Category Archives: Economics

How to Win a Trade War

I believe we have been in a trade war with China for 20 years. They have been fighting every day and gaining ground. We have been acting like Stalin at the beginning of Operation Barbarossa – mired in disbelief and incompetence. It was so much easier to think China was just giving us what we wanted (cheap consumer goods) without any cost to our own economy or security.

Thanks to Trump many more Americans and even economists are recognizing that we have been taken for a ride. There are confessionals everywhere; Few who now defend China in light of such public documents as Made in China 2025. This seems to have sent Trump and his team into a sort of frenzy, attacking every country as though it’s China. He even attacked a country that we have a trade surplus with (and there aren’t many of those) – Canada!

Memo to Trump: How to Conduct a Trade War

  1. Set an example by attacking the leader of global trade crime – China. (Let’s give a big shout out to Marco Rubio for this bill.)
  2. Clearly explain why it has been singled out so others know what the new rules are.
  3. Attack transhipping to prevent new tariffs against China from being circumvented.
  4. Pick a favorite country to use as an example of good conduct – one that has a deficit with us ideally and who we can trust under any situation to deliver needed goods in case we have a (military or trade) war. Canada or England will do. Celebrate their fairness.
  5. We must use tariffs and subsidies in case the spinoff effects of higher prices are too costly. Some combination of the two makes sense with steel, solar panels, and LCD screens.
  6. Make sure critical inputs like rare earth metals and pharmaceuticals are stockpiled or brought in only from friendly sources.
  7. Someone call up Peter Navarro and tell him you can’t win a war without allies.

Trump is right about one thing – every country in the world has been targetting debt-loving, consumption-crazy Americans. We have been in love with policies that favor consumers over producers/workers for thirty-five years.  It is a shock to wake up and be told that something you buy or use as an intermediate good in your business may go up in price. For every other country in the world, that’s a normal day. Everyone (except in America) pays extra for something, knowing they do so to grant a higher wage (or social service) to a neighbor. That’s why they accept higher tax rates and/or a VAT.

Surely Americans can see the absurd place this has gotten us – we have a (fake) unemployment rate of 3.8% and wages are barely keeping up with inflation. There are a ton of unfilled jobs out there – at Chinese wage rates! Corporate outsourcers have reset the price on domestic labor. Unless we break with the global trade parasite we shall continue to circle the drain with huge tax shortfalls and an opioid epidemic.  The war has begun and we must all be drafted to pay something for our safety, our sovereignty, and higher wages. We should accumulate allies to fight with us – sing along with me: Oh Canada (… or God Save the Queen).

Let’s not continue to act like Stalin in 1941.

Crossing Over into the Third World

In his 2nd volume of The History of the English Speaking Peoples, Winston Churchill made the claim that what separates his people from all the rest is the recognition that a leader has no authority unless he is supported by the rule of law. This is certainly a key part of what makes societies work. I would add another rule: To be civilized one must accept that we are obligated to conduct ourselves with restraint. We must all take the greater good into account before we … steal, murder, plunder, lie, cheat, extort etc.

The first world applies the law and a need for restraint differently depending on what you do.  What we deem to be ethical or appropriate is entirely different in the public sector compared to the private sector. There is an expectation that when you choose to become a public servant, you also choose to become (more) ethical. A worker in the private sector is expected to be driven by the profit motive and the materialistic demands of the conscience-free corporation.  We expect a company to pay a lobbyist to win a tax break for their business. We similarly expect a politician to resist such pressure unless it benefits his voters or the country.  We expect a CEO to make a fortune and fly in a private plane to Davos every year.  We are (rightly) outraged when a public servant gets paid a lot of money or receives unusual/excessive perks like flying around in AirForce 2.

When we elected a businessman with no sense of duty and a history of taking advantage of whatever angles he could find, we knew it would be unlikely he would pivot and become a public servant. Civic values are often established by the examples our public figures provide. We don’t look to Jeff Bezos or Mark Zuckerberg for ethical or political guidance any more than we looked to Rockefeller or Vanderbilt. We don’t just revere Lincoln, we need him as a guidepost to tell us what’s right and wrong. This was the function provided by Augustus Caesar, Henry IV, (France), Queen Victoria and Churchill.

