Friday, August 22, 2008

Trade and the Election

Check out new postings on our new blog. www.tradeandtaxes.blogspot.com.

Saturday, August 2, 2008

Friday, August 1, 2008

Joseph Calhoun had an excellent commentary on the credit problem in yesterday's American Thinker

Joseph Y. Calhoun, III, had an excellent commentary on the credit problem in yesterday's American Thinker. I especially appreciated his wisdom when he pointed out that the real problem is a capital accumulation problem, not a credit problem. He began:

A long wave of credit stimulation has been allowed to obscure the underlying problem of capital accumulation in the United States. We are paying a price, but not solving the problem.

The political class simply cannot be trusted to provide solutions. They are too interested in retaining power for the sake of power. They do not have the guts to say what needs to be said for fear of alienating some group of supporters. They do not have the integrity to stand on principle and advocate unpopular but necessary policies. They are too beholden to special interest groups to do what is right for the country rather than what is right for their campaign contributors. It is high time that politicians were held responsible for the damage done by policies intended to benefit the few at the expense of the many....

In a recent market commentary, Bill Gross called credit the mother's milk of capitalism. That sentiment, echoed by our politicians and policy makers, is the source of our problems. It is not credit but capital that is the lifeblood of capitalism and the US doesn't accumulate enough capital to support the growth to which we've become accustomed. The savings rate has ticked somewhat higher over the last few months, but for years we've saved too little and spent too much. The difference to date has been provided by foreigners such as the Chinese who now own over $1 trillion of US debt and Middle Easterners who own even more.

The U.S. problem is not a lack of credit. Our extremely low interest rates are testament that there is plenty of money available to be borrowed if Americans were credit worthy. The basic problem is a failure to accumulate capital (i.e., a lack of savings). No amount of borrowing from abroad will solve the underlying problem.

Follow the following link to read his commentary: http://www.americanthinker.com/2008/07/the_credit_problem_1.html.

Howard

Thursday, July 31, 2008

Good news! Doha Round of WTO negotiations collapses!

An article by Stephen Castle and Mark Landler in yesterday's The New York Times reported that the Doha Round of the WTO negotiations just collapsed. The story doesn't mention that the Doha Round does not address mercantilist government currency manipulations, a glaring oversight that makes the whole agreement worthless.

According to the New York Times article, the chances of this incompetent agreement passing in the future are minimal given changing political opinion in the countries that are being victimized by mercantilism. Specifically:

Deep skepticism about the advantages of free trade was on vivid display during the Democratic primaries and it is growing in Europe, particularly as France, Italy and other countries have fallen into an American-style economic malaise.

Howard

Tuesday, July 29, 2008

Growing Trade Deficit with China Cost 2.3 Million Jobs

The Economic Policy Institute just released a report that estimates the jobs lost by each U.S. state due to trade with China.

The top line of the press release emphasizes the main findings.

WASHINGTON – As the nation’s economic woes mount, a new study details the devastating impact that the growing U.S. trade deficit with China is having on American jobs, wages and key industries. Between 2001 and 2007, 2.3 million American jobs were lost due to the China trade gap, including 366,000 last year, according to the report released today by the Economic Policy Institute (EPI).

Those displaced workers lost an average of $8,146 in wages last year, a total of $19.4 billion, as they took lower-paying jobs. China is also the predominant source of downward pressure on wages of other production workers, about 100 million Americans. Competition from low-wage workers in less developed countries and less bargaining power here at home pushed the median wage for full-time workers without a college degree – about 70 percent of the U.S. workforce – down about $1,400 in 2006.

The EPI used an input-output sector specific model of the U.S. economy to estimate these impacts. The full report contains some revealing arguments and text.

The authors note that the trade deficit with China is supported by a range of anticompetitive tactics.

A major cause of the rapidly growing U.S. trade deficit with China is currency manipulation. China has tightly pegged its currency to the dollar at a rate that encourages a large bilateral surplus with the United States. Maintaining this peg required the purchase of about $460 billion in U.S. treasury bills and other securities in 2007 alone.2 This intervention makes the yuan artificially cheap and provides an effective subsidy on Chinese exports. The best estimates place this effective subsidy at roughly 30%, even after recent appreciation in the yuan(Cline and Williamson 2008).

In addition, the report summarizes China's subsidy of key industries, and its suppression of workers rights.

One of the more intriguing results from this study is the balance between the wages of workers gaining from trade with China and the wages of workers in sectors loosing from trade with China. Typically, workers in exporting industries earn higher wages. In the case of our manipulated and distorted trade with China that isn't the case.

The growth of trade deficits with China shifts jobs from better-paid traded goods industries into jobs in non-traded sectors where wages are significantly lower on average. Moreover, average wages in import-competing industries were higher than those in export industries. Thus, the growth in the overall volume of trade (imports plus exports) with China substituted lower-paying export jobs for higher-paying jobs in import-competing industries. This somewhat surprising finding stands economic logic on its head. Economic theory would suggest that the United States should specialize in producing goods that intensively use high-skilled, highly educated (and highly paid) workers and import labor-intensive goods that use more low-skilled labor. In fact, low-wage commodity sectors were some of the largest exporters of goods from the United States to China.

Sunday, July 27, 2008

How to Bring Down Oil Prices Now

How to Bring Down Oil Prices Now
Raymond L. Richman

Economists have ignored in the name of free trade the unfortunate consequences of the trade deficits which are rapidly converting us into a second-rate power and turning our enemies and potential enemies into industrial powers. Imports of oil are responsible for nearly half of the trade deficit so far this year. Market forces will bring down the price of crude oil a little if you count as market forces the subsidized substitution of ethanol for gasoline, subsidized wind power for coal, oil, and natural gas, subsidized hybrid vehicles, etc. Much more likely to bring down the price of crude oil in the short-run is ending the prohibitions on offshore drilling in the Atlantic and Pacific, in the Alaskan Wild Life Refuge, and on public lands. The price of crude oil would fall substantially if the world believed U.S. actions to increase the domestic supply of oil and oil substitutes were to be effective even though such efforts would not reduce the importation of oil for several years.

The key is credibility. Prof. Martin Feldstein in his op-ed, "We can Lower Oil Prices Now," (WSJ, 7-1-08) has rendered an important service by arguing that credible steps by the U.S. to reduce future consumption and increase the future supply of oil will lead to lower prices of oil immediately by changing the expectations of oil-exporting nations with respect to the expected rate of growth of demand and supply of oil. Unfortunately, history since the oil shocks of the 1970s, demonstrates that this country's decision-makers simply have not considered our dependency on imported oil a problem. Any benefit-cost analysis would have to weigh the supposed benefits and costs of fewer carbon emissions against the real impact of the trade deficits on the dollar, on jobs, and on the economy, which have been very serious as we show in our book, Trading Away Our Future.

Sen. Obama and Congressional Democrats support the current prohibitions against drilling off-shore and in the ANWR. Unfortunately, the Democrats, at this moment of time (July, 2008), appear likely to win the 2008 presidential and congressional elections, Sen. McCain, who likewise supported these prohibitions, recently changed his position and is calling for permitting off-shore drilling. President Bush has called for legislation eliminating the prohibitions against drilling off-shore and in the ANWR. Republican legislators have introduced such legislation. Pressure is building on Sen. McCain to endorse such legislation. This would lend credibility that the U.S. will adopt measures to reduce the importation of oil substantially especially if it becomes an important issue in the current election campaign.

Saturday, July 26, 2008

We are currently in the second-stage of a mercantilist produced collapse

During the first stage (from 1995 to 2005) the mercantilist government loans lowered our interest rates causing our asset values to go up. We felt rich and were able to borrow for consumption and for house and mall construction. The foreign money pouring in enriched our financial industries. We closed our eyes to the fact that we were losing about 20% of the our manufacturing jobs while investment was stagnating in our trade-competitive sectors.

During the second stage, which we are now in, our lack of past investment in our trade-competitive sectors, such as manufacturing, is causing the dollar to decline. Foreign governments, and it’s not just China, have been increasing their dollar purchases to keep their currencies undervalued relative to the dollar while at the same time they maintain other barriers to our imports including tariffs as well as artificial barriers, such as the Chinese prohibiting the riding of Harley Davidson-size motorcycles on many of their roads.

The mercantilist countries, especially China, will continue to finance our trade deficits while they steal our remaining industries. China is currently working on getting US market share from the following industries:
  • Currently the Chinese government is financing the purchase of GE Appliance to get GE’s market share. After that purchase, they will close many US factories.
  • Currently tariffs and other barriers in the growing markets of the world have put our vehicle parts and vehicle production industries on the ropes. If nothing is done, it is quite likely that GM and Ford will go bankrupt.
  • Airbus is moving its production to China which should allow China to steal our aircraft production industry.
  • China is building 3 factories to compete with our heavy mining equipment companies, including Bucyrus, while protecting their new industry behind both a currency-manipulation barrier and a tariff barier.
More and more governments are voluntarily participating in these dollar purchases. (After all, it is not often that a country voluntarily gives away its productive resources!)

