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 Richmans' Trade and Taxes Blog



Average house prices may fall 15% over the next four years
Howard Richman, 3/30/2011

The Federal Reserve, Congress, and the Obama Administration have been engaging in an expensive attempt to keep house prices from falling along their trend line. They have spent hundreds of billions of dollars subsidizing first time home buyers, buying mortgage-backed securities, subsidizing mortgage buyers, and in other measures.

Yet, despite these subsidies, house prices have been falling rapidly for the past six months according to the S&P/Case-Shiller Composite-10 Index, and the trend downward looks pretty steady, as shown in the graph below:

CaseShillerJan10Jan11v2.gif

The following graph shows the long-term trend line. The red line shows the actual house prices, adjusted for inflation (using the CPI). The black line is my projection of where real house prices will go over the next four years:...

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Consumer confidence is tumbling - economic growth will likely slow during 2nd Quarter
Howard Richman, 3/28/2011

In March, consumer confidence tumbled to 67.5% from 77.5% in February. Before the New Depression hit in late 2007 consumer confidence was in the 90s. Then consumer confidence fell, hitting a 28 year low in November 2008 at 55.3%.

On Friday, the BEA released its final revision for GDP during the fourth quarter of 2010. The rise in GDP during that quarter was led by increased consumption demand and improved net exports. The following table shows the components of aggregate demand and their contributions to GDP growth during each of the four quarters of 2010:

Contributors to Real GDP Growth
Year 2010-1 2010-2 2010-3 2010-4
Household Consumption 1.31% 1.53% 1.66% 2.78%
Business Fixed Investment 0.41% 2.19% 0.19% 0.86%
Government Consumption -0.31% 0.75% 0.75% -0.33%
Net Exports -0.26% -3.37% -1.70% 3.23%
Inventory Change 2.48% 0.75% 1.59% -3.17%
Total Change in Real GDP 3.68% 1.71% 2.53% 3.08%

 

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Where's the Beef?
Howard Richman, 3/25/2011

The Chinese government has been growing its trade surplus with the United States during the Obama administration, as shown by the blue line being above the red line in the graph below:

DeficitWithChina0209to0111.gif

It uses a wide variety of techniques to keep out U.S. products. For example, a March 2011 report from the United States International Trade Commission (China's International Trade: Competitive Conditions and Effects Upon U.S. Exports) reports that the Chinese government charges a 13-17% Value-Added Tax on food produced by U.S. farmers, but little to no tax on food produced by Chinese farmers. The following summary appears in Table 4.3 of the report:...

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Why Lt. Gen. Clapper, Director of National Intelligence, Is Being Belittled
Raymond Richman, 3/24/2011

Air Force Lt. Gen. James R. Clapper was alleged in the media to have “flunked ABCs' quiz”  about a London terror case in which a dozen suspected terrorists were rounded up a few hours earlier. Diane Sawyer, who asked what he knew about the roundup, was shocked, shocked, shocked! that he had not been informed about the incident.   Participating in the interview with Gen. Clapper were Homeland Security Chief Janet Napolitano and white house terrorism chief John Brennan, who had read the Post or had been briefed, as they should have been, involved as they were in terrorist matters. The interview on a Monday morning aired on the following Tuesday evening. Gen. Clapper, like Sarah Palin, does not apparently read the Post first thing every morning during breakfast.

Should Gen. Clapper have been alerted to the story by his staff? Yes, if they brief him every morning about what’s in the press and if they met with him that morning. But they did not. What’s the shock; what’s the surprise? It was news to Diane Sawyer and her question was legitimate but she did not ask him if he was aware of the roundup. She just assumed that because she knew about it, surely Gen. Clapper did, too.

Gen. Clapper was accused of another faux pas when asked in another interview his opinion of the Muslim Brotherhood....

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Retired Gulf VP Charles Campbell nails US economic problems and their solution
Howard Richman, 3/23/2011

Retired Gulf Oil Senior VP Charles Campbell nails our chief problems and their solutions in his brilliant March 23 Baltimore Sun commentary (End America's addiction to Mideast oil: Only hope for U.S. economy is to bring down our trade deficit, become self-sufficient in energy).