The damage done to a democracy by putting such people as Maduro or Putin in power is no different than if we elected Martin Shkreli to be our president … or Donald Trump. It naturally causes everyone to question the ethics of the government at every level which leads to people dodging taxes, paying and accepting bribes, moral relativism in every facet of life. Trump fans arrive at the same conclusion because they believe his denunciations of the “deep state”. Do we want to live in Somalia? If we do we have found the fast lane.

Ethics survive by virtue of the archetypes we see in government. The entire society will follow their example. We’ll need a figure like Gandhi to offset the damage done by Trump in this regard.

A Moron with a Flashlight


The United States just ended its first session of trade talks with China. In theory, this is supposed to be a negotiation where China confesses to voluminous trade crime and the United States walks away with big concessions. No confessions or concessions will ever be made. So what’s the point?

Simply having these talks opens up the subject within the United States. Free trading globalists who consider themselves to be more moral than protectionists are forced to answer reasonable questions like:

  • Does China steal American intellectual property?
  • Does China require all American companies to set up partnerships with Chinese companies if they want to produce goods for the Chinese market?
  • Does China block Google, Facebook, and Microsoft from their market or are these companies simply unable to compete locally?
  •  What is the “Made in China 2025“ initiative?

It is virtually impossible to respond to these questions without conceding that China is engaged in rampant protectionist behavior.   The question then changes: Are we OK with trading with China on their/these terms? This is big progress.  For the past 20 years trade with China has been called “free“.   American presidents going back to Bill Clinton have sought popularity by facilitating unlimited imports of opium (cheap consumer goods) from China. We have been in a consumption stupor, unable or unwilling to see the costs.

My sense is that even the most liberal media outlets who want to denounce all Trump initiatives are really struggling with the narrative surrounding these talks.  They have changed their argument [weakened it] to excoriating steel tariffs but they know that such denouncements don’t address the greater problem. Fine, steel tariffs have a poor return, so how (else) do we fight back against dumping?

This situation is so outrageous that even Donald Trump can’t soil it by association. He still may screw it up with inappropriate policy but the genie is out. It’s hard for me to see politicians coming out in favor of globalism and its embedded free trade beliefs ever again. They may eschew populism as pandering to xenophobes but they see the merit of this trade fight. Authors like Ian Bremmer and Robert Kuttner are on the circuit offering intellectual support. Even The World is Flat – guy – Tom Friedman issued a sort of mea culpa last week! Up to now such voices were mute.

The hard part is still ahead of us – applying good policies that may raise the price of that 4K TV you wanted. We need to swing the pendulum back toward workers and away from consumers or else we will continue to see zero (real) wage growth forever (regardless of how low the fake unemployment rate goes.).

The Best Word in any Language

What’s the one word that is indisputably good? 

 Free 

We love free association, freedom to travel and freedom to work anywhere in any profession. We love free information on the web and free love. We all look for promotions that offer free goods. As consumers, we like free competition. Freedom and liberty are almost synonymous in a consumer society. If we put the word in front of anything it makes it better. That’s how we got the term free trade.  

The question at hand is: Is anything ever free? 

We have been trained to be skeptical of the term on TV but gullibly optimistic at the same time. We click on internet ads to see if their free offerings are true. We know not to believe car salesmen and promotions which only require your email address. This cynicism matches our disbelief in big corporations. Few of us think they are working with the greater good in mind. It’s all about the stock price. 

Why then do we shed this skepticism when it comes to trade. Every journalist is willing to accept the idea that all global trade relationships are fair and honest. Even when we trade with global pariahs and communist countries, they seem sure that it’s all pure perfect competition. They cite Adam Smith and David Ricardo as though they were two of Jesus’s disciples. And they love to use the term free. They are daring opponents to say that free is not good. In this case, to be free there must be no barriers or tariffs on imports and exports. It’s easy to see that we don’t tax or block imports so everyone presumes that our trading partners do the same. They don’t. 

