Trade Tantrums

I lamented in the last weeks that there are few voices in government to stand-up for budgetary and monetary control. This week my complaint is about international trade. Whether it is Trump or Sanders or Clinton – the story is pretty much the same. Americans are being hurt by free trade and we have to put an end to that.

This unified wail against trade is expected in slow growth times like we are living through. It is always easier to point the finger of blame and redirect rage at external forces. It is easier to do that than to admit that an economic behemoth like the United States can only linger in slow growth because of our own domestic policy failures. It might be comforting to some that the US is joining other countries in complaining about unfair competition. But it doesn’t help matters. Economists have long pointed to the disastrous effects of the Smoot-Hawley tariffs as a major contributor to the severity of the Great Depression. Protectionism can be devastating. 

As I showed in a previous post, the US has been hurt much less than other countries in the aftermath of the last global crisis. China is a shadow of its former self. Other developing countries that saddled their success to commodities trade are experiencing very slow if not negative growth. Europe grows slower than escargot. We complain when those countries allow their exchange rates to decline or engage in other emergency trade protection measures to resuscitate their economies. But the truth is that we in the US will gain much more than we lose if we ignore those misguided diversions from sanity.

So we ought to stop pointing fingers abroad and instead lead the world by example. And the example is to show that competition is good – whether it plays out domestically or in wider global markets. Since many Americans do not buy that story, let me work on it here today. The story has two parts. One is economics and common sense. The other part has to do with history.

Let’s discuss history and change. Most of us do not want to go back to the days when we washed our clothes by hand using tubs, scrub boards, and clotheslines or when we asked Mary the telephone operator to put our call through to Aunt Bee. We don’t want the textiles industry back in New England. We like modernity and most of us appreciate change that makes our lives easier and better. Transitions can be painful but in retrospect the pain has produced enormous gain.  

It is true that low skill manufacturing has all but disappeared in the US since the baby boom was born. But somehow as that was unfolding gradually over time, the economy grew and employment growth has been nothing short of spectacular. Much of the employment gains went to high valued added manufacturing and to services. And while services do include many low paid jobs they also include many very good ones in technology, scientific research, communications, health services, entertainment, energy, travel, shipping, tourism, finance, banking and much more. It surprises people that while manufacturing jobs have disappeared in the US, manufacturing output has not. US Manufacturing has grown at the same pace as the overall economy for the past 60 years. To say that manufacturing has disappeared in the US is wrong. Manufacturing has survived because US firms and locations have fought to maintain competitive.

Industrialization in America has been nothing short of spectacular as hordes of men and women have found good jobs and ample incomes. And while most of that process was domestic, part of that industrialization has been the phenomenon of globalization. It is the same process but it overlaps borders. No we don’t make many or any televisions in America anymore. How could we when an American factory worker wants to earn $50,000 per year and we can pay a Vietnamese worker $2,000 to produce the same TVs.

Vietnam is just one of many countries that offer advantages for low skill production. Somewhere around the early 1990s the world changed. Whether it was the breakup of the Soviet Union, the economic changes in China, or the demise of Latin American dictatorships and self-sufficiency programs – the next quarter of a century produced a dramatic increase in output and trade. Countries that never traded started to. Countries that traded only with their best regional friends began looking globally for markets.

That major historical change is not going away. And while it benefited the people in emerging market countries it also benefits us every day. We import goods that we could not possibly make as cheaply. We export to countries that need what we can make.  And investors have found new and successful global trading opportunities. If the US stock market is not making money for you – you can more easily buy emerging market stocks.  And vice versa. Call it diversification. Call it globalization. Or just call it good. 

It is true that in times like now when growth is so slow, our first instinct is to blame and protect. But it is also true that we cannot protect ourselves from dozens of countries whose inhabitants want to make $50,000 per year. The only way to truly protect our rich civilization in the US is to maximally exploit our advantages and opportunities. Do we not have world class scientists, companies, workers, infrastructure, and so on? Of course we do. No one should cry for America. But what we need to do is employ all our assets in ways that create competitive products and grow wonderful jobs. 

The future promises new and innovative processes, products, and markets. As people in emerging nations succeed and earn larger incomes, they will spend some of this new wealth at Apple, Microsoft, and Google. We need to focus on getting better and on how we can be the very best at what the world wants to buy. We do this by opening markets not by closing them. 

The Suckling Fed: A Central Bank Acting without License

One of the problems with monetary policy these days is that it seems level-headed and responsible and yet there is still something sadly wrong with it.  It seems correct and rational because the economy continues to have risk factors and we have a Fed with very powerful tools. So why not let the Fed continue to support the economy?