This stage will not end until China has finished stealing our remaining industries. The US trade deficit will continue to increase even while the dollar gradually falls.

The third stage will commence at the time that China chooses to start selling their dollars. My guess is that it will occur approximately one year before China challenges the United States over Taiwan.

The third stage will leave the United States in poverty with a collapsed currency, high interest rates, and high inflation. It will leave China as the dominant economic and political power in the world.

As we note in our book, Trading Away the Future, it is not too late for the United States to avoid the impending collapse. The United States still has enough industry left to build upon, should we take action now. If we wait ten years, then it will be too late.

All we would need to do now is to insist upon balanced trade with our mercantilist trading partners. The result would be a huge increase in investment in our remaining industries. America would resume the path toward prosperity.

Howard

Friday, July 25, 2008

Shouting Match in Tax Evasion Hearings

The Senate Homeland Security and Governmental Affairs Permanent Investigations Subcommittee continues to investigate tax evasion by U.S. residents who hid millions from U.S. tax officials using the services of the Swiss bank UBS and the Liechtenstein bank LGT. The most recent hearings ended in a shouting match between Senator Levin and Washington lawyer Robert Bennett. National Journal's Congress Daily writes that the two tried to shout each other down. Apparently the dispute involved a Bennett client who had earlier taken the fifth amendment to avoid testimony before the committee. Hopefully these hearings will be the beginning of the end of the global tax frauds perpetuated by banks around the world to hide income from legally owed taxes. As noted before, U.S. banks are clearly implicated along with the rest.

Wednesday, July 23, 2008

Gerald P. O'Driscoll Jr.: "Socialism is alive and well in America - thanks to a Republican Treasury secretary"

Secretary Treasury Paulson comes in for some well-deserved scathing criticisms in a commentary by Gerald P. O'Driscoll Jr. in today's New York Post. Here is a selection:

TREASURY Secretary Henry Paulson's bailout plan for mortgage giants Fannie Mae and Freddie Mac should be titled "The Bondholder Relief Act of 2008": The taxpayers will be providing the relief to holders of Fannie/Freddie debt, many of whom are foreigners.

Paulson has asked Congress for a blank check from the taxpayer to pay off investors for losses already incurred and likely to be incurred in the next few years. He told Congress that, if it promises unlimited funds to backstop the lenders, Fannie and Freddie are unlikely to draw on the credit line. But the nonpartisan Congressional Budget Office estimates the most likely outcome to be a cost of $25 billion over the next two years - and more if housing deteriorates further.

He also wants authorization for Treasury to buy senior preferred shares in Fannie and Freddie. That prompted Sen. Jim Bunning (R-Ky.) to remark that he thought he'd woken up in France. Yes, socialism is alive and well in America - thanks to a Republican Treasury secretary.

Absent from Paulson's plan is any protection for taxpayers. They'll fund the downside if losses mount at the two mortgage giants. But if Fannie and Freddie recover, stockholders and management gain. Call it "casino capitalism" - taxpayers bankrolling management high rollers....

Republicans, especially in the House, have found their political spine and are pushing back against Paulson's largesse for Wall Street. House GOP Leader John Boehner demands more time to review the proposal - and opposes attaching it to the Housing bill....

The article briefly mentions that many of Freddie and Fannie's bond holders are foreigners. Brad Setser is more specific in his July 12 blog entry, "Too Chinese (and Russian) to fail?" in which he pointed out that the Chinese and Russian governments likely hold huge stakes in Fannie Mae and Freddie Mac.

Thus what Paulson is doing is making sure it is doubly profitable for mercantilist governments to steal market share from American industry. They not only benefit by getting American jobs, but when the bonds they buy as a byproduct of their currency manipulations lose money as the American economy goes south, the US taxpayer will bail the foreign governments out. Macro Man made a similar point in his blog. He wrote:

The more interesting question is what becomes of Fannie and Freddie's bonds? The rapscallion in Macro Man would like to see substantial losses for the bondholders as well. After all, people like Voldemort and the Russkies have been buying a helluva lot of Agency bonds with the proceeds of their FX piss-taking. If globalization has brought about of economic realpolitik, it would be refreshing to see SAFE, CBR, et al hit with hundreds of billions of losses as a "reward" for their currency manipulation.

Howard

Tuesday, July 22, 2008

The Road to Tax Shelter Perdition

I wrote previously about Senators Levin and Coleman's bill aimed at cracking down on tax shelters abroad. Today I want to fill in some of the background. How did we arrive at the point where 50 to 100 billion dollars of tax revenue is lost every year due to the wealthy and not so wealthy sheltering their income from taxation through offshore banks?

The European Union has taken more aggressive steps than the United States to combat tax fraud. The "European Union Withholding Tax" aims to prevent citizens of E.U. member countries from hiding income by depositing it in other E.U. countries (and in a substantial number of non-EU countries). All deposits, even those in accounts protected by bank secrecy laws, are subject to a withholding tax (initially 15 percent, but 35 percent by 2011). The withheld revenue is transfered to the depositor's country of residence. For a summary of the policy see the relevant Wikipedia page.

The United States abolished all withholding of tax from foreign deposts in the U.S. in 1984. The U.S. also stopped collecting information on the deposits and interest earned by foreigners. With the exception of Canada, with which the U.S. has an agreement to share tax information, the U.S. does not inform any foreign governments about income earned in the U.S.

The beneficiaries of these policies have been U.S. banks, which are able to attract money from foreigners interested in hiding it from taxation. The policy is further protected by a curious mutant of free market conservative ideology that equates tax fraud with economic freedom. The case in point is the fight over IRS proposed regulation (REG-133254-02).

The regulation began in the waning days of the Clinton administration. In brief the regulation proposed to require that U.S. banks would report interest income earned to the IRS, which might then report this information to foreign governments.

The proposed regulation generated a firestorm of protest from conservative think tanks (e.g. the Heritage Foundation), small business organizations, and U.S. banks. In part opponents argued that the measures were unnecessary and thence illegal because the U.S. did not and does not tax interest earned by foreigners in this country. Be that as it may, some of the arguments made against reporting the interest income are worth reflection.

Argument 1. We abolished the withholding tax and protect foreigners from any realistic chance of being caught underpaying their taxes because the U.S. needs to attract foreign capital.

For instance, a quote from Andrew F. Quinlan's testimony:

House Way and Means Vice Chairman Phil Crane:"The Internal Revenue Service is supposed to enforce the tax laws approved by Congress. It is with some dismay, therefore, that I see that the Service has issued a regulation designed to overturn existing Congressional intent. On many occasions, Congress has visited this issue, and in every instance has chosen not to tax this income and not to require its reporting. The goal, clearly seen in legislative discussion, is to attract capital to the American economy where it will be used to create jobs and boost growth."

The problem with this argument is that much of the capital attracted to the U.S. economy by giving foreigners preferential tax treatment compared to American savers was used to finance consumption, including consumption of imported foreign goods. This exacerbated the trade deficit and encouraged the endebtedness that now threatens the U.S. economy. In addition, the unrealistic exchanges rates these subsized capital inflows created helped make U.S. producers less competitive internationally, which discouraged investment.

Argument 2. Reporting income would hurt the competitiveness of U.S. financial institutions.

The cheap loans financed by foreign capital did help U.S. financial institutions grow for a long time. At present it looks as if those gains were not so solid as they seemed. Ultimately, a bank is only as sound as its borrowers are credit worthy. The long era of cheap money has encouraged Americans to borrow without saving. Some banks are now reaping the whirlwind they helped create.

Argument 3. Imposing reporting requiremets would result in "double taxation" of income.

This is bogus. Because the U.S. did not and does not tax any income earned by foreigners in U.S. banks, there is no way on earth that the income could be double taxed. What reporting would do is allow the income to be taxed by someone.

Some advocate allowing individuals to avoid paying tax anywhere on interest income earned. I'm all for a shift to more emphasis on consumption taxes, but I don't think we should begin such a shift with foreigners. It should begin with U.S. citizens. Reversing the equation, and allowing foreigners to invest unlimitted amounts tax free has been a disaster. It has encouraged Americans to borrow and live beyond their means, and it his exacerbated trade deficits that have helped undermine the competitive position of the U.S. economy.

I support the effort by Senators Levin, Coleman and others to restrict the ability of American citizens to hide income earned abroad. It is worth remembering, however, that when the United States complains that data on income earned by U.S. residents in foreign banks is not forthcoming or accurate, we are the pot calling the foreign kettle black. U.S. banks play the same tax shelter game only bigger than anyone else. The game has been bad for the broader U.S. economy. It is time the game ended.

Bush administration promising agricultural concessions in attempt to pass the worthless Doha round of WTO negotiations

A Reuters article reports that the current US and European leadership is working hard to pass the Doha round of the WTO negotiations. The story doesn't mention that the Doha Round does not address mercantilist government currency manipulations, a glaring oversight that makes the whole agreement worthless.

The article reports that the Bush administration wants to pass the agreement as a way to help the flagging world economy. But the real reason that the world economy is flagging is because the WTO rules, with or without the Doha Round, do not prohibit mercantilism, the practice of deliberately maximizing exports and minimizing imports in order to steal market share in the world economy.

