary to make it work: unrestricted movement of people, money, and goods as our Constitution requires of the states of the union.
Our proposal for “scaled tariffs” which would be imposed only against countries with which we are experiencing trade deficits does not affect the rate of exchange between countries and fully accords with World Trade Organization (WTO) rules which empower countries to impose tariffs for the purpose of correcting Balance of Payments(BoP) imbalances. Taking advantage of these rules does not require approval in advance of any country or group of countries. ...
Speak Loudly, but carry No Stick!
In my last posting, I discussed the choice facing the Obama administration after Geithner's letter to his fellow G-20 finance ministers calling for balanced world trade was applauded by UK, Canada and Australia but vetoed by the mercantilist countries. I wondered if the Obama administration would take action to achieve balance trade, or whether it would continue to think that it could talk the mercantilist countries into abandoning their successful strategy. I wrote:
Peter Morici sees the current situation through the same prism, but he doesn't expect any administration action that goes beyond diplomacy. He writes (QE2 Won't Make Big Waves as G20 Flops):
At the G20 talks, Treasury Secretary Geithner failed to accomplish a grand bargain to wind down Asian trade surpluses and boost demand for what western economies make. Opposition from champion mercantilists Japan and Germany, who pioneered some of the very tactics China now exploits on a grander scale, caused the G20 to adopt only soft, modest goals and no remedies for deficit countries like the United States.
Geithner calls for balanced world trade
In an October 20 letter to the finance ministers of the G-20 countries, Treasury Secretary Geithner called for balanced world trade with each country limiting its trade surplus or deficit to an unspecified percentage of its GDP. Only raw materials exporters with huge trade imbalances (e.g., Saudi Arabia and Russia) would be excluded from the requirement.
According to a New York Times report, Geithner's proposal was supported by the UK, Canada and Australia but opposed by Germany. The Obama administration has finally identified America's economic problem and has gotten the other English speaking countries to stand with it!
If this is more than just talk, the next step will be for the Obama administration and the other English speaking countries to threaten and, if necessary, institute an Import Certificates plan or a scaled tariff that would gradually force their trade toward balance over the next few years.
Other trade deficit countries would soon follow suit. The result would be balanced world trade. The world, led by the trade-deficit countries, would recover quickly from the Great Recession. Not only that, but the English speaking countries would continue to lead the world politically and economically, and the Obama administration would go into the 2012 elections presiding over an economic recovery.
On the other hand, Geithner's letter may just be another case in which the Obama administration substitutes words for action. The Chinese government will not give up its successful mercantilist strategy voluntarily. China's WTO-illegal cut-off of Rare Earth shipments to the United States this week may be its first rejection of Geithner's proposal. As in the past when China broke the U.S. embargo against shipping gasoline to Iran and supported North Korea's torpedoing of a South Korean ship, the Obama administration will once again wipe the Chinese spit from its face, look up at the sky, and pretend that it is raining.
Here is the text of Geithner's letter:...
Geithner undercuts Bernanke's negative-interest rate plan
At the moment, the Federal Reserve is increasing the money supply in order to increase the U.S. inflation rate from about 1% to about 2% while keeping short-term interest rates close to zero in nominal terms. This action is intended to drive real American short-term interest rates further into negative territory so that Americans spend their money (instead of saving it) and so that the dollar weakens (when private savers sell their dollars in order to earn higher interest rates elsewhere).
But Treasury Secretary Geithner just took the upside out of the Federal Reserve's plan, the weakening of the dollar. As a result, the inflation that the Federal Reserve is producing will increase American imports by increasing American demand for imports, and discourage American exports because the inflation will increase American producer costs. As a result of Geithner's action, Bernanke's plan will make the U.S. economic situation worse, not better.
Specifically, Geithner endorsed the Japanese Central Bank's recent decision to buy dollars and the upcoming decision by the European Central Bank to buy dollars. Here is a what Geithner told the Wall Street Journal:...
Nobel Prize winning economist Paul Krugman has come a long way in the last few years, from being an advocate of America's unilateral-free-trade policy, to being one of its harshest critics.
In an October 17 New York Times commentary (Rare and Foolish), he accuses China of violating WTO rules in its decision to halt rare earth materials exports to Japan and limiting those exports to the United States. He wrote:
Why Pres. Obama's Economic Stimulus Has Failed
The Obama administration’s 2009 Recovery Act allocated $787 billion intended to stimulate the economy. To Keynesians spending is fungible and it does not matter what the increased spending is for so long as it is spent on goods and services. But as is evident from the data which appears on the government site, www.recovery.com, which is supposed to keep track of the Recovery Act’s progress, most of the expenditures were not for goods and services: $288 billion or 29 percent consisted of Tax Benefits and $224 billion, or 28 percent were for Entitlements. Thus more than half consisted of income transfers. The remainder was for Contracts, Grants & Loans to individuals, businesses, organizations, and governmental units. The payouts are continuing: 85 percent of the Tax Benefits have been paid out, only 54 percent of the Contracts, Grants and Loans, and only 73 percent of the Entitlements.