The answer is that while it all seems warm and fuzzy, there isn’t any real precedent or theory to support this kind of behavior. Pardon my little walk through history to make my case.

The Fed joined the central bank game in 1913. It didn’t have much to do during the Gold Standard days. After WWII we had something called the Gold Exchange Standard and the Fed was supposed to be pretty passive in that system too – though some people would argue that it was Fed activism that caused the US to have to embarrassingly admit they screwed up a very lovely system. President Nixon notoriously closed the Gold Window because we could not continue to honor our pledge to buy gold for $32 an ounce. We had depreciated the dollar and had to end the system or go broke.  

When I first learned monetary theory in the olden days of yore, there was a very simple idea that guided monetary policy. An economy needs money to make transactions. The Fed should make sure there is enough money to sustain a normal pace of economic growth. That was pretty simple. The Fed was not supposed to deliver babies or groceries or pizza. It was supposed to let money grow at a nice easy pace commensurate with long-run growth. Snore.

If you are still awake you might point out that the modern Fed has a dual mandate to keep inflation below 2% while pursuing a fully employed economy. That’s true but even those words do not support what the Fed has been doing the last few years. There is a difference between being a lender of last resort and being a lender of first resort. Let me explain.

Even some ardent conservatives believe the Fed should be the lender of last resort. That means that when we have an emergency that requires liquidity in the economy, most of us believe the Fed should provide that liquidity.  When the emergency vehicle comes to your house you are glad it contains a medical professional who will administer to your heart attack. The Fed performed that role in the beginning of the recent financial crisis. Give them a gold star. They did the right thing. It helped.

But just because the emergency doctor gets your heart going it does not mean you want her sitting in your living room watching reality TV and eating your butter drenched popcorn on a daily basis. Dude, go home. I am okay. Go help someone else.  

And that is the root of the problem with the Fed. Janet does not want to go home and leave us along. You might say – but she has plenty of support and authority from modern macroeconomics. Neo-Keynesians and even a few monetarists might agree that the Fed can provide stimulus and support for an economy entering a recession. The Keynesians have models that show a little bit of stimulus can go a long way. Monetarists might fret that such actions would cause higher inflation but both groups of economists admit that stimulus could be effective in moving us away from the worst of the recession.

But what none of them can show with or without models is why the Fed needs to keep suckling the baby. You and I know of mothers who are breast feeding their kids at age 14. Hey gal, it is time to give up on that. Enough is enough. I could not possibly do better than you in imagining all the reasons why breast feeding beyond even three years old could have some negative impacts down the line. Summarizing:

·        The Fed should be lender of last resort --- yes

·        The should stimulate the economy in a recession – maybe

·        The Fed should keep stimulating the economy until every last man and woman is employed – No No No.

·        The Fed should keep stimulating the economy until inflation rages --- No No No

Our Fed has absolutely no historical or theoretical support for what they are doing today. Can you name a time when the Fed successfully engineered the economy six years after the previous recession? They are freelancing in the worst way. Remember when the Fed chair used to meet with Congress annually and lecture the legislatures about prudent budgets and runaway debt? No longer. The ideal of an independent fiscally responsible Fed is sadly gone. 

Instead today what we have is a Fed that supports the government in its progressive agenda. What they are doing has no support in economics. What they are doing today is everything about progressive ideology. It is a sad precedent for the Fed and for the country. Maybe you haven’t noticed but despite all their so-called good work, the Fed remains skeptical about the economy. Instead they should admit that they are out of their province. Instead, they should be back yelling at Congress to fix what’s really wrong with the economy. They should be restoring more normal interest rates and money. They should leave us alone. 

US Governement: Liars and Thieves?

Mom, I need a bigger allowance. Honey, Pops and I gave you a bigger allowance last week because you said you had to pay off your debt to the cannabis store. I know Mom, but when I went to the store I saw some really cool edibles and now I owe them even more money.

Stupid, eh. But now replace the word Mom with tax-payer and the word Honey with the US Government. President Obama and his cast of stooges make no sense. If we go along with this nonsense then we deserve whatever happens to us in the future. 

Congress is going to give the President a short-term budget with higher military spending and he is going to veto the bill unless they also add more spending on domestic programs – and make all of it permanent. You’d think that we have a deficiency of government spending in this country.

