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 Richmans' Trade and Taxes Blog

Hubbard and Navarro advocate VAT and end to currency manipulation in new book
Howard Richman, 12/15/2010

Jeff Madrick reviews Glenn Hubbard and Peter Navarro's new book Seeds of Destruction: Why the Path to Economic Ruin Runs Through Washington, and How to Reclaim American Prosperity. He points out that Hubbard and Madrick are advocating a VAT, something that we advocate also. The VAT is a consumption tax, which means that it encourages savings and wealth accumulation. It's also inexpensive to administer, requiring just 3-5% in complaince costs, compared to 12-14% for our current tax code. Most important of all, it is also border adjustible, which means that it taxes imports into our country but not exports from our country.

Madrick pretends that one of their goals is to hurt the poor, even though VAT proposals almost always provide tax credits which make them progressive at low income levels:

Perhaps their chief goal is to reduce progressive income taxes, which they believe undermine incentives to work and invest. Ideally, they would replace much of the income tax with a value-added tax (VAT)—basically, a national sales tax. Although it is regressive in the sense that it takes more from a poor person’s income than it does from a rich person’s. They argue that it will force America to consume less. They would also do away with taxes on capital gains and interest to encourage more investment and more savings.

Madrick also claims that they are advocating free trade and an end to currency manipulation but don't have a way to achieve their goal:

They blame the loss of manufacturing in America, and the good jobs that come with it, essentially on the trade deficit with China, which they would rectify by demanding that all nations abide by international rules of free trade; they also want to prohibit manipulation of currencies. Apparently, America should simply insist that free trade be practiced around the world; but the authors should know by now that this proposal will be resisted by many countries.

If Madrick is correct, then Hubbard and Navarro haven't yet figured out that you can't fight mercantilism without requiring balanced trade. If so, then we, unlike Hubbard and Navarro, have a solution. We advocate that the United States impose a WTO-legal scaled tariff on the currency manipulating countries. It's rate would go up when our trade deficit with a currency-manipulating country goes up, down when our trade deficit with that country goes down, and disappear when our trade deficit with that country disappears. It would take the profit out of mercantilism.

I'll try to get my father to review this book. Then we'll find out what they're saying without Madrick's filter.

Comment by Jan Smith 12/20, 12/21/2010:

Hubbard and Navarro seem to have given up Ricardo's rigorous argument for squishy free-market sentiment.

In one respect, that's good, for Ricardo's argument is about an ethereal world utterly different from anything to be found in mundane human history.

In another respect, it's disappointing, for H and N shy away from an unpleasant truth: one can curb mercantilism only with mercantilism.  Tit for tat.

And their sentimentality leads them to claim too much for free trade.  For instance, there is no theoretical proof, or persuasive historical evidence, that a shift to greater worldwide free trade would cause faster world economic growth.

Same old, same old!  For thirty years, the neoliberals have been talking a good game but consistently have failed to deliver. Even now, after 2008, they still don't see that formulaic free-market pablum is increasing the chances of an economic and political collapse, and the nasty stuff sure to follow?