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 Richmans' Trade and Taxes Blog



Saving Mr. Smith -- How to Fix the Filibuster
Jesse Richman, 5/29/2014

In Frank Capra's 1939 classic Mr. Smith Goes to Washington the filibuster is described as "democracy's finest show, the filibuster, the right to talk your head off, the American privilege of free speech in its most dramatic form."

Claims that the filibuster is "Democracy in action." may seem odd on their face. A central tenet of democracy is majority rule. The filibuster can thwart majority rule. It protects minorities against majorities. In the modern U.S. Senate, ending a filibuster requires that 60 Senators vote for cloture. If only 59 Senators support a measure, there is nothing they can do. The 41 against the measure win every time.

....

In Mr. Smith goes to Washington, Jefferson Smith's willingness to engage in an individual filibuster even in the face of broad opposition signaled the credibility of his case, and blocked Senatorial action Smith opposed. By bringing back legislative rules that support filibuster wars of attrition, we can save the valid core of Capra's case for the filibuster from the abuses of tyrany by the minority.

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Obamacare Slowdown: Economy Shrank at 1% rate in first quarter
Howard Richman, 5/29/2014

On May 29, the Bureau of Economic Analysis reported that the U.S. economy shrank at a 1.0% rate during the first quarter of 2014. The size of the slowdown caught analysts by surprise. As recently as April 29, the Associated Press was predicting a 1.1% growth rate during the first quarter, not a 1.0% shrinkage rate.

The following table shows the contributors to real GDP growth. You can add up the contributions from the components in each column to get the rate of Real GDP growth shown in the bottom row:

Contributors to Real GDP Growth
Quarter 2013-1 2013-2 2013-3 2013-4 2014-1
Household Consumption 1.5% 1.2% 1.3% 2.2% 2.1%
Business Fixed Investment -0.2% 1.0% 0.9% 0.4% -0.4%
Government Consumption -0.8% -0.1% 0.1% -1.0% -0.1%
Net Exports -0.3% -0.1% 0.1% 0.9% -0.9%
Inventory Change 0.9% 0.4% 1.5% -0.1% -1.6%
Total Change in Real GDP 1.1% 2.5% 4.1% 2.6% -1.0%

The largest component of the slowdown was the decrease in inventories. If not for that, economic growth would have been a positive 0.6%. Inventories tend to go up and down. The decrease in inventories by 1.6% during the first quarter of 2014, which made GDP artificially low, corresponded with the increase by 1.5% in the third quarter of 2013, which made GDP artificially high.

On April 30, the Obama administration's Council of Economic Advisers attributed the slowdown to the cold weather during the first quarter. This is nonsense. Increased consumption, including higher payments to utility companies, would have contributed more than 2% to economic growth, had other factors not intervened.

Other causes of the slowdown were: (1) the fall in business fixed investment which contributed a negative 0.4% to GDP growth, and (2) the fall in net exports which contributed a negative 0.9% to GDP growth....

 

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What Produces Inequality of Income and Wealth? What Should Be Done About It?
Raymond Richman, 5/27/2014

From an economist’s viewpoint, the present distribution of income after tax is greater than it needs to be in a market economy. Some inequality is necessary as an inducement to work hard, to excel, to save, to invest, and to innovate, the essentials of a productive and growing economy. But the present inequality in the U.S. is excessive and greater than it needs to be even at the present rates of the personal income tax. But that is not because the personal income tax is not progressive enough. The rates are progressive but a lot of income escapes taxation or is taxed at special low rates. More important, much of the taxes paid by corporations is really paid by customers of the corporation. Shareholders bear little of the burden of the corporate income tax and since ownership of corporations is highly concentrated in the hands of the rich, the rich get richer faster. Moreover, the personal income tax allows property to be depreciated over and over again and taxes dividends and capital gains, highly concentrated in the hands of the rich, at lower rates than ordinary income. There are some reforms of the personal income tax that would increase the progressive incidence of the tax without raising rates. Of course, there is another tax that reduces inequality of wealth between generations, the federal estate tax.