Yes, I think Donald Trump is a corrupt moron but on this issue, he is absolutely correct. Who knows why people glom onto certain subjects (see below)? There is a huge risk that his advocacy will stain the cause but I must stick to my principles. Yes, huge importers will hate tariffs on Chinese imports but they are not our friends. They don’t reward society by paying workers more when their profits rise. The more they make, the harder they work to avoid taxes. If there are tariffs applied to their Chinese made goods they will seek to evade them.  

The stock market will be similarly irritated. It loves companies who dodge taxes and put all their production offshore. It’s also good with hidden pollution and price collusion. If most Twitter followers are fake – great, as long as total measured traffic rises. The market is fine with Facebook selling everyone’s data to Russian bots, as long as they get a good price. Taking comfort in your position by looking to Wall Street for corroboration is a very naïve practice. 

Trade crime is a thing just like corporate crime. Every other country seeks to protect its own interests and we are blind to it. Try signing up a car dealership in Japan that will market your US made brand. How easy is it to buy Excel in China? (Hint: it’s the same as buying meth.) Why are Americans so willing to be scammed? Has no one figured out the trade-off between jobs and cheap TV’s?  China certainly has. 

So why is Trump on board? Perhaps a man who has run a variety of business scams such as selling steaks and university degrees knows a dishonest scheme when he sees one. And so do we. Deep down everyone knows when they buy a dirt cheap electronic gadget or shirt, there is a cost in American jobs. Everyone knows that when an illegal immigrant sneaks into the country and works for you for far less than a US citizen, they’re getting away with something. Every low wage worker is a casualty. That’s why globalism is under pressure in most of the developed world.

We are all to blame.

 

Open Borders and Cheap Imports

In order to make a credible  argument in favor of granting all illegal immigrants green cards, you must also have a plan to control and limit future immigration. Otherwise you are simply saying you don’t believe in countries, sovereignty and the rule of law. Similarly, before you defend cheap imports you must explain where you draw the line between illegal trade practices (such as dumping and foreign subsidies) and the free and fair global trade system. It’s easy for anyone to argue that cheap foreign stuff saves consumers money.  Why should we stop China from giving us steel for free?  Locally produced car companies would be very happy and there are many more jobs making cars than there are making steel [in the United States] . We could extend this argument to everything – solar panels, computers, clothes, toys, furniture. Even if China is subsidizing all those exports to gain market share and/or bankrupt first world producers- so what. This is modern economic Darwinism -right?

Why should I start a business knowing that at any moment China et al could target my product group? What happens to manufacturing employees after they are casualties of dumping?  Pass them some opioids along with a python textbook. Those whining car companies are next on China’s target list. I suppose the New York Times will then defend China saying consumers should be able to buy cheaper cars made in China. And so on until the only business is debt issuance so people can buy foreign goods. Comparative Advantage is a quaint anachronism in this world of parasitic mercantilism.

Quite simply – If you want to sustain a strong American economy you must draw a line somewhere regarding trade cheaters. You must then penalize them. That doesn’t mean putting tariffs on all steel importers – just putting them on the cheaters. Punishing Canada for the crimes of China is shockingly stupid. [China is number 11 on the list of exporters of steel and aluminum to the United States but it is the sole perpetrator.)

The problem here is not that Trump is trying to punish cheaters, rather it is that such punishments have been applied so infrequently in the past.  We have allowed trade crime to run rampant so that now when we act it seems unfair – like ticketing a particular car for speeding after allowing fifty other speeding cars to go by. The broken windows crime prevention theory tells us we should be putting up trade barriers quickly and often. (That’s exactly what China and Japan do.)

If the press and economists in general are so outraged by the economic inefficiency of tariffs then why did they not yell and complain when China completely blocked Google, Facebook and Microsoft from doing business in China? They seem far more willing to defend foreign producers of goods than American companies. Maybe they’re just in love with rampant debt crazed consumerism. Whatever is best for consumers is always the way to go… we buy everything from everyone and ultimately sell nothing. Is that a path to prosperity? These economists frequently revere the recent economic success of China – but it has exactly the opposite model(?!)

