Tuesday, December 6, 2016

Tariffs to Fund Infrastructure, a plan for President-Elect Trump

Donald Trump has made fixing trade a centerpiece of his agenda.  He has repeatedly called to end the practice of outsourcing American jobs to other countries.  He has also repeatedly threatened high tariffs to those companies that do outsource jobs.  Numbers quoted have included a blanket 35% tariff.   A second piece near the center of his agenda is rebuilding American infrastructure, where he has called for $1T investment over the next 10 years.  That infrastructure in the US is badly in need of repair and upgrade is not in question.  He has often spoken of how other countries have shinny new airports, roads, damns, bridges, etc. while those in the US look dilapidated comparison, and few could argue with that. 

Information about how Mr. Trump plans to implement this infrastructure plan have slowly trickled out in the forms of various quotes, briefings, reports, etc.  One of the features appears to be a form of privatizing infrastructure where private companies will pay for the work and then collect a toll or fee for its use.  This is probably not feasible for the majority of infrastructure projects, nor is it advisable in general.  The American people will not likely be in favor of selling off the US Interstate system, all the bridges and tunnels, the water systems in towns, etc.  Doing so is just another short term fix that puts the public in hoc in the future to endless user fee increases.  The problems with the initial idea appear to be so pronounced that Mr. Trump is now said to be reducing the amount to spend on infrastructure to only $550B to appease those in his party who would rebel against any significant deficit spending on infrastructure.

A better solution is to combine these two pieces of the agenda into a single, self-funding package.  Use the funds generated from tariffs on imports to fund the infrastructure projects.  This would provide for the $1T of spending on infrastructure and much more. 

In 2015 the US imported $2.25T of goods (census figures) [1].  If even a 5% average tariff were applied to the import of these goods that would more than cover the suggested spending on infrastructure.  The 5% figure is an average.  Specific tariffs would depend on the particular goods and the source country as the balance of trade with that country will be the main determinant if tariffs are an appropriate mechanism to use in trade policy. 

The US ran up a total deficit of $745B in that year.  With nearly half, $365B, coming from China [2].  No wonder China is Mr. Trump's favorite target in regards to trade agreements.  The US also had a trade deficit of $60.6B with Mexico [3], another of Mr. Trumps trade targets.

As described in previous postings the main purpose of tariffs should be twofold.  First, to balance trade so that long term imbalances don't cause the kinds of dislocations in the economy like we have experienced here in the US for the last few decades causing the kinds of job loss and consequent stagnation or loss of standard of living for many Americans.  The second is to protect high-tech, high-value, and high-wage industries as these yield the highest prosperity for the country.  High-tech industries in particular tend to also be high-value and high-wage industries.  Further, future technology grows on current technology.  So, creating and maintaining a cutting edge, technology environment is key to sustaining and growing a modern economy.

Given the high level of the trade deficit with China a high tariff may be needed to bring this figure into balance.  Indeed, more than balance a trade surplus with China is needed to offset the many years of trade deficit that have accrued.  Perhaps a tariff as high at the 35% tossed around by the Trump team is in order after all with regards to China?  The US imported $483B from China in 2015 and if a 35% tariff was applied that would have yielded $169B from that country alone.

Tariffs could provide a meaningful and ongoing source of funds for the infrastructure projects that the incoming Trump administration proposes.  He should consider linking the two to create a revenue neutral plan that his Republican colleagues can live with.  Perhaps even delaying the implementation of the proposed corporate tax cuts until the tariff and infrastructure issues are settled.

[1] http://www.census.gov/foreign-trade/statistics/historical/goods.pdf
[2] http://www.census.gov/foreign-trade/balance/c5700.html 
[3] http://www.census.gov/foreign-trade/balance/c2010.html

Wednesday, March 9, 2016

A quick thought on a Paul Krugman article

Paul Krugman writes lots of interesting articles and blog posts on economics.  He recently commented on the trade policies of Donald Trump and his critic Mitt Romney.

See: http://www.nytimes.com/2016/03/07/opinion/when-fallacies-collide.html?partner=rss&emc=rss

Dr. Krugman says : "In fact, a worldwide trade war would, by definition, reduce imports by exactly the same amount that it reduces exports."

This property of trade is a bit short on its completeness.  This is simply stating that an export from one country is imported to another country.  Such a tautology is necessary, but hardly helpful in understanding trade.  Unfortunately, this leaves out the balance of trade of a single country, which is what is really important to that country.  The problem is with what is advertised as “trade” actually is is not trade.  Rather, it is a multi-currency purchase and sale system where each country buys from another in its own currency which is then exchanged for a global reserve currency, such as USD, and then exchanged to the seller’s currency.