The vast majority of the Recipients of Recovery awards consist of state and local governments including school districts, universities and research institutions, NGOs (non-governmental organizations, and private companies. The Act looks like a list of ear-marks, a politically inspired set of expenditures and not of a recovery act. The President’s advisors learned nothing from the failure of Pres. Roosevelt’s “New Deal”. The CCC, WPA, and PWA, etc., etc. stimulated the economy but had no multiplier effects as the recession of 1957-58 showed. No one should be surprised that the Recovery Act, in spite of the billions already paid out, appears to have contributed little and, like the increased expenditures in the 1930s , will produce just a temporary increase in GDP and will likewise have no multiplier effects. But the Recovery Act faced another challelnge which the New Deal" did not, a growing trade defricit which drags down the Gross National Product and does have a multiplier effect.
The President has indicated his disappointment with the lack of so-called “shovel-ready” projects. But even if there were a great many “shovel-ready” projects, it would have no multiplier effects. That the economy will experience a double-dip in the GDP cannot be ruled out although it may be deferred by the billions still remaining to be paid out. Unfortunately, there was little in the Act to stimulate industry. Like the trade deficits, economists chose to ignore the fact that the large corporations were outsourcing the production of their new products. As Andy Grove, a founder and former CEO of Intel pointed out, Apple, HP, Dell and other innovators have ten times as many employees producing their products abroad than they employ in the U.S. Our commitment to unilateral free trade continues in spite of fifteen to twenty percent unemployment, counting those working part-time and those who stopped looking for jobs. ...
The 'Move Your Corporate Headquarters Offshore' Act -- We're published in today's American Thinker
Here's how we begin:
Follow the following link to read it:
Democrats Increasingly Turning to Trade Theme
A recent analysis by Democracy Corps highlights the growing importance of trade as a major political issue favoring the Democratic Party in the 2010 midterm elections. The recommended attack:
"(REPUBLICAN HOUSE CANDIDATE) has pledged to support free trade agreements with Colombia, Panama and South Korea that will bleed American jobs and tax breaks for companies that export American jobs. As a result, that campaign has received massive financial and advertising support from big business groups that get support from foreign corporations and that champion outsourcing as good for consumers and oppose any buy-American rules. That’s a bad deal for America."
Democracy Corps lists this as one of the two most potent attack lines for Democrats to use against Republican candidates, alonside charges that the Republican candidate will support...
European Central Bank calls for a fixed exchange-rate system
For several reasons, the dollar is falling rapidly against foreign currencies at the moment. This will be good for the American economy. It will make American exports less expensive and foreign imports more expensive. I predict improved U.S. economic growth in the first quarter next year.
The European Central Bank is not happy. Although U.S. trade imbalance will improve, the euro zone's trade balances will worsen. It called for a fixed exchange-rate system so that it will be justified when it intervenes to keep the dollar up relative to the euro. Here is a selection from a Reuters story:...
Gomory calls for Import Certificates to balance trade
We are not the only ones proposing ways to balance trade, Ralph Gomory, one of our country's premier economists and business leaders, has also been proposing practical ways to do so.
There are two ways to balance trade, Import Certificates (ICs) and the scaled tariff. We called for ICs in our book Trading Away Our Future, but in our recent writing we have been calling for the scaled tariff. Both methods have their own advantages. ICs balance trade more surely, while the scaled tariff requires no new bureaucracy.
On September 14, Ralph Gomory (Jobs, Trade and Mercantilism -- Part II -- Dealing with Reality) reiterated his call for Import Certificates to balance trade, which he calls BT/BC (which stands for Balancing Trade by Certificates or Balancing Trade with Buffett Certificates. Specifically, he wrote:...
Only the USA's Leaders Are Foolish Enough to Embrace Unilateral Free Trade
As every economist knows, the editors of the Wall Street Journal believe in free trade. They can be forgiven; they are not economists. But economists should not be forgiven. There is no economic theory that supports a unilateral policy of free trade. Yet most economists believe it is the best policy for the U.S. to follow. Free trade is an ideology, based on faith, not science.
In its weekend edition, 10-9-10, the WSJ features an article by Professor of Economics Douglas Irwin of Dartmouth College entitled “Goodbye, Free Trade.” How distant the title is from reality is indicated by the fact that there is no such thing as free trade among nations and probably never will be. There is no free trade theory in any economics textbook. But every text decries mercantilism. We, too, decry mercantilism but we believe in balanced trade, not free trade. Economic theory shows that when trade is in balance all the trading partners benefit.
Every country has some trade barriers. America’s barriers to trade are among the lowest in the world and the lowest of any large country. The U.S. Constitution forbids the states from imposing tariffs or interfering with the free movement of citizens and the free movement of capital among the states. Those are the conditions required for a free trade policy, no barriers to trade, or to the movement of capital, or to immigration. Ever since the classical economists, Adam Smith and David Ricardo, condemned mercantilism, U.S. economists have preached free trade and to turn the other cheek if other countries employ mercantilist policies....