Keep calm, there will be no trade war since we hold all the cards. The stock market won’t be happy but it is a corrupt entity in this regard – it would prefer if all Americans worked at Walmart, hopelessly indebted – buying only marked up foreign-made goods. That way profit margins are maximized. The S&P 500 will worry about the debt later, besides it’s good business for banks. Sovereignty and domestic solvency are the enemies of the stock market. (That’s why Trump’s corporate tax cut was received so well.) so please stop using stock market declines as proof of the validity of your anti-tariff position.

I’m tired of hearing about white nationalists, I want to know why we have no economic nationalists. What happened to those anti-WTO protestors? America loves its military but it is the least patriotic country in the world. Let’s not oppose tariffs because Trump is for them.

A broken clock is right twice a day.

Our Post Industrial Economy

Economics professors have always agreed about what comes after an industrial economy: a knowledge-based economy. Service industries would rise up to push around the money we made, inventing and utilizing new technologies. Workers would be data crunchers. They would be accountants, economists, health care workers and computer scientists. Great – no problem we all said. Just stay ahead of the (education) curve and don’t expect to get rich as a steel or car plant worker.

There is, however, another path. What if our remaining industrial base becomes so denuded that it (virtually) no longer produces goods. We won’t need as many engineers to improve productivity or to build robots to replace workers. We won’t need accountants or investment professionals to manage the wealth created by these industries. We won’t need scientists to do R&D since that always takes place near the production facility. (Why do R&D anyway in a world of rampant global IP theft?)

China has replaced us as the new industrial behemoth. They need raw materials for their factories and food for their army of peasant labor. Yes, they need services too but those markets are completely closed to foreign providers. (Just ask Google and Microsoft). Who shall feed the beast?

The Future: Our industrial capacity is shrinking towards irrelevance and our service sector is stalled out. We are the global consumer and without any trade barriers, everyone is just chewing on our flesh. We can still buy their goods but it’s all paid for with borrowed money. So now we are to go back to what we used to do – before the 2nd industrial revolution. We will produce food, minerals, and fuel and sell them to China and Japan just like Africa, Australia, and the Middle East. There are no import barriers on oil or wheat. This is economic development in reverse. It is, of course, a path to poverty and massive income inequality. The whole idea behind trade barriers was to protect young industries (and countries) until they have improved efficiency and become innovative. We have been doing the opposite for 20 years and it’s killing us.

Am I  being too cynical? Let’s look at the data. In 2017 6/10 of the top exports (by category) to China were commodity goods. Only three of the top ten were commodity sectors in 2007. ” In 2007, the U.S. manufacturing trade deficit … accounted for 76.99 percent of the overall merchandise deficit on a Census basis. The 2017 figure? 116.50 percent.”

The race to the bottom that began when China got MFN status is in its final stages. To sustain 2.5% growth we are bankrupting the state.  We have manufactured the illusion of increased wealth by virtue of massive debt increases. The robotics wave will have a greater effect on Chinese and German productivity since that is where global manufacturing now resides. We must get it back. Mercantilism can save us just like it made us in the 19th century but we’ll need a new mindset and new leadership.

Let’s dig up Alexander Hamilton.

 

Why do you hate the idea of a wall?

Let me guess your answer – “… because I can’t stand Donald Trump so I want to deny him anything he asks for.” If he wants something, it must be for some malevolent reason – right?. There is some merit to the argument but it frequently goes along with an effort to justify the anti-Trump position with a legitimate reason. That has lead us back to identity politics. Suddenly a wall is bad because all illegal aliens coming from Mexico and Central America are flawless perfect immigrants who just happen to be “undocumented“. In fact, it’s better for us to get these people (“who do all those horrible jobs we won’t do”) than it is to get migrants from anywhere else – even educated ones that speak English.

This leads directly to an open borders position. If you can’t articulate how you’re going to keep out some people then you must be in favor of letting everyone in.

Let the deluge begin.