As Richard Duncan pointed out in The Dollar Crisis: Causes Consequences and Cures, the (mercantilist) countries pursuing export-oriented growth are producing more and more goods without a corresponding increase in income among worldwide consumers.

Back in 2003, Duncan predicted exactly what is happening today: US consumers will not be able to borrow more for consumption. Like other debtors they will be forced to pull back.

Europe is picking up the slack in American demand at the moment, but unless the mercantilist countries change their policies, an eventual world depression or severe recession is in the offing.

In our book, Trading Away Our Future we advocate that the United States insist upon relatively balanced trade with the mercantilist countries. This would move the world system toward a sustainable system based upon balanced trade, instead of the current regulatory-based system that permits mercantilism.

We advocate that the United States require that our mercantilist trading partners move their trade with us toward balance over 5 years or we would force that movement toward balance using Import Certificates to balance trade, adapting a recommendation originally made by Warren Buffett in 2003.

The Bush administration is in a hurry to pass the agreement thinking that it would enhance the world economy. But any newly negotiated agreement that doesn't combat mercantilism is just another step toward the upcoming worldwide depression or recession.

The Bush administration should leave the negotiations to an Obama or McCain administration. Neither could be as incompetent as the Bush administration in these negotiations. Here is a selection from the story:

GENEVA (Reuters) - The United States sought to kickstart efforts to rescue a global trade deal on Tuesday by offering to cut a ceiling on its contested farm subsidies, but leading developing countries said it was not enough.

U.S. Trade Representative Susan Schwab announced Washington was ready to cap its trade-distorting farm subsidies at $15 billion (7.5 billion pounds) a year, on condition countries like Brazil and India also make concessions to save the World Trade Organisation talks.

"This is a major move, taken in good faith with the expectation that others will reciprocate and step forward with improved offers in market access," Schwab told reporters.

The long-awaited U.S. move came on the second day of a week-long push by ministers for a breakthrough on farming and manufacturing -- core trade issues that have dogged the WTO's nearly seven-year-old Doha round of world trade talks....

Supporters of a WTO deal say it could send a morale-boosting signal to the slowing global economy.

Howard

Monday, July 21, 2008

Change in China's policy could cause dollar to fall and US interest rates to rise (at least temporarily)

I am convinced that Brad Setser discovered a new trend in his July 14 blog posting "The mystery deepens. China’s June reserve growth is surprisingly low". According to Setser, Chinese reports indicated that the Chinese government purchased much less foreign currency in June than in previous months.

There were two possibilities: Either the June data was a fluke or the June data represents a new Chinese policy. My first inclination was to suppose it was a fluke, but I just read a Financial Times article which reports that the Chinese consumer price inflation fell the same month to 7.1% from 7.7% in May.

Combine that with Dr. Yu's overview of the Chinese economy where he advocates strong measures by the Chinese government to counteract inflation, and I think that Brad Setser was the first to spot a real change in Chinese policy! So long as China sees a need to fight inflation, they may plan to greatly slow their foreign exchange purchases.

China had a choice if it wanted to fight inflation. It could either reduce the amount that it was lending to foreign countries (which would cause its currency to strengthen, thus reducing its exports and increasing its imports) or it could reduce the amount it was lending to its own citizens. In June, they apparently decided to reduce the amount they were lending to foreign countries.

There has been some grumbling about the decision to tighten credit. The Financial Times article reports: "(T)he central bank is under growing pressure from different parts of the government and industry to relax some of the tightening measures, which could increase with the latest signs of slowing growth."

Some in China want the government to resume buying ever more foreign currency. The same article reports: "In particular, the Commerce Ministry called last week for slower appreciation of the currency."

It appears that Chinese inflation is causing the Chinese government to pause its mercantilist attacks upon foreign countries. I would expect a rise in the yuan, a fall in the dollar, and a rise in US interest rates as a result of this new (possibly temporary) Chinese policy.

Howard

Sunday, July 20, 2008

WTO rules against China on autopart tariffs

On Friday, the WTO ruled against China's tariffs (typically 25%) on foreign made autoparts. These tariffs are one of the reasons why Michigan auto parts companies have been laying off workers. China also has a 25% tariff on foreign vehicles. These tariffs are all part of China's mercantilist strategy of exporting as much as possible while importing as little as possible.

Instead of reducing its autoparts tariffs right away, China will appeal the decision. Here is a summary of some major facts about the the Chinese auto market that accompanied the Financial Times story about the WTO ruling:

  • China’s $19bn (€12bn, £9.5bn) vehicle market is the world’s third largest after the US and Japan
  • China’s exports of vehicles and parts jumped 45 per cent last year to $41bn
  • China’s imports of vehicles and parts rose 25 per cent in 2007 to $26bn
  • China’s export sales of car parts reached $2bn in 2007

The story also includes this snippet about Chinese motivation:

(T)he US, EU and Canada argued [that the Chinese tariff] was a protectionist device which was designed to discourage imports, build up China’s domestic motor manufacturing industry and force foreign part-makers to relocate manufacturing to China.

The $19bn (€12bn, £9.5bn) Chinese vehicle market is the world’s third largest after the US and Japan. Chinese manufacturers such as Chery have seen rises in both domestic and export sales above those of joint ventures between big US and European companies, such as General Motors and Volkswagen, though these still dominate the market.

Nothing in this decision would challenge the 25% Chinese tariffs on foreign vehicles of all sorts, including American and Japanese automobiles and motorcycles. Nor would anything challenge the Chinese currency manipulations which produce an additional 40% hidden duty on all foreign imports and a hidden 40% government subsidy on all Chinese exports.

The world is currently moving toward a global recession because the mercantilist countries have growing economies but are not buying and the United States, the chief victim of the mercantilist countries, has a stagnant economy and can no longer afford to buy as much.

While it is encouraging when WTO rules reduce tariffs between countries, such rulings do not do anything to fix what is clearly a broken international system.

Howard

Saturday, July 19, 2008

Combining wind power with hydrogen: A science fiction idea

I had a fun idea of a possible energy future. If I find out that someone else has already thought of it, I'll give them credit. The basic idea is to convert wind power into electricity, turn the electricity into hydogen at a water source, ship the hydrogen to market in huge robot controlled hydrogen filled balloons, and then compress the hydrogen and use it to power motor vehicles.

T. Boone Pickens is currently advocating building windmills all through the Western great plains of the United States. He notes that that region of the United States, from West Texas north to Canada, is the Saudi Arabia of wind power.

He advocates getting the electricity to market by building power lines from the Great Plains to the population centers that are currently using natural-gas fired power plants, and then using the freed up natural gas to run motor vehicles, decreasing the need for gasoline produced by foreign oil.

It's an excellent plan, but as Senator Obama points out wind power has the problem that the wind does not always blow. Electricity produced by wind power needs to be stored when it is coming in strongly so that stored electricity will be available at other times. In other words, windmills would need batteries.

Perhaps power lines could be built to transport the electricity produced by wind mills to a water source, such as, perhaps, the Missouri River where factories could use electrolysis to turn the electricity into hydrogen and oxygen, releasing the oxygen into the air but collecting the hydrogen for use in powering cars.

I realize this is a fanciful idea with many likely drawbacks. Still, in my minds eye I see a future in which robot-controlled zepellins fly hydrogen produced by windmills to the markets where it would be compressed and used to fuel vehicles.

Howard

Friday, July 18, 2008

What is Obama's real stance on nuclear energy?

On June 24, Senator Obama opposed McCain’s plan to build 45 nuclear power plants by 2030, giving the lame excuse that nuclear plants should not be built until the nuclear waste disposal problem is solved. Meanwhile his Democratic colleagues in the Senate, led by Harry Reid of Nevada, have prevented the building of a needed nuclear waste dump at Yucca Mountain in Reid’s home state. As a result, nuclear waste storage has become a huge problem for any who would consider building new nuclear power plants.

But at a July 11 town meeting in Dayton Ohio, Obama began to nuance his position. He is now sympathetic to all forms of energy investment, but critical of them all at the same time. He told a questioner that problems with nuclear waste disposal could be overcome.

Until he actually enunciates some action steps, we will not know where Obama stands. He might propose a solution to the nuclear waste disposal problem, but he might not. He may just continue to talk about the positives and negatives of all kinds of energy in order to sound sympathetic both to those who favor investment in energy production and those who prefer conservation.

We now know that a President McCain would be elected with a mandate to build nuclear power plants and free up offshore areas for oil drilling. He would put America back to work creating substitutes for the oil that we now import. While preparing for the inexpensive nuclear electricity to come online, a President McCain would provide incentives for the development of improved electric car batteries. We do not yet know whether a President Obama would spur investment in US production of energy.

Howard

Thursday, July 17, 2008

UBS Tax Shelter Folds its Tent

The Senate hearings involving UBS had a surprising conclusion. The bank all but admitted to fraud, and promised to reform. Whether the reform is real remains to be seen. From Friday's NY Times story:


Mark Branson, chief financial officer of the UBS global wealth management group, told a Senate subcommittee that the company would provide banking or securities services to United States residents only through companies licensed in this country and that it would help the federal government identify American citizens engaging in tax fraud.