He is correct that if we fail to solve these problems, we are headed toward economic disaster. In fact, our government debt problem may be about to get worse as a result of upcoming sales by Japan of dollar reserves and the expense of Obama's military intervention in Libya. As far as energy production is concerned, his area of expertise, he argues that we need to develop domestic energy resources but are moving in the opposite direction. He writes:

We ... will not drill on the shallow continental East and West Coast shelves or in the Arctic National Wildlife Reserve because of the BP accident; increased nuclear power is dead after Japan; coal production has been restricted after the West Virginia mine disaster; and the environmentalists will frustrate natural gas production from shale.

That leaves green wind and solar energy solutions, which are erratic and inefficient and will take decades to replace any appreciable amount of fossil fuels. Diverting corn from food to ethanol fuel does nothing for reducing carbon dioxide and is one of the principle causes of current record-high food prices.

He joins fellow businessmen Ralph Gomory and Dick Alexander in recommending Warren Buffett's Import Certificates, realizing that our foreign debt problem cannot be solved without balancing trade:...

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Why Obama's $8billion Recovery Act Did Not Stimulate the Economy
Raymond Richman, 3/20/2011

On Feb. 13, 2009, Congress passed Pres. Obama’s American Recovery and Reinvestment Act of 2009, a $787 billion economic stimulus proposal.  The Recovery Act stated that its goals were 1) to create new jobs and save existing ones and 2) to spur economic activity and invest in long-term growth. It provided $288 billion in tax cuts and benefits “for millions of working families and businesses,”  $275 billion for federal contracts, grants and loans, and 244 billion in entitlements. In addition to offering financial aid directly to local school districts, expanding the Child Tax Credit, and underwriting a process to computerize health records to reduce medical errors and save on health care costs, the Recovery Act plans investment in the domestic renewable energy industry and the weatherizing of 75 percent of federal buildings as well as more than one million private homes. Given the enormous expenditure, Keynesian economists are hard put to explain why the Recovery Act created so few new jobs.

The reason for its failure to spur economic activity, we believe, is that a third of the expenditures were transfers to state and school districts which may have saved some jobs assuming the recipients could not have raised revenues or cut expenditures. Grants were made to households which used the proceeds to pay off debt preponderantly, creating few jobs. The tax benefits and entitlements, five-eighths of the total, did not get spent by the recipients on consumption or investment goods. Either that or too much of it was spent on imported goods and services which provided jobs abroad and not in the U.S.  

A glance at the government agencies that paid out the most money indicates what the balance of the money went for. ...

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German and Chinese Surpluses and Growth; PIIGS and the U.S. Deficits and No Growth
Raymond Richman, 3/15/2011

The enormous chronic trade deficits that the U.S. has been experiencing during the past decade have eliminated millions of U.S. manufacturing jobs. If we were to succeed in bringing our trade into reasonable balance, many of those jobs would be performed in the U.S. and the recession would be over. The U.S. has allowed these deficits because of its foolish ideology embraced by its economists of Free Trade, which has prevented the U.S. from dealing with its terrible consequences. It was exacerbated by other foolish domestic policies to be sure. Other nations contributed to our deficits by their mercantilist policies which have advanced their industries and the welfare of their workers at the expense of U.S. industry and American workers. The Financial Times reported (14 March 2011) that China has overtaken the U.S. as the World’s biggest goods producer. According to research conducted by consultancy IHS Global Insight, China accounted for 19.8% of world manufacturing output in 2010, edging ahead of the US which accounted for 19.4%.

The reaction of the overwhelming majority of U.S. economists is to ignore China’s growth as an industrial power, the result of the huge trade deficits between China and the U.S. A typical view of American economists is illustrated by a comment of an American economist that it  “shows the need for the US to compete in the future not on the basis of commodity manufacturing but on innovation and new kinds of services that are driven by production industries,” said Deborah Wince-Smith, head of the Washington D.C.-based Council on Competitiveness. No mention of the trade deficits! This kind of passive acceptance of trade deficits will ultimately destroy the U.S. as an industrial power. Most of the consumer goods the U.S. imports from China are designed and produced by U.S. and other foreign firms which have outsourced their production to Chinese affiliates. Included are many of our largest and most respected corporations. It has been reported that Apple, HP, Dell, and many other high tech firms have ten times as many employees in China as they have in the U.S.

Just as the U.S. trade deficits adversely affected the U.S. economy, the trade deficits that Portugal, Italy, Ireland, Greece and Spain ( the so-called PIIGS) have been experiencing have resulted in a shortage of Euros among those countries and a surplus of Euros in Germany. Oh, how wonderful it is to have a positive trade balance. ...