This would be fairer to those unfortunates born in s(*&hole countries but then we must set a new rule. You are never allowed to whine about lousy income distribution. Your open borders policy will guarantee the suffering of our ever increasing underclass. You can never lament the poor economic position of the African American community or those less educated souls who failed to get a CS degree. There is pure Darwinian hell at the very bottom of the labor force and open borders guarantee its survival. (Let’s say it together class – Opioid Crisis)

Maybe you prefer feudalism…

I am not a heartless person – really. I do understand the luck of being born in the west and (in my case) getting entry to America legally. I don’t want to break up families or condemn teenagers to gang warfare in Central America. For that matter, I’m sure we could find an infinite number of Senegalese, Syrians, and Ivory Coasters who just want safety and justice. The problem is a simple one of supply and demand. A limitless number of destitute workers will (is) suppress wages for the unskilled. There’s a reason “no one will do those jobs” – the pay is terrible. What do you call a country with no borders?

So get on with it Chuck – get protection for DACA people and let’s build a southern border wall. Do the deal. And please, NPR and all the writers at the NewYorker,  stop interviewing members of the huddled masses who are either here illegally or sitting offshore waiting for plane-fare. You must tell me how you would stop the deluge before you make an argument in favor of letting in every person you profile.

Personalizing policy is the worst way to make it.

The Union Gets a Win.

The American confederacy was an agrarian economy trying to survive during the industrial revolution.  The only way for it to compete with the north and raise living standards was to enhance productivity by the use of free labor. Agrarian economies tend to be more traditional culturally since their lifestyle is the same as it was generations ago. Cows are cows and wheat is wheat. Eventually that culture gets out off sync with industrial competitors and neighbors. A rift grows and such rifts are not easily repaired.

To some extent the animus produced by cultural difference is exacerbated by  inferior economic performance. A hundred and fifty years after the war the rift still exists for the same reasons it did in 1858. The  animosity tends to expand into other spheres such as science and religiosity.

This national bifurcation has been around a long time and the party of the south (and the rural west) has always had to strike a balance or a tolerance between its two factions. FDR had to look the other way  in the face of the KKK and southern lynching because he needed southern Democrats to vote for his new deal programs. Truman and Kennedy  made similar compromises. Johnson blew up the party and handed the south to the the Republicans when he pushed through new civil rights laws. Now the balancing act must be done in that party.

The Repubs used to have a hard core group of free market driven Northeastern intellectuals led by William F. Buckley who had nothing in common with southern racist (James Birk Society)  southerners. Each side served to offset the other so they delivered compromise candidates who could still win a national plurality.

Coastal intellectuals have uniformly rejected Trump’s malevolent narcissism so he must now cow to the southern racist wing of the party. A narcissist must find adoration. Of course he/they favor no estate taxes just like English land barons of the 19th century). Social services for the poor (healthcare) are absurd if you rule over a plantation. Don’t tread on Jesus and Robert E. Lee.

Congress is now ruled by southern Senators with southern Confederate agendas. There is no balance of northeastern or Californian senators who believe in evolution, climate change or balanced budgets. In fact there is little populism in their policies since the south has always been ruled by plutocrats just as it was in medieval times in Europe. Tax cuts for corporate donors – of course!

The structure of the US Senate and the Electoral College were supposed to ensure regional balance and fairness. All they do now is sustain the Confederacy’s malevolent influence. We are condemned to a life or death struggle against the likes of Roy Moore and Mike Pence – living anachronisms, ascendant in the era of Elon Musk.

Today we can celebrate our win and next week Congress will pass a new tax plan that will destroy the federal budget.

Are all these policy changes targeted at me?

That’s how it feels. It’s not just Trump who is after me,  it’s the entire Republican party. I have a few basic issues that excite me and it seems that someone in Congress is singularly devoted to doing the exact opposite of what I believe in:

  1. All steps closer to universal coverage and subsidies for the poor are being undone – as though Republicans want the working poor and the nearly old – to die, literally.
  2. Net Neutrality is being revoked. I have (like most people) no choice regarding my internet provider. Now, if they want to jack up my rates because I use Netflix then they can and will.
  3. At every turn, the government seems devoted to anti-science. I seem to waste my time learning about such things as climate change as though my advocacy for clean energy production matters.
  4. Corporate taxation ranks right at the bottom of my priorities. Why? .. because profits as a share of GDP have never been higher! How does anyone defend lower corporate taxes in this context? Are many head offices moving to Switzerland? Have all those profits produced fabulous wage increases for workers?
  5. I seem to be the only person left in this country who cares about the US budget deficit. Why? I have to accept that neither party cares and the the Republicans are unfazed about jacking the deficit to $1 trillion/year. If there’s a new recession then maybe we’ll see $1.5 trn!
  6. Eliminating the estate tax moves us precisely to where the founding fathers said they didn’t want us to be. An up and coming business will be moat construction.
  7. The elimination of state and local tax deductiblity, is a perfect way for the Republican Party to hurt Democrats including yours truly. Let’s say it together -Double Taxation for all!

We have finally arrived at irrefutable proof that this is not a democracy. Gerrymandering had already pretty much accomplished this. A  new tax bill that raises personal taxes on non-millionaires in order to pay for a reduction of corporate taxes tells us that voters are irrelevant. This is precisely the kind of policy you would expect to see in a corrupt third world autocracy.

What surprises me is how this all contrasts wits other western democracies. They’re not taking the same anti-science anti-democratic bus to  insolvency town. They all have universal heath care – our House speaker wants to cancel Medicare!

I emigrated to the USA 31 years ago – I never felt as foreign as I do today.

Is this Tax Reform or a Tax Cut?

Maybe it’s both so let’s look at five (Republican) axioms for their veracity:

  1. Flattening, simplifying and reducing the corporate tax rate will help business which will stimulate the economy. Why? Corporate taxes are too high so corporations are not locating here anymore. Really, name some. Last I checked Silicon Valley wasn’t having a problem with new business formation (and they’re in a high tax state too). So how much higher are our rates?The countries with meaningful lower rates are ones where infrastructure and talent are severely lacking. They have lower rates to make up for these (and other geographical) shortcomings. Please note – the effective rate is nowhere near the “statutory” rate.
  2. Corporations have a ton of money locked up offshore. Give them a tax holiday and it will come home and be spent on new plant and equipment -jobs!! (Yes I have already written about this.) US corporations are awash with cash and rather than spend it on new capacity (or higher wages) they are buying back stock with it. Is this just a plan to increase stock buybacks?
  3. We are in year 8 of an economic expansion – that’s when we should be raising taxes to balance the budget, not cutting them. Has no one read Keynes?
  4. If I pay taxes to the state and town, is that money still taxable by the Feds? Let’s say I earn $100,000 and pay $80,000 (total) to the state and my municipality (easy for someone with a big house in Westchester NY). Can the Federal government still come along and ask me for $30,000 more? They have been prevented from doing this ever since the inception of income tax in 1918 so as to protect state revenue from the evil Feds and to prevent income tax rates from exceeding 100%. I feel a supreme court challenge coming.
  5. Can we please stop saying that tax cuts pay for themselves. Until they come up with one perfectly clean example of this, it must stop. In fact, they don’t really have the right to say that tax cuts are good at all unless they find a case where interest rates rose, taxes were cut, and GDP rose without some corresponding budget deficit nightmare. That leaves the 80’s out. How about the EGTRRA of 2001?  Yes – the one that took the budget from a surplus of $600bn/yr to a $200bn/yr deficit. Does anyone want to talk about the Kansas tax cutting disaster? Does anyone remember that Clinton raised rates (in 1993) and economic growth accelerated? In economics, like all social sciences, nothing is cut and dried.
  6. All LLC’s must have low tax rates to compete with corporations or else they’ll all just incorporate. If the LLC rate falls way below the maximum tax rate then everyone will quit working for wages and become an LLC. Wait, have I seen this ridiculous idea before – Yes, Kansas did it!

If you hear an expert espouse the magic of tax cutting like a religious zealot – change the station.