On Wednesday, a Senate permanent subcommittee on investigations released a report saying that UBS’s offshore practices helped American citizens hide an estimated $18 billion in 19,000 accounts from the Internal Revenue Service.

Bravo for Levin and the committee for this progress. Hopefully this move by UBS will not prevent the enactment of legislation that reduces the opportunity for fraud.

Other banks remain recalcitrant.


Mr. Kieber told the subcommittee that LGT had used sophisticated methods to avoid detection by American tax authorities. LGT customers were advised to use only public phones to contact the bank, and the company mailed correspondence from nearby Austria or Switzerland, he said.

Michael Robinson, a spokesman for LGT, said in an e-mail statement to a reporter that the documents Mr. Kieber supplied dated “back to a time when the regulatory environment was completely different.”


Ironically, the Google-placed ads associated with the Times story may be pitching just the kinds of accounts that the Senators are investigating. Here they are.



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It appears that there is more work to be done.

Senator Levin (D-MI) with cosponsors including Senator Coleman (R-MN) and three other Senators including Senator Obama introduced legislation last year aimed at restricting the use of off shore shelters. The text of the legislation in Thomas is available here: Bill Summary & Status file.

A shortcoming of the legislation is that it is one sided. It focusses on Americans hiding assets abroad. This is a problem, clearly. It would also be worth while to go after foreigners hiding assets here.

Because there is no withholding tax foreigners pay no U.S. taxes on income earned from investments here. And a substantial amount of money goes unreported abroad. Hopefully the next president will cooperate with countries around the world to prevent this sort of tax avoidance fraud.

As we document in Trading Away Our Future, the abolition of the withholding tax is one of the culprits in encouraging Americans to borrow rather than save. It helped smooth the way for our dangerous habit of borrowing to pay for imports rather than trading to pay for imports.

Wednesday, July 16, 2008

The Number One Solution to U.S. Economic Problems

Raymond Richman has argued on this blog that the trade deficit is the root of our economic problems. The public in two critical swing states agrees. An NPR, Kaiser Foundation, Harvard School of Public Health poll released today emphasizes fixing the loss of jobs overseas as the best solution to America's economic problems. The poll question:


(SCRAMBLE ITEMS) 8. People have suggested various ways that the government could act to try to fix the U.S. economy. How much do you think each of the following would help fix the country's economic problems? (First,) what about (INSERT)? would this help fix the country’s economic problems a great deal, some, only a little, or would it be no help at all?

A ranking of the "great deal" answers in Florida and Ohio:

Florida Ohio
56% 64% Stopping American jobs from going overseas
49% 40% Pulling out of Iraq
42% 42% Lowering the cost of health care and health insurance
40% 39% Making sure all Americans have health insurance coverage
35% 34% Putting more money into the hands of people
32% 33% Cutting taxes
34% 29% Increasing spending on domestic programs like health care, education, and housing
30% 28% Investing in public works projects like roads, bridges, and new schools

There is quite a contrast between what the American people see as the most effective solution to U.S. economic problems and what the presidential candidates and the U.S. Congress are proposing.

In Congress, House Democrats appear to be gearing up for another economic stimulous package. More tax cuts or more money in the hands of people are well down on the list. Democratic presidential candidates have long discussed pulling out of Iraq and lowering the cost of health care. Various politicians have proposed investing in public works projects like roads, bridges and new schools.

NO ONE has a serious plan that addresses the approach the public in these swing states believes will be the most effective single way to remedy America's economic problems. The issue also has the smallest number of poll respondants who think that this would do nothing to help U.S. economic problems. Taking effective action to stop "American jobs from going overseas" is the only solution that a majority of the public in these states believe would do a great deal to help the economy.

Why are the candidates ignoring the issue? Check out chapter 3 in Trading Away our Future. Many of our leaders are like ostriches with their heads in the sand. And they lack an effective plan. Chapter 1 explains why trade deficits matter for the loss of U.S. manufacturing jobs.

NPR buried this poll result in a report that focused much more on health care and gas prices. The only mention it received was in passing. The title of the section doesn't even suggest that this is focussed on public views of what should be done.


Concerns About Jobs, Iraq

But according to the poll, the top two things people in Florida say would help the most are stopping American jobs from going overseas and pulling U.S. troops out of Iraq.

For Moskona, Iraq is an economic issue....

To clarify, it wasn't just the Floridians who said that stopping jobs from going overseas was the most effective solution.

I continue to believe that the trade issue could be central to this election. It is at the root of our financial difficulties. Although the hour is growing late, I believe that the candidate who actually addresses the trade issue in a thoughtful, realistic, optimistic and sensible way is likely to win in a landslide. We attempted to lay out such an approach in Trading Away Our Future. Chapter 10 summarizes our plan.

Tuesday, July 15, 2008

Banking Regulations Hearing

National Journal's Congressional Daily Alert notes a planned hearing on bank reporting policies.

Finance. A hearing Thursday by the Senate's Permanent Subcommittee on investigations will focus on the role of Swiss bank UBS AG and a small Liechtenstein bank, LGT, in assisting U.S. clients seeking to avoid tax responsibilities. The panel, part of the Homeland Security and Governmental Affairs Committee, is investigating tax havens as Investigations Subcommittee Chairman Carl Levin, D-Mich., and ranking member Norm Coleman, R-Minn., press for passage of legislation to strengthen laws intended to stop overseas banks and their clients from using overseas accounts and shell companies to hide assets from the IRS. The senators hope outrage over the practice amid the economic slump will help advance their bill, which stalled in the Senate after introduction last year, and encourage the IRS to take steps to force overseas banks to disclose the names of American clients.

These tax shelter strategies are the result of the United States' decision to not impose any tax on interest income earned in the United States by foreigners. The removal of the withholding tax in the early 1980s is one cause of the dramatic growth of the U.S. trade deficit, part our pursuit of foreign savings. In addition this has helped drive down U.S. interest rates and U.S. savings rates.

Hopefully the investigation will also examine the abysmal lack of reporting carried out by U.S. banks. Unless foreigners with money in U.S. financial institutions voluntarily report their income on taxes, their home country will be none the wiser. Heritage foundation estimates several years ago when the IRS was considering revising the rules to report this income suggested that hundreds of billions of dollars were invested in the U.S. to take advantage of the loophole. (The Heritage Foundation thought this was a great thing).

Monday, July 14, 2008

Capital Gains -- Where's the Investment Gain?

The capital gains tax rate is currently at a level lower than at any time since the beginning of the New Deal. Advocates of cutting capital gains tax rates argue that low capital gains tax rates stimulate investment. Are low capital gains tax rates stimulating investment?

A July 1oth story from by Robert Cohen for Newhouse News Service quotes Lee Burman, a senior fellow at the Urban Institute arguing that

the argument that low capital gains rates are important to investment and entrepreneurs is "overstated" He said that the lower rates tend to "fuel all sorts of tax-shelter activity, much of it unproductive, and benefit the wealthy.

Low capital gains tax rates are a good idea... except for the problems this creates. One of the reasons that tax revenue from capital gains taxes tends to go up when the taxes are cut is that this gives investors incentive to transform everything taxable into a capital gain. For instance corporations have been buying back their stock at an unsustainable pace in recent years, probably in part to create capital gains for their investors.

A partial solution to this problem is the one we propose in Trading Away Our Future. Tax any capital gain that is consumed at regular income rates. This would dramatically reduce the incentive for tax shifting. Any capital gain that is reinvested in a productive income-producing investment would not be taxed.

There would still be some incentive for tax shifting, but only with savings. And encouraging savings is not a bad idea for the U.S. economy at this time.

If policymakers would rather not reduce capital gains taxes in any form, an increase could also be structured along the lines we discuss, with consumed capital taxed at higher regular income rates, but reinvested capital gains taxed at lower contemporary capital gains rates. This would not reduce the incentive to invest or take risks to produce income in the future at all. It would reduce the incentive to produce (and then consume) capital gains.

US Trade Deficit For May at 59.8 Billion

The trade deficit figures for May 2008 continue the pattern set in recent months. In spite of the weak dollar and the financial crisis, the trade deficit is stubornly slightly higher this year than it was last year. It could be worse: the 2007 defict was better than the deficit in 2006. It could also be better. A more rapid narrowing of the trade deficit would help put a basis other than credit under the dollar, and raise the odds of a soft landing.

The May 2008 deficit for goods and services stood at 59.8 billion dollars.

The May 2007 deficit was 59.4 billion.

Thus, the May deficit was the second highest on record for May, behind only the 2006 deficit.

Sunday, July 13, 2008

Obama moving toward endorsement of nuclear energy

The news from the political campaigns is excellent. Both candidates, McCain and Obama, are starting to compete to see who will be the candidate to most support investment in energy development. It looks like they are both going to support the development of both wind energy and nuclear energy. The result should be an increase in US investment and prosperity following the election!