What produces inequality? A French economist, Thomas Piketty, a sort of new Marxist, has just written a book that is little more than a tract. Some have even questioned his data. The book argues that capital accumulation, because the return on capital grows at a higher rate than the economy grows, inevita bly leads to greater and greater inequality of wealth. Marx actually argued that capital accumulation would tend to diminish the rate of return on capital as capital accumulated relative to other inputs. That follows from the universal acknowledgment of the law of diminishing returns. Were it not for innovation, new products and methods of production, the marginal return on capital would diminish as capital accumulated, to zero. (Has that been happening and is that the reason for so little new private investment and our slow recovery? That’s a good question.) Regardless, our French economist seems to believe that progressive taxation is ineffective. He ignnores the everchanging membership among millionaires and billionaires and seems never to have heard of estate taxation.

Our view is that the excessive accumulation of wealth is due to the fact that shareholders of corporations bear little of the burden of the corporate income tax and, therefore that corporations should be treated like partnerships. Corporate earnings would be taxed as personal income and subject to the progressive rates of the personal income tax. The estate tax should be made more progressive and would reduce the inequality as wealth passes from one generation to another. ...

 

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Fiscal and Monetary Policies Are Ineffective in an Economy Characterized by Monopolistic Competition
Raymond Richman, 5/18/2014

More than five years into Pres. Obama’s administration, the U.S. economic recovery has been slow and lethargic. Keynesian economists are at a loss to explain why the billions of dollars the federal government borrowed and spent and the billions of dollars created by the Federal Reserve System failed to stimulate the economy. The principle accomplishment was to increase the value of capital assets, especially corporate securities and real estate. The stock market experienced a boom as corporate earnings grew and the capitalized value of those increased earnings sky-rocketed. Why were economists like Profs. Summers, Bernanke, Romer, who were advising the president so wrong, not to speak of those like Prof. Krugman who believed the federal government should have spent more? They could not be more wrong.

As we have pointed out many times on this blog and in our newly published book, Balanced Trade, the failure to balance our foreign trade was a huge drag of the economy. But those foreign trade deficits were as great as or greater during the recovery after the 2001 recession than they have been since the recession of 2007-08.

The answer to the question, “Why were the Keynesians so wrong?” is, we believe, the fact that economists have ignored for eight decades the revolutionary insight of Harvard Prof. Edward Chamberlin’s that nearly all firms have some monopoly power, ranging from hardly any economic power in industries producing homogeneous products, natural resources and agriculture, for example, to pure monopolies protected by government policies, patents, for example. Counter-recession policies affect firms with different amounts of monopoly power differently. ...

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Why Stock Markets Boomed While Economic Growth and Employment Stagnated
Raymond Richman, 5/16/2014

Economists have been unable to explain why the stock market has been booming while the economy has been stagnating. Perhaps one reason is that they have ignored the economic theory that could explain it.

The most important contribution to economics in the twentieth century got little recognition from economists. Prof. Edward Chamberlain of Harvard invented monopolistic competition which unlike perfect competition describes most of the economy. It is not “imperfect competition”, economist Joan Robinson’s phrase. All enterprises have some monopoly power except for producers of agricultural products, raw materials, and minerals whose prices are determined by nearly perfect markets. The degree of monopoly varies from nearly zero to 100 percent. Producers of homogeneous natural resources and farm products operate in nearly perfectly competitive markets. Automakers and nearly all manufactures not protected by patents all have some degree of monopoly power largely created by advertising (illusory product differentiation) and with varying degrees of real product differentiation. Some businesses enjoy location advantages such as greater accessibility, better access to transportation, parking, etc. And many enterprises gain greater confidence by its consumers and their competitors enjoy simply as the result of the experience of their customers.

As a result, enterprises enjoy varying power in their ability to charge higher prices than their competitors. 

...

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Our New Book -- Balanced Trade
Jesse Richman, 5/12/2014

Lexington Books has just brought to market our new book Balanced Trade: Ending the Unbearable Costs of America's Trade Deficits, by Jesse Richman, Howard Richman, and Raymond Richman.