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Foolish Economic Stimulus Policies Aggravate the Trade Deficits
Raymond Richman, 3/11/2011

The U.S. international trade deficit unexpectedly widened in January 2011 to US $46.34 billion compared to $40.26 billion in December 2010. Both imports and exports increased but imports increased at a substantially faster rate than imports. An increase in exports(X) shows up as a contribution to the Gross Domestic Product while an increase in imports(M) shows up as a subtraction from GDP. To refresh the reader’s memory, if he or she took a course in economics, GDP = C + I + G + X – M, where C is the sum of consumer goods and service produced in the country, I is the sum of investment goods (Machinery, buildings, and the like), G is the sum of goods and services purchased by governments, and X equals exports of goods and services and M equals imports of goods and services.

DeficitWithWorld0209to0111.gif

The U.S. has not had a favorable balance of trade in decades. In 1992, X-M amounted to $39 billion; by 2000, the last year of Pres. Clinton’s second administration, it had grown to $379 billion in spite of the fact that the federal budget was in balance that year. We mention that because many believe that our budget deficits are responsible for our trade imbalances. By 2008, the last year of Pres. G.W. Bush’s second administration, it had grown to $699 billion. The trade balances are no respecter of the President’s party affiliation.

Nearly all academic economists gazed passively on the growing trade deficits. Many were aware that it was costing American workers millions of good factory jobs and that it was accelerating the decline of manufacturing. But they considered that a price that had to be paid in the interest of their ideology, free trade. The fact that it was contributing to a worsening of the U.S. distribution of income, they refused to admit. They argued instead that it was the poor education of the American worker that denied him access to good jobs. As though the workers abroad whose products we were importing were better educated rather than lower paid....

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Must Read: Saleri's Opinion Piece in WSJ 3-9-11
Raymond Richman, 3/10/2011

In the WSJ, today March 9, 2011, Nansen G. Saleri, President and CEO of Quantum Reservoir Impact in Houston, Texas, in an opinion piece entitled “Our Man-Made Energy Crisis” argues that, “At current rates of global consumption, there are sufficient oil and gas supplies to last well into the next century.” He writes:

What’s missing is a coherent U.S. energy policy. At best, the Obama administration’s approach to U.S. domestic oil and gas production can be characterized as a strategy of ambivalence, an uneasy equilibrium between desire to lessen the role of fossil fuels and the reality of their necessity in a functioning U.S. economy. Last year’s Deepwater Horizon tragedy in the Gulf tilted the current administration’s policies to an even more punitive posture vis-à-vis domestic energy production....

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When the Jews and Persians were Friends
Howard Richman, 3/8/2011

[Please bear with me as I depart, temporarily, from trade and taxes to present one of my pet topics.]

For thousands of years people have been inspired by Esther’s brave choice when she risked her safety in the king’s harem to save the Jewish people from annihilation. Her Uncle Mordecai had called her to greatness when he asked her, “Who knoweth whether thou art not come to royal estate for such a time as this?” (Esther 4: 14). She had bravely replied to Mordecai:

Go gather together all the Jews that are present in Shushan, and fast ye for me, and neither eat nor drink three days, night or day; I also and my maidens will fast in like manner; and so shall I go in unto the king; which is not according to the law; and if I perish, I perish. (Esther 4: 16)

Some think that the Book of Esther is fiction. But I do not. It fits too well with what we know about Persian history. Even though the Persian libraries were destroyed by Alexander the Great and the Greek reports conflict wildly, the Jewish account of Persian history is quite consistent. Esther is part of a chain of historic Jewish figures (Mordecai, Esther, Ezra and Nehemiah) who worked together to save the Jewish people at a time of extreme peril. The following timeline shows how Persian and Jewish history fit together:...

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Geithner thinks our trade problems with China are solving themselves
Howard Richman, 3/4/2011

In testimony before the Senate Foreign Relations Committee on March 2, U.S. Treasury Secretary Timothy Geithner explained why he thinks that market forces will balance U.S. China trade without the Obama administration having to do anything more than talk. Here are some selections:

China understands they can no longer depend on demand from United States consumption being such a substantial contributor to growth. So, they have no alternative but to shift their growth strategy to a growth strategy that relies more on domestic demand.