The latest change is the movement of Senator Obama's campaign position from being against the development of nuclear energy when he spoke in Nevada on June 24, to being in favor of it this week. A July 11 article by Bonnie Kapp on the Fox News website gives a selection about Obama's remarks on energy investment at a town meeting in Dayton Ohio:

(W)hen a voter expressed concerns on storing nuclear waste ... Obama told the crowd that we have to utilize experts to figure out a way to store the waste safely because nuclear power has “a very big advantage” in that it doesn’t cause global warming and concluded that “nuclear power is gonna have to be a part of the mix. I know some people don’t like to hear that, but there is no perfect energy source.”...

“Every energy source has a problem, even energy sources that sound really clean, like for example hydropower. I was in Oregon, it turns out it’s messing up the salmon runs and the fish are being affected. You know wind is a great energy source except sometimes it’s not windy…I don’t think we can eliminate any single energy source….Solar, wind, biofuels - all these different approaches we should try and make different investments and figure out what works.”

Howard

Friday, July 11, 2008

The energy crisis could be a blessing in disguise

By taking away investment opportunities from American businesses, foreign government mercantilism is reducing fixed investment in the productive sectors of the American economy. For a while, the lower interest rates caused by mercantilism increased investment in housing and in the retail sector, but with the housing crash, those investments have largely come to an end.

Some worry that the result of less fixed investment is that the government needs to run ever-increasing deficits just to try to produce enough aggregate demand for American products to keep people employed. (See for example Bill Gross's July commentary on the PIMCO website.)

Most economists, as exemplified by Andrew Batson's commentary in today's Wall Street Journal, live in a dream world in which the mercantlist countries reduce their trade surpluses on their own. According to their wishful thinking, the mercantilist countries (starting with China) will spontaneously abandon mercantilism. He writes, "Most economists deem a fall in China's huge trade surplus to be inevitable, and largely desirable." Our current presidential candidates are living in the same dream world due to the poor quality of advice that they are getting from their economists.

However, don’t despair. God has a way of providing for America. The energy crisis is actually a very promising development.

The United States could get a huge boost in fixed investment as a result of the energy crisis. I am especially encouraged by T. Boone Pickens’ commentary in the Wall Street Journal for investment in wind power. Senator Obama seems to like wind power also. And Senator McCain is talking about taking away the impediments to development of nuclear power.

If the government helps out by: (1) doing what Pickens suggests to move electricity generated by Rocky Mountain wind power to other markets, and (2) doing what McCain suggests to take away legal and government impediments to nuclear power, and (3) providing tax incentives for turning wind-generated or nuclear-generated electricity into a gasoline substitute, then we should get plenty of increased investment in domestic energy production that could be just what the doctor ordered for our economy.

Howard

Are Fred and Fran too big to save?

The financial crisis symptom de jure: the struggles faced by Freddie Mac and Fannie Mae the giant mortgage loan repackaging companies chartered by the U.S. government, and (assumed to be) guaranteed by Congress. In fact the loan guarantees with the Treasury Department that are available to the companies amount to only a few billion dollars, so the US government's official obligation to help is miniscule. Bush administration suggestions that as part of a bailout, stockholders would loose almost everything hardly seem likely to improve the companies' capacity to sell stock in order to recapitalize after losses.

Which brings us to the question of whether the Fred and Fran can and should be helped. Everyone says that they will be saved if need be. But the costs? Quite possibly enormous. With price-to-market accounting, Freddie Mac is technically insolvent already.

The New York Times today has a story which suggests (without quite saying so) that the companies may be too big to save as well as too big to fail.

As government officials discuss various rescue plans — including taking over either or both companies in a conservatorship, others are pushing for more immediate action.

“We are potentially looking a crisis in the face, and we must not allow this to happen,” said William Poole, who retired in March as president of the St. Louis Federal Reserve. “The government must intervene.”

If a bailout were to occur, it would most likely make it more expensive for the United States government to borrow money in the future, since the government’s potential obligations, which currently stand at about $9 trillion, would rise by an additional $5 trillion. Moreover, such a bailout would potentially put taxpayers on the hook for billions to offset Fannie’s and Freddie’s losses.

“The major banks are taking write-downs of 20 percent to 50 percent of their assets,” said Sean Egan, managing director of Egan-Jones Ratings, an independent credit ratings firm. Just a 10 percent write-down in the value of Fannie Mae’s assets would be “a loss of $150 billion that taxpayers would need to offset. So you’re talking about the cost of another Iraq war.”


The most significant sentence is the one which asserts a bailout or takeover "would most likely make it more expensive for the United States government to borrow money in the future..."

Since the financial crisis began, many sectors of the U.S. financial system have lost much of their ability to borrow money. But money must be borrowed to sustain the trade deficits and prevent the dollar from collapsing. The US government itself has not seen the cost of borrowing increase markedly, with interest rates suppressed by central bank purchases.

If an when interest rates increase on U.S. government borrowing, the relatively managable 400 billion per year the U.S. currently pays in interest would also climb. This would set off a cycle of fiscal problems that might well trigger a free fall in the value of the dollar, and an economic collapse.

Thursday, July 10, 2008

Chinese Espionage Raises "Concerns"

The New York Times reports that a string of recent cases have revealed a pattern of systemtatic Chinese military and commercial espionage.

Joel F. Brenner, the intelligence community’s top counterintelligence official, said China was by far the leading practitioner [of espionage]. In an interview, Mr. Brenner described China’s information-gathering efforts as “a full-court press and relentless.” As a result, he said, few professional analysts “really think that what’s going on is anything other than an orchestrated, deeply thought-out, strategic campaign.”

The targets of the campaign?

Mr. Brenner said, not all the information-transfer cases involving China are part of that suspected government-led espionage effort. “Some instances are purely commercial and just involve greed,” he said.

On the military side, Mr. Brenner said, China is especially interested in improving its naval capability against any threat from the United States and obtaining intelligence that might be important in a military confrontation in the Taiwan Strait.


Are the two sides of the espionage campaign really that distinctive? As we argued in Trading Away Our Future, China's mercantilism aids China's military ambitions by strengthening the Chinese industrial base. Commercial espionage (one example noted in the article involved Boeing) may help China gain strategic advantages in the military as well as commercial sectors.

On the other hand, this is not to argue for increased U.S. military spending. Robert Scheer notes the irony of US military spending on programs designed to counter China's military.

Fomenting fear of China is essential to making the case for the whole range of high-tech war toys that no longer have a legitimate military purpose. But it's a sick joke. We are paying the Chinese the interest on the money we borrow from them to build very expensive weapons to counter weapons the Chinese have no intention of building.

Wednesday, July 9, 2008

T. Boone Pickens proposes excellent energy plan

In yesterday's Wall Street Journal, oilman T. Boone Pickens came up with an excellent energy plan. He begins by identifying the problem succinctly:

Each year we import more and more oil. In 1973, the year of the infamous oil embargo, the United States imported about 24% of our oil. In 1990, at the start of the first Gulf War, this had climbed to 42%. Today, we import almost 70% of our oil....

(I)f we don't do anything about this problem, over the next 10 years we will spend around $10 trillion importing foreign oil. That is $10 trillion leaving the U.S. and going to foreign nations, making it what I certainly believe will be the single largest transfer of wealth in human history.

He then proposes the building of windmills in the Rocky Mountains. Specifically:

How will we do it? We'll start with wind power. Wind is 100% domestic, it is 100% renewable and it is 100% clean. Did you know that the midsection of this country, that stretch of land that starts in West Texas and reaches all the way up to the border with Canada, is called the "Saudi Arabia of the Wind"? It gets that name because we have the greatest wind reserves in the world. In 2008, the Department of Energy issued a study that stated that the U.S. has the capacity to generate 20% of its electricity supply from wind by 2030. I think we can do this or even more, but we must do it quicker....

My plan calls for taking the energy generated by wind and using it to replace a significant percentage of the natural gas that is now being used to fuel our power plants. Today, natural gas accounts for about 22% of our electricity generation in the U.S. We can use new wind capacity to free up the natural gas for use as a transportation fuel. That would displace more than one-third of our foreign oil imports. Natural gas is the only domestic energy of size that can be used to replace oil used for transportation, and it is abundant in the U.S. It is cheap and it is clean. With eight million natural-gas-powered vehicles on the road world-wide, the technology already exists to rapidly build out fleets of trucks, buses and even cars using natural gas as a fuel. Of these eight million vehicles, the U.S. has a paltry 150,000 right now. We can and should do so much more to build our fleet of natural-gas-powered vehicles....

Here is what he suggests the government should do:

The future begins as soon as Congress and the president act. The government must mandate the formation of wind and solar transmission corridors, and renew the subsidies for economic and alternative energy development in areas where the wind and sun are abundant. I am also calling for a monthly progress report on the reduction in foreign oil imports, as well as a monthly progress report on the state of development of natural gas vehicles in this country.

Pickens does not mention increased nuclear power, which should be part of the eventual energy mix. A nuclear plant, however, takes 4 to 6 years to construct. Pickens plan would begin to improve our energy situation much more quickly and could give us time to develop the other parts of the long-term solution. There is no reason why the United States can't eventually become completely self-sufficient in energy production.