Recall – we have a national debt that soared when the government “rescued” us in the wake of a world financial crisis. Former Fed Chair Bernanke is now making a pot of gold out of a book and book tour giving us his version of what happened when the Fed went arm in arm with our Government during those hairy days. At least someone is getting rich from all this craziness. But I digress. Our national debt (held by the public) went from about $5 trillion in 2007 to $9 trillion in 2010 and then kept on growing. It was almost $13 trillion in 2014. Nice going dudes – you almost tripled the national debt in a mere 7 years. We thought the increase was going to be temporary. Hmm. Read on.

Have you heard the US government moaning and worrying about all that debt? Have you heard the President pointing his finger at Congress demanding that they not imperil our fine land with debt, pointing out all the possible long-term unintended consequences of a major increase in debt? Did the Republican Party engineer a major austerity program? You might think we had such a thing when you hear about budget caps but nothing could be farther from the truth.

Like the kid on cannabis, we are spending more and more and we are getting deeper in debt. You think I am making up stories? Go to the CBO website and you will see that without any of the currently discussed spending additions being proposed, the debt will reach $16 trillion in 2019 and then $20 trillion in 2024. Watch the politicians in coming days…wringing their hands over the horrible austerity we Americans have had to endure. But austerity means falling debt so there is something wrong with this story. 

As you listen to them explain why we need more spending (and taxes) just look at the data below.

Total Federal government spending will increase by 5.3% per year for five years and then by 5.5% per year for the five years after that. Does this sound like an austere budget? Those increases are per year. Imagine if your wage went up 5-6% per year. Starting with $3.5 trillion in 2014 total spending will have risen to $5.7 trillion in 10 years. Poor Poor government. How can they possibly live on an increase of $2.2 trillion?

Point of emphasis – these numbers are estimated by the bipartisan CBO based on spending bills already passed – spending will grow faster if the Ds and Rs and O get together on a deal to spend even more.

Table. CBO Projections for Government Spending based on current budget law. Yearly amounts are in billions of dollars. Changes are percent change per year. 

                         2014   2019  2024  2014   2019

                                                          to        to

                                                       2019   2024

Mandatory       2,099  2,783  3,586    6.5      5.8

Discretionary   1,179  1,222  1,362    0.7      2.3

Net Interest         229     437     710  18.2     12.5

Total                 3,506  4,443  5,657    5.3      5.5

And by the way, your tax bill is not going to go down. This rapid spending has consequences for both higher tax revenues AND a larger debt. The government’s tax revenue will rise from about $3 trillion in 2014 to $4.8 trillion in 2024. In 2024 the government deficit is estimated to be almost $900 billion in that one year alone. Above I explained that the total debt will rise from $13 billion in 2014 to $20 trillion  in 2024. 

I am getting dizzy. Where is the JD when you need it?

Total spending is composed of mandatory, discretionary, and net interest. Mandatory spending is ongoing and determined by past laws. Social Security, Medicare, Medicaid, Obamacare subsidies, disability insurance are the main programs that fall into that category. Notice that Mandatory spending is the biggest part of spending at $2,1 trillion in 2014. It will increase by 6.5% per year for five years and then by 5.8% per year in the remainder of the decade. Does that sound like austerity to you?

Discretionary spending is a smaller component that includes a lot of other things including defense and many non-defense programs. After rising by less than 1% per year for five years it will then increase by 2.3% per year. Program recipients might complain about the rate of growth -- but even these programs are scheduled to grow if past legislation is extended to the future. 

Check out Net Interest which will grow by an average of about 15% per year for the next 10 years. Beginning at a humble $229 billion it will balloon to more than $700 billion in 2024 alone.

Don’t fall for those politicians who scare you by showing you real declines in some heart-rending discretionary programs. They control every line item in the budget. They have already signed off on $800 billion more annual spending on mandatory programs between 2014 and 2019. If they took even a meager $100 billion off that increase, they could add it to Discretionary programs that are most hurt. If they shifted that $100 billion then we would be spending $1322 billion in that category in 2019 and the growth rate in the first five years would jump from 0.7% per year to 2.4% per year.

The long and the short of it is that this government is spending too much of our money on government programs. While it cannot do much to reduce spending on interest, it can address all of our important needs without adding a dime to whatever is already in the pipeline. Don’t be fooled by these jackals. Ask them how a larger national debt is going to expand employment and help the average guy and gal. If they want to spend more on X, then they should spend less on Y. That's their job. We should tell them to do that. 

Loopholes and Loonies

I love it when people use the word "loophole". It sounds so devious. I don't have a loophole but the rest of you big meanies have lots of them. I looked it up and here is what Wikipedia says

A loophole is an ambiguity or inadequacy in a system, such as a law or security, which can be used to circumvent or otherwise avoid the intent, implied or explicitly stated, of the system.

