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Boeckh Nails It, but Opposes the Solution
Howard Richman, 8/30/2010

J. Anthony Boeckh nailed it (Increasing Risks). The world economy is heading downhill because of the failure to rebalance trade. His graphs clarify. His investment recommendations seem sound. If his 2010 book is as perceptive (The Great Reflation) then it is well worth buying. Here is his summary of how mercantilism is sapping U.S. growth at the moment:

Effectively, the surplus countries [e.g., China, Germany, Japan, etc.] are stealing growth from the deficit countries [e.g., the United States, Greece, Portugal, etc.] and not allowing them to adjust to external and internal disequilibrium. In the U.S., this can be seen most clearly by the simultaneous rise in the savings rate, the trade deficit and the deterioration in labor market data. When the natural forces of the adjustment process to economic disequilibrium are blocked, political tension must necessarily increase. In an election year, you can expect vulnerable politicians to act.

Boeckh fears that U.S. policy makers choose his "third option":

The third option is for the U.S. to opt for non-market solutions—tit-for-tat mercantilism—to boost domestic demand and employment at the expense of foreigners. Trade protection can be employed via competitive devaluation, tariffs, non-tariff trade restrictions, etc. It was last tried in the 1930s when surplus countries didn’t allow deficit countries to adjust. It would be a far more dangerous option now because the U.S. is a large foreign debtor. The U.S. has net liabilities of over $3.5 trillion, most of which are held in short-term instruments by central banks who could try to dump them in retaliation. The international monetary system is seriously flawed as it was in the 1930s, although there is the important difference that domestic money supplies are not rigidly linked to central bank holdings of gold or foreign exchange assets. Nonetheless, great instability with the major reserve asset of the world—dollars—would be catastrophic.

Boeckh is focusing here upon the damage that anti-mercantilist American action could do to the world economy. He foresees that U.S. action will be unsystematic and will result in a "tit for tat" trade war. Perhaps he does not know about our scaled tariff proposal which would be systematic and preclude "tit for tat" retaliation.

As we noted in our recent American Thinker commentary (U.S. Growth Slows Due to Trade Deficit), the tariff rate of our proposal would be scaled to our trade deficit with each mercantilist country. Doing so would enforce IMF rules, comply with WTO rules, end mercantilism, reduce American imports, and increase American exports. We wrote:

Some fear a trade war with China and some of the others which would reduce trade. But, we have little to lose from a decline in one-sided trade which would stimulate American factory production. If these countries were to react with counter-tariffs instead of taking down their barriers to our products, they would face increasing tariff rates on their products. If they were to react by rapidly selling off their U.S. Treasury bonds, there are plenty of buyers including the Federal Reserve. And what would China do with the dollar proceeds? Sell them and drive the dollar down and make us more competitive around the world?

Essentially, Boeckh sees the world realistically and his advice to investors seems sound. But, he appears to oppose the U.S. solution that would work. He would give away our economic future for the good of the world. But doing so insures that the Communist government of China dominates the future, supporting brutal dictatorships worldwide, just as they are currently doing in Burma, North Korea, Sudan and Iran. Ending mercantilism would produce an economically growing United States which could continue to spread democracy worldwide.

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Comment by John Schuler, 8/32/2010:

As you have noted elsewhere, the USA built its wealth and jobs base by using high import tariffs. Initially to block British and European manufactured goods.

Alexander Hamilton did a few dumb things, but mostly brilliant ones. Were we then to apply the rules of today, we would have exported raw materials and imported finished goods and been a 3rd World Nation. hmmm.

One of the key reasons it took Detroit so long to fail was because of the 25% import tariff on light trucks that gave them a huge edge from the 60s and even today. It also scared the Japanese into building auto-manufacturing plants here; they incidentally proved that American workers could build a quality product when managed somewhat well.

Today, we are continuing to bankrupt our dying middle class to enrich the top few % of our population who also control our Congress. If Obama so desired - and had the freedom to act - we could have full employment with living wages in our own factories within 6 months; it will probably not happen in our lifetimes as it would mean moving trillions of dollars down from the top few %, into the pockets of the "masses".

Soon we will see the wealthy living in armed communities, traveling in armed vehicles and driving on toll roads - to skirt the poverty-ridden masses in their traffic jams - formerly built and owned by the taxpayers. Correction! It seems we have that already.

Response to this comment by Howard Richman, 9/4/2010:
It will be sad to see the rich locked up on gated communities. One of the striking things about the United States is the open lawns you see everywhere. That may change.

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  • [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]