Pickens may not realize it, but our failure to deal with mercantilism has left the United States facing an eventual energy crisis. If we were still a country with a strong export-oriented industrial base, we could export manufactured goods and use the proceeds to import oil. But given the fact that we have been giving away our industry to the mercantilist countries of Asia, especially Japan and China, we don't have the exports needed to buy energy. We need to vastly increase our own production of energy before the dollar collapses in world markets, because after the dollar collapses we won't be able to afford imported energy and will have to ration gasoline and oil.

Follow the following link to read Pickens commentary: http://online.wsj.com/article/SB121556087828237463.html?mod=opinion_main_commentaries

Howard

Tuesday, July 8, 2008

US Commerce Department sets tariffs on Chinese off-road tires

In a move to protect the US tire industry from Chinese dumping, the U.S. Commerce Department today set a 210% duty on some brands of Chinese off-road tires, but not others. Here's a selection from the Reuters story:

The U.S. Commerce Department on Tuesday set final duties ranging up to more than 210 percent on millions of off-road tires it said were being sold in the United States at unfairly low prices.

"After a thorough investigation, the Department of Commerce has found that Chinese exporters of off-the-road tires have received government subsidies and sold at below the cost of production in the United States," said Assistant Commerce Secretary David Spooner said in a statement.

Titan Tire Corp, an Iowa-based company that makes off-road tires for agricultural, construction and industrial vehicles for customers including John Deere-Lanz Verwaltungs AG, and union workers filed two cases last year asking for import relief.

Nashville-based Bridgestone Corp, the world's largest tire and rubber company, has supported the case....

The case is one of several that U.S. manufacturers in businesses ranging from steel pipe to refrigerator magnets have brought over the past year against their Chinese competitors....

"China illegally subsidizes its industries and manipulates its currency to unfairly give an advantage to its manufacturers over American workers, and those Chinese companies must be punished in this case," Rep. Don Manzullo, an Illinois Republican, said in testimony to the U.S. ITC.

The ruling of course, does nothing against Chinese currency manipulations which subtract about 40% from the price of every Chinese product sold in the United States and add about 40% to the price of every US product sold in China. Recently the US Treasury Department told an incredulous Congress that China was not manipulating its currency, even though they have already collected about $1.3 trillion as a byproduct of these "nonexistent" manipulations.

There is a pattern emerging: The Commerce Department uses anti-dumping provisions to protect politically-active industries, while the US Treasury Department gives less-well-connected US industries to the Chinese government saying, in effect, "Take them -- we won't want them!"

Follow the following link to read the Reuters story about the new tariff: http://www.reuters.com/article/marketsNews/idUSN0830689920080708

Howard

Monday, July 7, 2008

Our trade agreement with Colombia would help in their fight against Communist guerrillas

Senator Obama is quite selective over which governments go on his blacklist. One explanation is that he opposes governments that fight Communism but supports governments that promote Communism.

For example, the Colombian government is standing up to Communist guerrillas supported financially and militarily by the leftist government of its oil-rich neighbor Venezuela, and Senator Obama opposes a new free trade agreement between the United States and Colombia.

On the other hand, the Communist government of China is intentionally manipulating trade and has already stolen up to 2.5 million US manufacturing jobs. Yet Obama is pleased that China is growing economically and is politically stable. Specifically, here is a selection from Obama's remarks when he spoke to the Alliance for American manufacturing in Pittsburgh on April 14 2008:

Seeing the living standards of the Chinese people improve is a good thing - good because we want a stable China, and good because China can be a powerful market for American exports. But too often, China has been competing in ways that are tilting the playing field.

Obama is dreaming if he thinks that China will be a powerful market for American exports. The Chinese government is practicing a policy called "mercantilism" which intentionally maximizes exports but intentionally minimizes imports in order to steal industry from its trading partners.

Senator McCain is completely the opposite of Obama regarding the Colombian and the Chinese governments. Not only does he support our trade agreement with Colombia, but he was also realistic about China's government in a column that he wrote with Senator Lieberman on May 27. They wrote:

China's rapid military modernization, mercantilist economic practices, lack of political freedom and close relations with regimes like Sudan and Burma undermine the very international system on which its rise depends. The next American president must build on the areas of overlapping interest to forge a more durable U.S.-China relationship. Doing so will require strong alliances with other Asian nations and a readiness to speak openly with Beijing when it fails to behave as a responsible stakeholder.

Unfortunately, neither candidate is proposing anything that would deal with Chinese mercantilism. Obama at least supports a bill that, if acted upon by the Secretary of Treasury, could address Chinese currency manipulations. McCain has not yet proposed any action whatsoever. Both talk about free trade as if free trade were beneficial even when it is totally one-sided.

The latest story from Colombia illustrates the support that the Communist guerrillas are getting from the Venezuelan government. The Colombian government staged a rescue of hostages by flying in an unmarked helicopter while pretending to be acting for the guerrillas' leaders. The guerrillas readily cooperated.

You can read the story in James Taranto's Wall Street Journal online column. First he quotes the Associated Press story which told what happened from the viewpoint of rescued hostage Ingrid Betancourt:

The stunning caper involved months of intelligence gathering, dozens of helicopters on standby and a strong dose of deceit: The rebels shoved the captives, their hands bound, onto a white unmarked MI-17 helicopter, believing they were being transferred to another guerrilla camp.

Looking at helicopter's crew, some wearing Che Guevara shirts, Betancourt reasoned they weren't aid workers, as she'd expected--but rebels. This was just another indignity---the helicopter "had no flag, no insignia." Angry and upset, she refused a coat they offered as they told her she was going to a colder climate.

But not long after the group was airborne, Betancourt turned around and saw the local commander, alias Cesar, a man who had tormented her for four years, blindfolded and stripped naked on the floor.

Then came the unbelievable words: "We're the national army," said one of the crewmen. "You're free."

The helicopter crew were soldiers in disguise. Cesar and the other guerrilla aboard had been persuaded to hand over their pistols, then overpowered.

Then James Taranto finished off the story with a good Israeli joke from Haaretz:

An Israeli pilot whose helicopter was in trouble over the sea lands on an aircraft carrier. The captain chastises him: "How dare you? This is an American aircraft carrier." "Really?," says the Israeli innocently. "I thought it was one of ours."

This joke, however, misses the point. The Communist guerrillas must have had reason to believe that the helicopter could be one of their own. Most likely they knew that the Venezuelan government was providing them with helicopter support.

Howard

Public Opinion Continues to Shift on Trade

Pollingreport.com summarizes the results of a recent CNN poll on trade. The question was: "What do you think foreign trade means for America? Do you see foreign trade more as an opportunity for economic growth through increased U.S. exports or a threat to the economy from foreign imports?" CNN first asked this question in November 2007, and then again in June 2008.

In November 2007, 46 percent of the public thought trade was an "opportunity" but by June 2008 only 41 percent held this opinion.

In November 2007, 45 percent saw trade as a "threat" but by June 2008 51 percent held this view.

CNN/Opinion Research Corporation Poll. June 26-29, 2008. N=1,026 adults nationwide. MoE ± 3.

Incidentally, this poll question has been asked by Gallup and CNN since 1992. The most recent poll is the first time a majority of the public believed that the US is threatened by trade. In May 2000, 56 percent believed that trade was an opportunity.

Trade can be both a threat and an opportunity for the economy. And the threat and opportunity can come through both imports and exports. However, given the disasterous mismanagement of US trade policy, the people are right about the threat.

The poisonous consequences of that mismanagement for the U.S. economy, our competitiveness, and the U.S. dollar are now being felt. The trade deficit and the irresponsible borrowing that supported it created a situation in which the dollar had nowhere to go but down. All the while, the trade deficit and borrowing helped reduce investment in U.S. manufacturing and other exportable capacity: exacerbating present challenges.

Economists rightly emphasize that with balanced trade there are efficiency gains from trade that are "pareto improvements". Potentially, the winners could compensate the losers and have resources left over. However, given imbalanced trade those losing their jobs to foreign competition have had millions fewer jobs to move to. There have been fewer winners and more losers.

Sunday, July 6, 2008

Why Obama opposes building of nuclear power plants

Senator Harry Reid of Nevada, the Democratic Party Majority Leader in the United States Senate, is opposed to the safe disposal of American nuclear waste in Nevada. He prevents any movement in the Senate of any bill that would provide for that disposal. There is no other credible alternative for long-term nuclear waste disposal.

On June 24, Senator Obama opposed the building of new nuclear power plants because the nuclear waste disposal problem has not been solved. Here is a selection from the Reuter's article:

LAS VEGAS, June 24 (Reuters) - U.S. presidential candidate Barack Obama on Tuesday criticized his rival John McCain's proposal to encourage the building of 45 new nuclear reactors by 2030.

Obama, a Democrat, said the Republican candidate lacked a plan for storage of the waste. It was among several energy-strategy ideas that Obama said were "not serious energy policies."