That makes a loophole sounds pretty ominous. And so I found something on the Internet by Redditt when I searched for famous loopholes:

     You can legally drink with your parents anywhere alcohol is served regardless of your age,

     Park your car in your neighbor's property and the company can not repossess your car

     Put a few safety features on your golf cart and you can get the same tax rebate intended for full-fledged electric cars

    You can sue someone who has a liability waiver

These loopholes underscore the negatives of a definition that uses words like inadequacy, circumvent, avoid intent, etc. Kids are not supposed to order a JD on the rocks but apparently a parent can order one and give it to little Nolan at any bar and grill on the planet.  Now that’s a loophole.

So when I hear politicians and  most recently in the WSJ (Wall Street Journal, October 2, 2015, page A13) Alan Blinder infer that tax loopholes are egregious and destroy fairness, it makes me wonder how we could have created such an evil tax system.

So I wondered. I drank a little and wondered a little more. As usual these politicians and their hacks are using inflammatory words trying to fool us stupid voters. So let’s step back a little and figure out where all this is coming from.

Many politicians want to reduce tax rates. Hey Joe – I am going to reduce your tax rate. Gee Mr Congressman, thanks so much. I love you.

When you reduce a tax rate and tax revenues fall, then you have a larger government deficit.  Since we have a really big deficit and we often espouse smaller ones – this creates a conflict for Ms Congressman. But Ms Congressman isn’t a Congressman for lack of verbal verbosity. She fixes the problem by increasing taxes on people who usually won’t vote for him or her.  Cool formula – reduce tax rates on people you like and raise taxes on those you don’t. But even that does not sound good to Mr Congressman who wants a lot of votes. So he doesn’t say he is going to raise taxes – he says he is going to make things fairer and more efficient by reducing tax loopholes. Now that sounds cool to everyone.

That is where the loopholes thing comes into your TV and other news outlets. And here is where the disinformation campaign goes to work. Recall that we have a government. If we are naive we believe that somehow this wonderful government is fair and impacts us all the same. It taxes us each the same and then spends the proceeds on each of us equally.  Ha ha. If you believe that I am willing to sell you the Edgestar wine cooler that died one day after the one-year warranty expired.

Anyway, if you live on planet Earth you know that the government has many reasons why it never treats us equally. And if you were crazy enough to purchase a copy of the US Federal Tax Code you would see there are many reasons why Congress has passed tax and spending laws to favor some groups of people over others. If you are one of those people – perhaps a poor person who receives a disability payment or who uses the earned income tax credit – you would not go down Main Street proudly shouting that you have a tax LOOPHOLE that costs America tax payers about $60 bill per year. 

The dilemma we face at the end of 2015 because Mrs Congressman decided to put budget stuff off until the very end of the year is what to do about a budget in the year before a national Presidential Election. Candidates want to say they want more fairness and efficiency in the tax code and promise you they will close loopholes. But loopholes ain’t loopholes. These “loopholes” are carefully reasoned and voted upon parts of government. Not one of them that matters will be taken lightly. Not one of them can be erased by a Cheshire grin or a loud voice. But alas, these pusillanimous politicians who want to say they are for fairness and small government deficits will not close any real loopholes and of course will not continue to control government spending.

I am not against tax reform and am not against lower tax rates. I simply believe that tax reform and closing loopholes is much harder than it sounds. If politicians were more honest they would more directly say they are looking for ways to raise taxes to offset the loss of revenue that comes when they reduce tax rates. But alas such honesty is not easily found, even after an extended visit by the Pope. 

I end with a list of the largest tax breaks or “loopholes” to show you that this stuff has nothing to do with the Wikipedia definition I cited above. This list of the top 15 and the five year dollar value estimates come from Forbes. The numbers are billions of dollars estimated over five years. Imagine who might not like the removal of any one of these. Imagine the blow back associated with removing any of these so-called loopholes: 

Employee Paid Health Insurance $760

Lower Rate for Capital Gains  $616

State and Local Government deductions $431

Mortgage Interest Deductions $379

Tax-free Medicaid Benefits  $358

Workplace Retirement Benefits $336

Earned Income Tax Credit $326

Childcare Credit $292

Capital Gains Death Exclusions $258

Insurance Exchange Subsidies $238

Charity  $224

Interest on Municipal bonds $217

Employer Paid Benefits $193

Cafeteria Plan Benefits $193

Untaxed Social Security Benefits $180