"They are moving in that direction but it can't happen unless they let their exchange rate move too. If they don't let their exchange rate move, it will work against that imperative in rebalancing. It is not just China, it requires a bunch of other countries that traditionally run large surpluses to make those same changes."...

"It is essential for China that they move. If they do not move they will face the risk of much more rapid inflation, much more risk of financial crises. That is why they are beginning to adjust now. They have not moved that far yet ... in real terms against the dollar the currency is now moving at an annual rate of 10 percent a year.

"(The yuan) is still undervalued substantially, they have not moved very much yet. (But) we want this to be sustained over time, and we are going to continue to use every tool of persuasion we have directly and multilaterally to encourage them to move more quickly.

"It is inevitable it is going to happen. It is either going to happen through more rapid inflation, in which case in real terms it is moving in our direction, or it will happen because the exchange rate appreciates more rapidly. But the real annual rate against the dollar is north of 10 percent a year. If that were sustained that is a huge shift over time."

I agree with Geithner that the U.S.-China trade balance will improve in the short-term. Federal Reserve Chairman Bernanke gets the credit. His massive buying of U.S. long-term Treasury Bonds (QE2) has made long-term U.S. Treasury Bonds such a bad investment (due to anticipated future inflation) that many investors are sending their savings out of the United States, including to China....

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Are China's coming reductions in import barriers a short-term or a long-term change?
Howard Richman, 3/3/2011

According to People's Daily (China considers tariff reduction to boost imports), the Chinese government is considering some cuts in its many tariff and non-tariff barriers to imports. Here is a selection:

Import tariffs will be reduced on a range of products and red tape involved in import application procedures will be further cut, to "maintain balanced trade", a senior official told China Daily.

"We will launch a series of measures to stimulate imports this year, including adjusting tariffs on some categories of goods and further simplifying the administrative process," Zhong Shan, vice-minister of commerce, told China Daily on the sidelines of the East China Fair, which opened in Shanghai on Tuesday.

Zhong declined to elaborate on the exact measures that will be introduced....

Huo Jianguo, director of the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce, said import tariffs on resources are comparatively low, but the government could consider reducing tariffs on high-tech goods.

The ministry said at the December conference that China will issue guidelines to promote imports of mechanical and electrical products, especially those related to new energy, energy saving, high-end manufacturing, low-carbon technology, aerospace, shipbuilding and railways.

There are two possibilities:...

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Rush Limbaugh apparently agrees with Donald Trump on China trade in March 1 interview
Howard Richman, 3/2/2011

For years, the Democratic Party has been saying that they would do something about foreign government trade manipulations, but when they had complete control over the Presidency and both houses of congress in 2009 and 2010, they did virtually nothing. Turned out that they had a left wing, represented by Andy Stern who commutes between Beijing and the White House, that prefers solidarity with world workers ("Workers of the World Unite") to good paying manufacturing jobs for American workers.

Now the Republicans, led by potential presidential candidate Donald Trump, are moving toward a balanced trade position. If the Republicans take a credible position on trade in 2012, they will probably sweep the American midwest and the presidential election. No more idiot scenes with Presidential candidate John McCain standing in front of a boarded up factory while touting his unilateral free trade position.

And it's not only Trump himself, and it's not only talk show hosts Lou Dobbs and Michael Savage. It's now the most widely-listened to talk show host of them all, Rush Limbaugh....

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Rising ChinaTrade Deficit Cost One-Half Million U.S. Jobs in 2010
Howard Richman, 3/1/2011

In September, Robert Scott of the Economic Policy Institute predicted (Rising China Trade Deficit will Cost One-Half Million U.S. Jobs in 2010) that our trade deficit with China would grow by $40 billion in 2010, as compared to 2009 and that this would cost the United States a half million jobs. He was very close. The goods trade data from 2010 (service data is not yet available) shows that the deficit grew by $46.2 billion. That deficit is shown in the graph below as the area between the red and blue lines:

TradeDeficitChina1011.gif

As a rule of thumb, we generally estimate that every American manufacturing job lost to growing trade deficits costs the United States about $100,000 in manufacturing production. So, we would estimate that $40 billion in additional trade deficit would only cost the U.S. an additional 400,000 jobs. Scott, however, uses more precise methodology and comes up with an estimate of job loss that is about 25% higher. Here's what he writes about his methodology:...

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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]