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 Richmans' Trade and Taxes Blog

Housing, Trade Deficits, and Global Warming Foolishness Caused the Recession: BalanceTrade and the Budget for Recovery
Raymond Richman, 3/11/2012

Notwithstanding that the recesion of 1937-38 indicated that there was no Keynesian multiplier--as soon as the stimulus of the preceding four years was reduced, the economy tanked--Keynesians maintained that the Roosevelt administration reduced its stimulus spending too soon. The same agument is being made by Nobel prize winner Prof. Paul Krugman and former Chairman of the Council of Economic Advisers, Prof. Christina Romer, and many others, after the failure of the $800 billion Recovery Act of 2009. 

Keynes was a great English economist who sought a solution to the problem of depressions and business cycles in general. He thought he found the answer and wrote his epic, the General Theory of Employment, Interest, and Money (1936) . While Keynes took a scientific approach to the problem of recovering from a depression, he turned out to be wrong about his “multiplier”; increased government spending creates employment temporarily but the jobs disappear when the stimulus is ended.

Dr. Valerie Ramey, Professor of Economics at the University of California, San Diego recently published in the NBER Working Paper Series the results of her research entitled “Government Spending and Private Activity” in which she concluded that “For the most part, it appears that a rise in government spending does not stimulate private spending; most estimates suggest that it significantly lowers private spending.  .. The results imply a multiplier on total GDP of around 0.5.” And further, “For all but one specification, though, it appears that all of the employment increase is from an increase in government employment, not private employment.”  

Readers of this blog may remember that we evaluated the effects of the Recovery Act of 2009 and concluded that any employment effects terminated when the expenditures ended. We believe that Prof. Ramey’s research validated our conclusion. We are looking forward to the reaction of Profs. Krugman, Romer, et al. to this remarkable paper.

We are not alone. Prof. Robert Barro, professor  of economics at Harvard and  distinguished economist, is on record as saying that the Recovery Act of 2009 and similar economic stimuli will not produce a recovery.  But we differ from most academic economists by believing that we need to know what caused the recession in order to recommend policies for a recovery.

We have identified three principle causes. First the immediate precipitating cause was the bursting of the housing bubble. Second was the enormous growing trade deficit on goods and services which reached about $800 billion in 2008. After falling as the result of reduced imports resulting from the recession, it grew to $50 billion in December, 2011 or an annual rate of $600 billion. Third was the enormous waste of expenditures whose object was to restrain man-made global warming, a theory that fails the scientific test inasmuch as it does not explain past periods of global warming and cooling. Moreover, there is no evidence that the hundreds of billions already spent have had any effect on the level of carbon and other “pollutants” in the atmosphere and on climate. Thousands of physicists, archaeologists, and other scientists have rejected the theory. And an alternative theory that magnetic changes on the sun determine the amount of cosmic rays that enter the earth’s atmosphere affecting cloud formation and causing weather changes, has been advanced. This theory has been developed by Prof. Henrik Svensmark of Denmark and is currently being tested by Jasper Kirkby at CERN, the world’s principal nuclear research institution. Prior to undertaking the so-called “CLOUD” experiment, Kirkby had shown from historical and geologic evidence that carbon emissions accounted for none of the global warming before the 20th century and only a small proportion since.    

Although billions have been spent to rescue home-owners and financial institutions, home construction is practically non-existent. It will be years before the home-building industry contributes to the recovery.

Economists are generally “free traders” but economic history tells us that many countries use mercantilist trade practicies—limitations on imports and subsidies to exports--to grow their economies at the expense of their trading partners. We have identified China and Japan as two of many nations and groups of nations who have pursued policies which economists describe as mercantilist, designed to increase exports and deter imports. What saves us from a fate worse than Greece is experiencing is the fact that our debt is expressed in dollars, still the world’s monetary standard. So we can always just print the money needed to pay the debt. But the dollar standard is under attack. When it ceases to be the world’s standard, we shall become like Greece and be forced to default on our growing debt to the rest of the world.  