By this mechanism imports and exports of a country are decoupled.  A country can choose to import and not export by simply making foreign purchases with currency.  Or, in the opposite extreme, a country can choose to export and not import by simply taking foreign currency for its goods.  More likely the trade is nearly balanced, or goes off to one side for a period of time as with the US where it imports more than it exports and has done so for decades.

But, what’s the long term effect of a trade imbalance?  Don’t imports have to equal exports over the long term?  Why would a country continue to sell to another for long periods of time, i.e. many decades, if it only gets foreign currency for its products?  What would happen to a country that maintains a balance of trade deficit for decades?  Wouldn’t trading partner nations simply stop selling to it after some time?  Well, the US may soon be able to answer this question.

So, what is wrong with moving toward a balance of trade by imposing tariffs when trade imbalances exist for long periods of time?  Wouldn’t that have the needed effect of reducing imports to be more in line with exports?

Saturday, February 20, 2016

Increasing inequity impeeds growth and causes deflation

Much has been written and commented on about inequity in recent years.  From the Occupy movement to the current campaign of Bernie Sanders.  Inequity has become a rallying call for many Americans who see the system as not benefiting them, while a few appear to reap all the gains of a growing economy.  Interestingly, no one that I've seen seems to have connected the growth in inequity to slow growth and deflation.  I would be interested in finding others that have examined this issue.

First a few definitions so we agree on what we're discussing.  Growth is the total change rate in real value of production in the economy, and is usually expressed as the change in GDP.  The measure of growth is thus truly economic as the effect of inflation (or deflation) is removed from the value.  Inflation (or deflation) is the change rate in the nominal price of a set basket of goods and services.  So, that the actual goods and services received are the same and the change in the total price is measured.

The increasing nature of inequity that is a driver of slow growth and deflation.  This is tied to long term debt that people have incurred over the previous decades.  This primarily includes mortgages and student loans, but some other debt like auto loans may also contribute.  When these debts were incurred decades ago the distribution of incomes was skewed more toward what we call the middle-class.  Workers in the economy brought home a greater percentage of the GDP compared to the highest earners in the economy.  These are the so called "1%" who's share of GDP has grown significantly over the last few decades as has been documented in many places.

The effect of a higher relative income in past decades is that people took on long term debts with the expectation that their incomes would continue to grow as they had for the previous decades.  When incomes failed to keep rising as they had in the past, i.e. inequity increased, people thought is temporary and took on yet more debt to maintain the life styles to which they had become accustomed.  Eventually, the lack of rising incomes and growing inequity led to an inability to pay the monthly payments on those large debts, and crisis ensued. 

This phenomena of growing inequity continues today with wages growing slowly relative to the economy and long terms debts slowly being paid down to levels that can be supported by the new expectation of future incomes.  These effects are deflationary for two reasons: first, the basket of goods and services that is used to measure inflation are mainly comprised of the very items that these middle-class members consume.  So, perhaps at better label would be "middle-class inflation" for what is measured.  Second, people are paying down their long term debt and have little additional money to spend on these goods and services, so their is little demand pricing pressure to push prices up.  Perhaps if the measures of inflation included more high luxury goods then the reported inflation would be rising at a faster rate that is more inline with the desires of policy makers.  In this case goods such as trendy art, super yachts, and mega-mansions would need to be included in the rate.

Growth suffers for similar reasons.  The distribution of goods and services planned for production still reflects the demands of the middle-class from years ago.  So, with the inability of this class to consume at a higher level with their constrained incomes growth stagnates.  To remedy this situation manufacturers can shift quicker away from producing middle-class goods and services to those that are consumed by the "1%".  Or we can simply wait for deflation to reduce the price of goods for the middle-class to a level where their incomes will allow them to consume more.  The economy is shifting toward a new steady state of lower relative incomes.  Until that new state is achieved the effects will be observed as low growth and deflation (or low inflation).

In any case, it is the lack of demand from middle-class consumers that is limiting both growth and causing deflation (or low inflation).  A shift in incomes from the "1%" back to the middle-class, as was the condition decades ago, will allow the middle-class to consume more.  This will have the twofold effect of raising prices as consumers compete to buy goods and services, thus eliminating deflation, and increasing growth as the increase in demand and subsequently prices will spur manufactures to increase production to satisfy that increasing demand.  This will contribute to a virtuous cycle of increased employment as manufactures hire to increase production which will in turn increase incomes which will in turn increase demand.

Tackling inequity is central to fixing the economy.  Fixing the economy is central to fixing the financial problems.  Changes to Federal government policies is central to both.