“Balanced Trade: Ending the Unbearable Costs of America’s Trade Deficits addresses the problems caused by this country’s unbalanced trade in a straightforward and hard-hitting way. The book describes the significant negative impact of unbalanced trade on the U.S. economy and the many possible steps that can be taken to move the country back to a productive trade regime.”— Ralph Gomory, New York University

In Part 1, we discuss the causes and problems of trade deficits:

  • Chapter 1 discusses trade deficits caused by foreign mercantilism.
  • Chapter 2 discusses trade deficits caused by private savings flows.
  • Chapter 3 discusses the damage done by trade deficits whatever the cause.

In Part 2, we discuss the reasons why little action has been taken in the United States to address the problem of trade imbalances:

  • Chapter 4 examines the failure of economists.
  • Chapter 5 examines the failure of the U.S. political system.
  • Chapter 6 examines the failure of the Federal Reserve.

In Part 3, we discuss the solution:

  • Chapter 7 develops the general principle of trade reciprocity upon which any solution must be based.
  • Chapter 8 analyzes the degree to which a variety of previously proposed solutions would efficiently and effectively generate a reciprocal balance of trade.
  • Chapter 9 develops the scaled tariff proposal which insures reciprocity.
  • Chapter 10 lays out the implications of our analysis for macroeconomic policy.

The book is currently out in hard cover and can be ordered from www.LexingtonBooks.com.  Orders placed by December 31, 2015 can use the following discount code...

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Morici wrote a good summary for Fox Business of the long-term problems caused by trade deficits
Howard Richman, 5/11/2014

His commentary is called Trade Deficit Dragging Down Growth. He begins:

On Tuesday, the Commerce Department reported the March deficit on international trade in goods and services was $40.4 billion. Overall, the deficit is up from $25 billion since the economic recovery began in mid-2009, and poses a significant barrier to stronger economic growth.

Household spending has recovered but too many of those dollars go to pay for imported oil, consumer goods from China and autos from Japan.

In the first quarter, GDP growth was a paltry 0.1% — consumer spending added 2.0 percentage points to growth. However, the increase in the trade deficit subtracted 0.8 percentage points. The increase in the trade gap negated 40% of the increase in consumer spending and cost at least 300,000 jobs.

At the end of the commentary he calculates the gain to economic growth that could be obtained by balancing trade:... 

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The Failure of Obama's, Prof.. Summers', and Prof. Bernanke's Keynesian Policies
Raymond Richman, 5/3/2014

The report that the GDP rose at an annual rate of only one-tenth of one percent (0.1%!) during the first quarter of 2014 was a shock to all economists notwithstanding that it was triggered in part by the horrible winter of 2013-14. Although the low growth rate may have been the result of an unusual combination of factors and is unlikely to be repeated, the slow rate of recovery during the first five years of the Obama administration is surprising given the enormous debt-financed expenditures of the federal government and the billions of dollars injected into the economy by the Fed’s quantitative easing policy. Keynesian economists were in charge, including Profs. Summers, Bernanke, Romer and many others. It is not too early to declare Keynesianism dead. Keynes himself would long ago have agreed with that conclusion given the swift recovery from the post World War II recession which was led by a booming private sector.

Given that a recovery from the great recession ought to have been given the highest priority, the federal government wasted enormous resources in the 2009 $830 billion American Recovery and Reconstruction Act. Almost all of the expenditures were transfer payments, and had as little effect as the Bush and Obama direct rebates to taxpayers did in 2008 and early 2009. As the administration reported, “the stimulus was fairly well divided among different types of relief. The biggest portion was public investment  -- those included the "shovel-ready" infrastructure projects and longer-term investments in green energy, broadband and the like. More than a quarter of the stimulus went to tax cuts, one-fifth went to helping states plug their own huge fiscal holes, and 15 percent went to bolster the safety net.” As the President himself later reported, there were very  few “shovel-ready” projects. And transfer payments create no new jobs. ...

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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]