Obama was speaking in Nevada, a state where proposals to build a nuclear waste disposal site at Yucca Mountain have generated strong opposition....

He also took aim at McCain's plan to allow more offshore U.S. oil drilling.

"It doesn't make sense for America," Obama said. "In fact, it makes about as much sense as his proposal to build 45 new nuclear reactors without a plan to store the waste some place other than right here at Yucca Mountain," the Illinois senator said.

The U.S. Energy Department has applied for a license to operate a long-delayed nuclear waste dump at Yucca Mountain, about 90 miles (145 km) from Las Vegas.

Opposition in the U.S. Congress to the Yucca Mountain waste site is among the hurdles it faces. Senate Majority Leader Harry Reid, a Democrat from Nevada, is among those who oppose it....

Howard

Saturday, July 5, 2008

How to Lower Oil Prices Now

Can We Get Lower Oil Prices
Raymond L. Richman

Prof. Martin Feldstein in an op-ed piece in the Wall Street Journal, “We Can Lower Oil Prices Now” (7-1-08) argues that policy changes that are expected to decrease the future demand for oil or increase its supply could quickly lower the current price of oil. Producers of oil can lower the current price of oil by increasing output. What output they choose depends on their expectation of future oil prices. If the future price is expected to rise faster as a result of rapidly growing demand from emerging market economies like China and India, they will choose to reduce current output causing current prices to rise. But if they expect that current consumers will take action to reduce their future consumption, prices would not be expected to rise as fast. And if high current prices induce oil importing countries to produce more fuel from unexploited reserves reducing their demand for oil imports, again prices would be expected to increase at a lower rate. If the reduction in the demand were credible, current prices would fall. The fact that they continue to rise means that oil exporters do not expect reduced demand. OPEC pretends otherwise.

Chakib Khelil, the president of OPEC, whose members produce about 40 percent of the world’s oil, said this week that the oil cartel had concerns that future demand for oil might not be strong enough to justify investment to boost oil production, that further investment by OPEC to produce energy has been clouded by the uncertainty about future demand which arises from increased investment in alternative sources of energy, the impact of energy conservation, falling economic growth and the stepped-up search for non-OPEC oil reserves. Each of these factors could reduce future demand for oil and the cartel needs to see "a credibility of future demand.” If he meant that, such uncertainty should have induced a decline in the price of oil. It must be judged as sophistry.

The world’s largest producer, consumer, and importer of oil, the U.S., has no plans to increase its output of oil significantly in the short and medium term although it has sufficient oil reserves to provide all our needs for a century or more. True, the U.S. is subsidizing the search and use of alternative fuels, encouraging fuel-economizing vehicles, etc Judging by the reaction of OPEC members, these are not expected to reduce the demand for oil significantly. Indeed, the U.S. is spending as much to divert electrical energy from coal to alternative sources as it is to find petroleum substitutes. But there is no shortage of electricity, no crisis, not even high prices. Coal is abundant, nuclear energy available, etc. We do not have to import any of the inputs required to produce electricity. The billions we are spending so foolishly is not likely to change estimates of the future price of oil!

We are in a position to announce policies to make us self-sufficient, reducing our imports to zero. The mere announcement of these policies, were they to be credible, would cause a very substantial fall in the current and future price of oil. To be credible, the Congress of the U.S. must, at a minimum, permit off-shore drilling in the Atlantic and Pacific, drilling in the ANWR and on other public lands, and if we are really serious go all out to produce oil from our vast deposits of shale. As of now, OPEC is right on betting on little or no supply from the U.S. To convince them otherwise, cutting our imports from the two OPEC countries supplying us, Saudi Arabia and Venezuela, should convince them. Even more convincing would be to institute gasoline rationing!

However, with both Obama and McCain declaring themselves opposed to drilling in the ANWR and opposed to opening up public lands to drilling, it is no wonder that the price of oil keeps rising. The OPEC countries plus China and Japan are the real imperialist nations, the latter two because of their mercantilist practices that perpetuate huge trade surpluses. The U.S. is fast becoming a has-been imperial power. The enviriputians have nailed us to the ground.

Friday, July 4, 2008

The Murder of US Manufacturing

Martin Hutchinson had an interesting commentary entitled "The Murder of US Manufacturing" in the Bear's Lair at PrudentBear.com. He discussed the upcoming sale of GE's applicance division to a foreign company who will likely move most production abroad while keeping the GE share of the US appliance market. Here is a selection:

GE's announcement a week ago that it would accept offers for its appliances business marked the death-knell of yet another US manufacturing business, one among so many in US manufacturing's long and seemingly unstoppable downtrend since 1980.

That decline may seem an inevitable historical trend, and Wall Street's analysts would claim that the US economy can prosper just fine without it. Yet impartial analysts of the putrefying corpse of US manufacturing capability are forced into an inescapable question: did it die of natural causes or was it murdered?...

To see how this happened, think back to the 1950s. Electric appliances were the major growth business of that decade, symbolizing the decade's new affluence. Forecasters confidently predicted that by 2000 robot appliances would be in every household, removing the drudgery of housework once and for all. As a youthful reader of Isaac Asimov's Robot stories I shared that confidence - after all, the computerization necessary for robot control systems, which had not existed in 1940 when Asimov wrote the first of his I Robot short stories, was already revolutionizing business management by the late 1950s.

Now it's not just 2000 but 2008. So where the hell are the robots? GE Appliances has no such offering; if you buy a GE vacuum cleaner you will still have do all the work yourself. Can it be that the technological optimism of the 1950s was misplaced, and that home robots will never exist, or will be invented only in the far distant future? You'd certainly think so from looking at GE's catalog of products.

However it turns out that GE is simply behind the curve. The iRobot Corporation of Bedford Massachusetts, founded by keen Asimov readers from MIT in 1990, manufactures fully robotized vacuum cleaners as well as some pretty neat robotized mine-clearing equipment for the military. iRobot's standard model runs around $300, less in real terms than an ordinary vacuum cleaner would have cost you in 1980. iRobot's total sales are only $250 million, which GE would no doubt class as a rounding error, but dammit, the company doesn't have GE's brand name or distribution network.

Had GE had the sense and innovative skill to develop robot vacuum cleaners, can anybody doubt that that product group's sales would today be several billion dollars, with appropriately high margins? It is thus clear that by starving GE Appliances of investment and, more important, of research dollars, and devoting the company's efforts to financial services, "Neutron Jack" and his cohorts have deprived the United States of a major new business and deprived us overworked consumers of a major labor-saving technology (unless we are lucky enough to find out about iRobot or its few small-company competitors)....

I agree with everything that Hutchinson wrote here. But to be fair to GE management you need to look at the reason why they failed to invest in appliance manufacturing while building up their financial business. The effect of the foreign government dollar purchases has been to take the profits out of US manufacturing while building up the profits in the US financial sector. In other words, GE management was responding logically to an international system characterized by growing mercantilism.

What GE failed to anticipate is that an international system characterized by growing mercantilism is not sustainable. The mercantilist countries eventually destroy the economies of their victims. US consumers no longer have the increasing wealth necessary to sustain increasing borrowing. As a result, GE’s investments in financial services have been proven to be a bad choice.

Howard

Thursday, July 3, 2008

Expanding Outsourcing

The range of jobs that can be outsourced continues to expand. The cumulative effect would be more global efficiency if trade wasn't so out of balance. The expanded outsourcing means that the absence of an effective trade policy by the U.S. (other than borrowing from tomorrow to pay for today's shipment) will hurt more workers in more industries. The New York Times' blog today discusses a move by the Orange County Register to outsource editing and page design to India. The post concludes:

What other choice is there, besides finding another line of work? White-collar knowledge workers” are beginning to understand what their factory brethren have known for years — that outsourcing is a spreading and inexorable phenomenon. Whether homegrown newspaper editing jobs are going to dry up for good is still hard to know. But for many workers in the rapidly changing American news business, the unthinkable now must be considered.

One of the comments on the blog puts an irony of the story rather nicely.

The author of the above piece may either have missed or simply been to PC to point it out, but the real irony here is that this is happening in ORANGE COUNTY - a conservative Republican constituency if ever there was one. I would guess that the conservative leaning paper has had more than one column in defense of outsourcing and further that they would be pro-free-traders. Ironic?

And indeed the editors of the paper had planned an article on the Role of Free Trade in Speading Freedom although it isn't clear they ever wrote it.

What to do...

The Dollar is falling because it has long been overvalued, we have already sold and mortgaged our future quite thoroughly, and the trade deficit has a life of its own due to oil that will keep it from falling rapidly even as the dollar declines.

The best way out of this mess is to increase US production and exports.

Oil is one piece of this, and a vital part because of the way oil exacerbates the trade deficit and the vicious cycle this seems to be establishing with declines in the dollar. Expanded oil exploration in the US and perhaps offshore, oil shale production, and so forth.

But almost as important, the U.S. should to work to expand and encourage manufacturing and other exportable goods production.

The first step is to reset expectations so that potential exporters know that the US is not going to revert to a debt and deficits policy as soon as the crisis clears. One way to do this would be with tradable import certificates and a clear plan to move trade towards balance over a series of years.