Let's have an Honest Trade Debate
The October 9-10 issue featured the most misleading commentary that I have yet read in the Wall Street Journal: Goodbye, Free Trade? by Dartmouth economics professor Douglas A. Irwin.
The entire first page is spent trashing the Smoot Hawley tariff. Then the author subtly admits that that Smoot Hawley tariff, which didn't go into effect until 1932, was basically a justified reaction by the United States to several of our trading partners either going off the gold standard or devaluing their currencies in 1931. Essentially, the United States had to respond to other countries devaluing their currencies by either shipping away gold, devaluing the dollar, or limiting imports. We chose to limit imports. He is correct that we would have been better off devaluing the dollar.
Irwin's primary economic recommendation in this piece can be proved nonsense by a simple thought experiment. He writes:
Here's a thought experiment that I devised which proves that his suggestion does not result in any new money being created, it just results in central banks swapping each others' bonds:...
Being Deaf, Dumb, and Blind on Our Huge Trade Deficits!
The employment data continue to be poor. New claims for unemployment compensation continue high, amounting to 445,000 for the week ending Sept. 25, 2010. Similarly, the unemployment news released October 8, 2010 reported that nonfarm payroll employment edged down (-95,000) in September, and the unemployment rate was unchanged at 9.6 percent. Government employment declined (-159,000), reflecting both a drop in the number of temporary jobs for Census 2010 and job losses in local government. Private-sector payroll employment continued to trend up modestly (+64,000). There was a lot of wailing on CNBC about the poor unemployment data. Nevertheless one hour after the release of the data, the stock markets opened -- UP!
None of the analysts on CNBC mentioned the fact that balancing the trade deficits would immediately change the employment prospects from negative to positive. Although estimates vary, at least five million well-paid manufacturing jobs have been lost over the past two decades to China, Germany, and other countries as the trade deficits worsened and the government-created housing boom burst. And under the rules of the World Trade Organization, countries suffering from chronic trade deficits are legally entitled to impose tariffs and other barriers to imports from specific countries with which trade is unbalanced. So why have both Republican and Democratic administrations done nothing to prevent million workers from losing their jobs? ...
Michael Savage proposes 20% tariff on Chinese products
In his book that just came out today, "Trickle Up Poverty," Conservative talk show host Michael Savage has proposed a tariff on Chinese goods in order to restore America's manufacturing sector, specifically:...
BOOK REVIEW - Made in the U.S.A. by Barr McClellan
Barr McClellan, Made in the U.S.A. -- Global Greed, Tax Laws and the Exportation of America’s Future; Why and How You Support America. (Arizona, Hannover House, 2010)
The author, Barr McClellan, published Blood, Money & Power: How LBJ Killed JFK, which became a best-seller in November 2003. In the book McClellan presented the theory that Lyndon B. Johnson and Edward Clark were involved in the planning and cover-up of the Kennedy assassination. He is also known as the father of Scott McClellan, Pres. George W. Bush’s press secretary. Blood, Money, and Power created a sensation. His new book Made in the USA is not likely to create a sensation but it is a book that everyone concerned about the loss of millions of American jobs to China, the deindustrialization of the U.S., and subordinating the USA to a world government antagonistic to traditional American values should read.
In his Introduction, he writes about how the U.S. and British elites established a new world order following WWII, financed by the U.S. As he writes, the UN was formed in 1945 to be the heart of the new world order but “Unfortunately, the United Nations and its related international organizations did not work.” The book was prompted by the “results of globalization since 1945.” He writes, “The world’s leading nation is no longer America.” The assault on America is never-ending.” We were successful “because of a capitalist business and commercial economy and because of a democracy based on law.” The key for restoration of a strong and healthy U.S. is international relations “based on parity, on a level playing field and fair competition.”
He devotes the first two chapters on people like the “trillionaires”, Gates, Buffett, and Boeing and political personalities like Kay Bailey Hutchinson, Amb. John Bolton, and the media all of whom were “globalists”. ...
WTO Helping China Loot Caterpillar -- We're published this morning in the American Thinker
Here's how we begin:
To read it, go to: http://www.americanthinker.com/2010/10/wto_helping_china_loot_caterpi_1.html
Trade pacifism killing Canada's Economy, not just the U.S. economy
On September 23, Jim Stanford in the Canadian Globe and Mail (The New Protectionism is Shutting us Out) the current status of world mercantilism. He regrets Canada's trade pacifism, just as we regret America's trade pacifism. He writes:
He also points out, just as we have, that John Maynard Keynes proposed a world system built upon balanced trade, writing:...
China's 30% Tariff snags Caterpillar's Technology
In a response to my blog posting yesterday (Caterpillar's New Chinese Factory ignites Voter Rage) about Caterpillar's decision to build a new factory in China, Jim Dugan, from Caterpillar's public relations, commented:
Dugan's basic argument is that Caterpillar could not profitably make these mini-excavators in the United States and sell them to China. So I decided to determine why. Why are Caterpillars mini-excavators competitive in other markets, but not in China's markets. So I looked up Chinese tariffs on excavators and found them to be 30%. Voila!:...
Journal of Economic Literature:
Atlantic Economic Journal: