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 Richmans' Trade and Taxes Blog



Republican presidential candidate Gov. Buddy Roemer would require balanced trade
Howard Richman,

In an interview with Ian Fletcher, Republican presidential candidate Gov. Buddy Roemer said that he would require balanced trade if he were elected president. Specifically, when asked what he would do to end America's trade deficits he said:

So we've got to consider things like a serious tariff to end our trade deficit. Not something I'd rush into blindly, and maybe there's other ways to skin this cat, but I wouldn't flinch at putting a 30 percent tariff on Chinese goods, or a tariff on imports across the board, with the whole world or the countries running a surplus with us. And the interesting thing, of course, is that once the other side knows that, knows that we'd do a tariff, maybe they learn real fast to be a bit more reasonable? But you've got to have a credible threat that you'd do it if you want that "Speak softly and carry a big stick" stuff to work.

When he said that he would consider imposing a tariff upon those countries which run trade surpluses with the United States, he was coming very close to our scaled tariff proposal. The tariffs in that proposal would only be imposed upon those countries which run trade surpluses with the United States. The rate of the tariff would be proportional to the trade surplus, giving those countries an incentive to take down their barriers to American products. Not only that, the scaled tariff would be WTO-legal (For more on this topic, see our article The Scaled Tariff: A Mechanism for Combating Mercantilism and Producing Balanced Trade, just published by the peer-reviewed Journal of International Law and Trade Policy.)

Requiring balanced trade would create about 5 million manufacturing jobs each producing about $100,000 of product. And those well-paid manufacturing workers would in-turn buy services from other Americans. The result would restart American jobs growth both in the short- and long-term. Gov. Roemer, who has an economics degree and an MBA from Harvard, is aware of these effects. In response to the question "How do you feel about the trade deficit?" he said:...

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United Kingdom's Prince Phillip Calls Wind Farms "Useless and a Disgrace"
Raymond Richman, 11/27/2011

Jonathan Wynne-Jones writing in the Daily Telegraph 11/21/2011 reported that Prince Phillip, Duke of Edinburgh, “in a withering assault on the onshore wind turbine industry .. said the farms were useless and ‘a disgrace’. He also criticised the industry’s reliance on subsidies from electricity customers, claimed wind farms would ‘never work’ and accused people who support them of believing in a ‘fairy tale’.”  He also noted that the windmills have to be switched off during strong winds because of complaints about their noise and they produce electricity at a higher cost than traditional energy sources. The writer adds, “The Duke’s views are politically charged, as they put him at odds with the Government’s policy significantly to increase the amount of electricity generated by wind turbines.”

It was a brave thing to say but every word is true. It was not the monarch who has no clothes according to the fable but a prince telling his subjects and the politicians who want their votes that they are naked of reason. We would go further, much further than Prince Phillip.

Proponents of the wind and solar farm subsidies argue that the reduction in carbon emissions, the social benefits, justifies the subsidies. But there is no evidence that convinces us that the spending of trillions of dollars world-wide has had any effect at all on world temperatures. They frighten us by alleging frightful things that will happen in the future, whenever that is, if emissions are not reduced substantially. But look at the benefits that were created by the melting of the glaciers historically, long before men even expelled carbon by breathing. The Great Lakes were created. Millions of acres of land in what was to become the U.S. and Canada became tillable. Billions of people are being nourished by the increased lands that became  available. People are living longer and billions are fed, clothed, and housed by the prosperity generated by global warming in the past. For all practical purposes, real poverty has been eliminated in the U.S. and Canada and Europe. ...

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Newt Gingrich on Trade
Howard Richman,

Ian Fletcher, author of Free Trade Doesn't Work: What Should Replace It and Why, had a piece in Friday's World Net Daily (Newt Gingrich: Free Trade Kool-Aid Drinker), in which he discussed Newt Gingrich's positions over the years on trade.

Gingrich, for example, supported President Clinton's decision to give China "Most Favored Nation" status and let China into the WTO without requiring any balance in America's trade relationship with China. He quotes the following Spring 2001 interview that Gingrich had with PBS:

INTERVIEWER: Was it a good thing to allow China to become an open trading partner?

NEWT GINGRICH: Absolutely … Trade increases the likelihood that you and they will engage in win-win activities. The difference between politics and trade is that in politics I may take something from you to give to somebody else, even though you don't want to lose it, so I raise your taxes. I charge you a fee. I confiscate your farm. In a free market you only do the things that make you happy in order for me to get the things that make me happy, and if we're not both happy the trade doesn't occur. So free markets dramatically lower the friction of human relationships and increase the relative pleasure and the relative success of human relationships. The more the Chinese and Americans [sit] down together to create more wealth, the happier they'll be with each other, the less likely we'll have conflict.

Gingrich did not understand Chinese mercantilism when he gave this interview in 2001. The goal of mercantilism is to delay consumption in the present in order to get increased consumption and power in the future. They give their trading partners increased consumption in the present followed by reduced consumption and power in the future. (For more on this topic, see our article The Scaled Tariff: A Mechanism for Combating Mercantilism and Producing Balanced Trade, just published by the peer-reviewed Journal of International Law and Trade Policy.)

Unfortunately, Gingrich still doesn't understand mercantilism. Fletcher points out:...

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Bad Reporting of Initial Unemployment Insurance Claims Data Continues
Raymond Richman, 11/23/2011

Rick Santelli of CNBC, much as I admire his reporting on the bond markets,  reported this morning, November 23, 2011, that seasonally adjusted initial unemployment insurance claims during the previous week amounted to 393,000 an increase of 2,000 from the previous week’s figure, hardly anything to get excited about. He was quoting from the weekly release by the US Department of Labor (Secretary Hilda Solis). The actual number of claims was included in the report but Santelli did not mention that it was not 393,000 but 437,049 an increase of 74,214 over the previous week, an alarming figure. Investors are not served by deficient reporting of economics data.  

The week before Thanksgiving should have the same adjustments in seasonal factors  from one year to the next so I decided to take a look at the 2010 figures. In the week ending  Nov 20, 2010, the seasonally adjusted initial claims amounted to 410,000, a decrease of 29,000 from the previous week. The unadjusted figure was 462,813, an increase of 55,345.  The unadjusted numbers of initial claims indicators a year ago were as favorable to economic growth prospects as this year’s data were as negative about the economy’s future prospects. While initial claims for unemployment compensation are only one factor is predicting the prospects of the economy, they should not be ignored by investors. They are an important indicator of the job market.

It seems to me that the actual figures should be reported by the media. ...

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China to devote $1700 billion to new import-competition
Howard Richman, 11/21/2011

U.S. Secretary of Commerce John Bryson told reporters at the U.S.-China Joint Commission on Commerce and Trade (JCCT) earlier today (November 21) that China plans to expand its subsidies to what it considers to be the "strategic sectors" of its economy. At the same event, Chinese Vice-Premier Wang Qishan justified the expenditure. According to the Reuters story:

Chinese Vice-Premier Wang Qishan warned on Monday the global economy is in a grim state and the visiting U.S. commerce secretary said China would spend $1.7 trillion on strategic sectors as Beijing seeks to bolster waning growth.

Under WTO rules, developing countries are allowed to declare certain sectors of their economy to be "strategic sectors" and are allowed to charge high tariffs (about 25%) on imports into these sectors. Many developing countries have designated their auto industries as strategic sectors under WTO-rules, but China's definition of "strategic sectors" keeps expanding, as the Reuters article also notes:...

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New Scaled Tariff Article Published
Jesse Richman, 11/15/2011

Our article The Scaled Tariff: A Mechanism for Combating Mercantilism and Producing Balanced Trade has just been published by the peer-reviewed Journal of International Law and Trade Policy.

The abstract is:

In this article we first discuss whether or not the modern form of mercantilism that contributes to the trade deficit of the United States and other countries is a self-destructive and thus self-correcting strategy. We argue that it is not self-correcting. Then we discuss mechanisms that a trade-deficit country could utilize in order to produce balanced trade. The mechanisms differ in six respects, with the Scaled Tariff excelling in each.

The entire article can be downloaded at the following website:  http://www.esteyjournal.com/j_pdfs/richman12-2.pdf

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Economics of Greek, Italian, and U.S. Sovereign Debt Defaults
Raymond Richman, 11/14/2011

The Greek government’s expected default on its bonds has had an enormous effect on the volatility of securities markets worldwide far beyond what should be expected from an anticipated default by a country of less than eleven million people with a GDP of only $300 billion. Italy is a different matter. Italy is a country of 61 million people and a GDP in 2010 of $2.1 trillion. Both suffer chronic budget and trade deficits that have made servicing their bonds increasingly difficult and both face the likelihood of default. The same is true of Portugal and Spain.

U.S. trade with Portugal, Greece, Italy and Spain was and continues to be relatively insignificant, although the U.S. did account for 5.8 percent of Italy’s exports in 2010. European banks hold billions of the sovereign debt of the above four countries. The write down of their debt has already caused the bankruptcy of a  large French-Belgian bank, Dexia. U.S. banks hold insignificant amount of their debt and the U.S. economy is unlikely to experience anything resembling a crisis as a result of defaults in Europe.

The world has experienced dozens of defaults on sovereign debt during the past century:...