To balance trade, we argue for the imposition of our invention, the single-country variable tariff which we call the scaled tariff whose rate increases when the trade deficit grows and falls as trade becomes more balanced. Besides generating considerable revenues while the trade deficit remains substantial, it has the virtue of not punishing our trade partners with whom we have a trade balance. It affects imports only from countries which, for whatever reasons, enjoy a substantial chronic trade surplus with us.

Trade is not the only contributor to our economic malaise but is one we can deal with quickly. The growth of state–subsidized bio-fuels, windmills and solar panels, hybrid vehicles, electric cars, and lithium battery manufacturers has highly negative effects on employment and regressive effects on the distribution of income.  We estimate that about $100 billion in grants and tax credits have been extended by the federal and state governments to the proprietors of those establishments, making many of them rich and eager to take advantage of the free capital and guaranteed loans. Tax rebates and tax credits do not appear in our federal and state fiscal budgets. American economists are at a loss to explain the continuing high level of unemployment in the face of the $800 billion Recovery Act expenditures, the $1.5 and $1.8 trillion budget deficits in 2010 and 2011, and “green” energy subsidies, federal and state.

Moreover, none of the “global warming” could compete with fossil fuels without huge government subsidies. The states and federal government provided about 60 percent of the capital of the green enterprises and got nothing in return. The government made sure that wind and solar plants got a high enough price for the electricity they produced by requiring electric utilities to buy their electricity output regardless of price. The subsidies are so costly that Spain had to end the wind and solar subsidies to avoid bankruptcy and we shall have to as well.

The president wants to raise taxes in order to continue subsidizing. The biggest contribution that he could make would be to end the enormous amount of subsidies to housing, urban development, education, wind and solar plants, and environmental projects.  The private sector is developing new products and technologies but the U.S. is not competitive and the factories are outsourced abroad. We need to eliminate the foolish regulations which create inordinate delays in building new factories. Just abolishing the Environmental Protection Agency, the excessive regulation of financial institutions, reducing the size of the federal government would provide a great stimulus to the economy, ending federal aid to education, reducing entitlements, would contribute to a quick recovery. There are tax reforms like abolishing the Corporate Income Tax and integrating it with the personal income tax that would help make us competitive.

We are on the way to becoming self-sufficient in energy as a result of the new technology for producing natural gas. But it is also time to end the infinite number of barriers to drilling for oil and gas that the President’s environmental goals have instituted and maintained. Even barriers to the construction of pipelines! The federal government should deal with real climate problems not “ism” generated climate change but real problems like hurricanes, tornados, cyclones, droughts, floods, etc., and avoiding their tragic consequences.  As Harvard Prof. Robert Barros has stated, the government should not spend money on any project that does not pass a test of benefit-cost analysis on its own merits. Ideology should not guide the selection of government projects.

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Comment by , 3/19/2012:

You are right in your analysis. Many people without economics knowledge feel similarly, led by intuition and common sense. However, people like you and or Prof Barro never appear in the media - it's Krugmans and Austrians, sound economics doesn't make it there.

So we have a political problem - broken media, dysfunctional democracy, fragmented and confused electorate.

Below is an interesting video - it's in Russian. The main concern of Anatolii Wassermann is that hard times are ahead of the US economy and the US will try to blame Russia (and others) for it. Because it's a side topic, he doesn't analyse the economic situation in the US but he provides an interesting conclusion: The US elites are waiting for the election to decide what to do while things are getting worse for the US economy. There are a number of solutions but all of them would be unpopular. Further, according to him, the best one would be to severely restirct imports and start rebuilding the US production capacity, but that would mean at least 10 years of quite resky belt-tightening.

Response to this comment by Raymond Richman, 3/20/2012:
My undersatanding of Russian was too inadequate to follow the video. I disagree with one thought you attribute to Wasserman. The administration will not blame foreigners; it will blame the Republicans even though the Democrats controlled the Congres for the past three years. Thanks for writing but next time include your name or an identification so that I'll know when you are writing again. Raymond ongo

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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]