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Wishful thinking expanding, but the trade data are flat
Howard Richman, 11/10/2011

If you rely upon CNBC for your  economic analysis, you probably think that the trade deficit improved in September. However, according to the data released this morning by the Commerce Department, the changes in the trade deficit were negligible. According to the enthusiastic CNBC report:

The U.S. trade deficit unexpectedly shrank in September to its narrowest level since December on record-high exports, while the flow of imports from China slowed.

The seasonally adjusted trade deficit was $43.1 billion, down from a revised $44.9 billion in August, the Commerce Department said on Thursday. Analysts had expected the trade deficit to widen to $46 billion. U.S. exports rose 1.4 percent to a record-high $180.4 billion, while imports were $223.5 billion.

Imports from China, which are not seasonally adjusted, fell to $36.4 billion in September from $37.4 billion a month earlier, narrowing the trade deficit with that country to $28.1 billion.

In reality, the U.S. trade deficit with China set yet another 12-month record, worsening slightly from $289.0 billion for the 12 months ending in August to $289.2 billion for the 12 months ending in September, as shown in the chart below:

ChinaThru0911.gif

On the other hand the 12 month trade deficit with the world did improve slightly, moving from $538.3 billion for the 12 months ending in March to $537.4 billion for the 12 months ending in April, as shown in the graph below:...

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Balanced Trade Monetarism
Howard Richman, 11/9/2011

Economic depressions, like the present one which began in the first quarter of 2008, are long periods of economic stagnation, characterized by high unemployment. They result from insufficient Aggregate Demand (AD) for the goods that an economy can produce. Aggregate Demand can be divided into its components:

AD = C+ I + G + (X-M)

where C = Consumption, I = Investment by businesses in tools and structures, G = Government consumption, and (X-M) is net exports (eXports minus iMports).

John Maynard Keynes was the first to point out that if a country had a trade deficit (i.e., negative net exports), then the trade deficit would act as a drag on Aggregate Demand. He more or less predicted the current depressions in the United States, Greece, Spain, Portugal and Italy in 1936 in his chapter about mercantilism and its victims from his magnum opus (The General Theory of Employment Interest and Money) when he wrote:  

(A) favorable [trade] balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)

Modern mercantilism is based upon the twin goals of mercantilism as explained by University of Chicago economist Jacob Viner: (1) maximizing a country's power through accumulation of foreign assets while (2) maximizing long-term consumption by delaying present consumption in favor of future consumption. In order to accomplish these ends it places tariffs (and other barriers) upon foreign products while at the same time buying foreign assets (mainly interest-bearing bonds today; gold in the past) in order to produce trade surpluses. In other words, mercantilist governments maximize their power and their people's future consumption, and bring down their trading partners' power and future consumption, through the combination of import barriers and foreign loans.

But American economists never paid attention to Keynes' and Viner's writings about mercantilism. They thought that an economy beset by mercantilist trading partners could increase AD simply by increasing Consumption or Investment or Government purchases. The methods that they have been recommending have all been failing:  ...

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Bernanke trying to hide the rise
Howard Richman, 11/6/2011

There are two key trends that the press isn't reporting these days:

  1. Sea levels have been falling at the rate of 5mm per year for the last two years, possibly in response to the reduced solar activity of the last decade.
  2. U.S. inflation rose steadily from 1.1% in November 2010 to 3.6% in May 2011, possibly as a result of the Federal Reserve Chairman Ben Bernanke's huge money creation to fund QE2 (his massive purchase of long-term US Treasury bonds), and it has stayed high since.

CPIthru0911.gif

But here is how Bernanke describes it:

I would simply point to the record. For the last five years inflation, although it's been volatile because of commodity price fluctuations, has averaged about 2 percent, which is close to a reasonable definition of price stability, whereas the area that we have fallen short obviously is on the unemployment side....

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Germany, the Euro and the Gold Standard
Raymond Richman, 11/2/2011

[This is reprinted from this blog on February 26, 2010. It is just as true today as it was then. Click here to read the original.]

Many commentators believe that dysfunctional Greece is the cause of Greece’s pending bankruptcy and many believe that dysfunctional USA is the cause of the USA’s pending bankruptcy. Time has run out for Greece and is running out for the USA. But the U.S. is more fortunate than Greece; its bonds are payable in U.S. dollars, issued as needed by its central bank, the Federal Reserve System. Poor Greece, its debt is payable in euros which are printed by the European central bank whose policies require Germany’s approval. And Germany does not approve profligacy.

The cause of Greece’s problems is alleged to be financial profligacy but its immediate cause is really its chronic trade deficit with Germany and the European community which causes it to run out of euros. The cause of the USA’s problem is alleged to be financial profligacy but its immediate cause is its chronic trade deficits with China, Japan, Germany, and OPEC  which flood the world with dollars which the world hoards as reserves or sends to the U.S. in return for U.S. Treasury bonds and other U.S. financial assets. Unfortunately, this is not sustainable....

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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]