In light of the credit crisis, it might be worthwhile to make federal loans available for companies seeking to expand domestic production. This would do the economy more good than current strategems to prop up the overvalued housing market.

Finally, we need to encourage Americans to begin saving money. One way to do this would be through tax policy.

But tax policy is only one part of the picture. When I was exploring banks in Europe to see whether I could move some of my savings to France, I noticed something very interesting about the way interest rates on bank accounts were structured in major U.S. banks and in French banks. I'm sure government policy has something to do with it. But... in France the small saver gets favorable terms and interest rates. The rates are somewhat worse for large deposits. In the U.S. rates are near zero for basic passbook savings acounts at most banks. If banks paid real interest on small consumer savings, many ordinary people would have a stronger incentive to save.

Wednesday, July 2, 2008

Why the Dollar has fallen

Judy Shelton in her op-ed entitled “The Weak-Dollar Threat to World Order” (WSJ, 6-9-08) mistakenly attributes the fall of the dollar relative to the Euro to “accommodative Fed policy”, which must be news to Dr. Bernanke, and to protective threats emanating from the Democratic left. The reason the dollar has fallen relative to the Euro and other currencies is our annual trade deficits that exploded from $96.2 billion in 1996 to $708 billion in 2007. These put so many dollars in the hands of foreigners and their governments which they used not to buy our goods but to buy trillions of dollars of American assets, ranging from U.S. Treasuries to corporate equities. They began diversifying by investing their surplus dollars in Euro assets about three years ago causing the dollar to lose its value against the Euro and other currencies.

The view of the vast majority of economists and the current and past Councils of Economic Advisors is that increased trade is wonderful even if it is one-sided. They could not be more wrong. The consequences of the trade deficits include accelerated de-industrialization and loss of U.S. factory jobs, wage stagnation, a worsening distribution of income, soaring commodity prices, and economic stagnation and instability as well as a depreciating dollar. Ms. Shelton seems nostalgic for the gold standard but the gold standard is no defense against the mercantilist practices of China, Japan, and the oil exporting countries as we show in our book Trading Away Our Future.

Unfortunately, neither the Fed nor the Treasury has any solution to the problem of the falling dollar and its cause, the trade deficits. Dr. Bernanke himself has said that market forces cannot be relied upon to get the trade deficits under control. My co-authors and I explore these and other issues in our book just published, Trading Away Our Future (Ideal Taxes Association, 2008).

Dr, Raymond L. Richman, Prof. Emeritus of Public and International Affairs at the University of Pittsburgh.

Tuesday, July 1, 2008

Is Bernanke causing inflation?

Asian Times online has a commentary by Spengler predicting an economic crash this year. He blames the current problems on the Federal Reserve's monetary expansion.

This got me looking up the June 26 Federal Reserve money supply statistics release which can be found online at: http://www.federalreserve.gov/releases/H6/Current/. Indeed Spengler is correct if just the first three months of 2008 are considered, but other than that period, Bernanke has been fairly moderate in his money supply growth. Here are the statistics that I am looking at:
  • Over the last twelve months, the Fed expanded money supply (M2) at a 6.3% rate,
  • Over the last six months, the Fed expanded money supply at a 7.7% rate
  • Over the last three months, the Fed epanded money supply at a 5.4% rate.
During this period, U.S economic growth has been very slow growing at about a 1% rate from October 2007 through March 2008. Thus we can deduce the following:
  • From June through November 2007, the Fed expanded money supply at a 4.9% rate, which would cause 3.9% inflation.
  • From December through February 2008, the Fed expanded money supply at a 7.7% rate, which would cause 6.7% inflation.
  • From March through May 2008, the Fed expanded money supply at a 5.4% rate, which would cause 4.4% inflation.
Bernanke is like a driver who first puts his foot hard on the gas pedal and then hard on the brake pedal again. He is not driving well. But, except for the first three months of this year, he has only been causing about 4% inflation.

Spengler does have one recommendation for avoiding the crash that I like. He writes:

Americans need a tax cut on savings, not on consumption. Shovelling liquidity into the system has made matters worse. But a shift from consumption to savings will increase the supply of long-term capital, bringing down the cost of equity to firms and long-term interest rates, including mortgage rates. Let the middle class save in pre-tax dollars....

Former governor of Arkansas Mike Huckabee's "fair tax" proposal goes even further, and in the right direction, eliminating all taxation of income, including income on capital, and substituting for it taxation of consumption. That's good medicine, but the patient probably is too weak to take it at the moment.

I agree that Huckabee's FairTax would be good medicine because it would increase American savings in the long-run, but I disagree with Spengler's statement that the patient would be too weak to take it for it to work in the short-run. The FairTax would have some instantaneous short-run benefits. Instituting the FairTax would immediately make corporate investments more profitable and would make American goods less expensive in foreign markets and foreign goods more expensive in American markets. The FairTax is exactly the medicine that the U.S. economy desperately needs, not just for the long-term, but for the short-term as well!

Howard

Monday, June 30, 2008

How do you get mercantilist countries to loosen their pegs to the dollar

Many countries peg their currencies to the dollar. When the dollar goes down versus the euro, their currencies go down as well. As a result a falling dollar does not much effect their trade balances with the United States. Despite the falling dollar, they are able to continue to keep down their imports from America and are able to continue to keep up their exports to America. In order to keep these pegs, their central banks buy increasing amounts of dollars whenever the dollar falls. In order to buy these increasing dollars, they sometimes print their own currency, causing inflation in their own countries. They also get inflation simply because the price of oil and other commodities is rising so fast versus the dollar. They could avoid inflation by letting their currencies rise against the dollar, and indeed the Asian countries have recently been letting their currencies rise a bit versus the dollar.

The US Treasury, the Wall Street Journal editorial page, and some American economists want the Federal Reserve to raise the US interest rate in order to make it easier for these countries to continue to peg their currencies to the dollar. They figure that higher interest rates will cause more private investors to buy dollars, so that the governments that are pegging their currencies to the dollar will not have to buy as many dollars.

In his June 27 blog entry ("Does the Fed’s mandate now extend to Beijing, Moscow and Riyahd?"), Brad Setser discussed the current debate regarding whether the Fed should raise the US interest rates in order to help these governments. He wrote:

The battle lines here are increasingly clear: some argue that the US needs to adjust, by changing its monetary policy to help out countries pegging to the dollar, others argue the rest of the world needs to adjust by letting their currencies appreciate. The US is calling for other countries to have more monetary policy autonomy, and others are calling for the US to, in effect, have a bit less.

There are some who want the United States to pursue a strong dollar policy in order to reduce inflation among the countries that are pegging their currency to the dollar. They hold the United States responsible for the fact that the countries that are exploiting us through their mercantilism are thereby suffering inflation.

Others, including Setser and myself want the pegging countries to loosen their pegs and instead let their currencies rise against the dollar. We realize that if they did so, then these countries would buy more US exports and would export less to the United States. Setser writes:

The challenge, in my view, is how to bring the world back toward a true equilibrium — one that requires less government intervention in the foreign exchange market — over time.

Missing from Setser's discussion is any realization that most of the countries that are pegging their currencies to the dollar are doing so as part of a mercantilist policy designed to steal market share from US industry. I posted two comments to him about this, but he ignored them both. First I wrote:

Brad,

I agree with so much of what you wrote in this posting. But you missed the disastrous effect of reserve accumulation upon the US production.

You pointed out, correctly, that the exporting sectors of the emerging countries have been helped by their reserve accumulations, but you failed to point out the flip side, that exporting sectors of the US economy have been hurt. This is evident in the rapid fall in employment in the US manufacturing sector and the near zero net investment in US manufacturing.

A graph that you posted on June 12 in “Can the debate over trade – or globalization – be separated from the debate over exchange rates?” (http://blogs.cfr.org/setser/2008/06/12/can-the-debate-over-trade-%e2%80%93-or-globalization-%e2%80%93-be-separated-from-the-debate-over-exchange-rates/#more-3583) shows the effect of these reserve accumulations. That graph showed that the emerging countries have been increasing their exports to the United States but not increasing their imports from us.

Later I wrote:

Brad,

I agree with three points that I heard you saying:

1. That over time the oil exporting countries will import more goods.

2. That China could encourage lending to the Chinese instead of using their funds to sterilize dollars.

3. That the adjustment in China’s reserve purchases could be gradual. There is no need to go cold turkey.

The only thing missing from your post is a motive why the Chinese should change away from a policy which is working. They are about to purchase GE’s appliance business and grab its US market share. Detroit is on the ropes and they will soon move in to the US car market. Airbus is starting to move production to China so they should soon gradually be getting the commercial aircraft production business. They are building three new factories to compete with one of America’s remaining exports - heavy mining machinery.

I suspect that Japan changed policy in 2004 partly because they didn’t want to destroy America as a counterweight to China in Asia. China has no such motive.

I did not get ignored by others in the discussion that followed Brad's posting. For example, I had an active discussion with Ruiz Huizer about how to get mercantilist countries to reduce their currency accumulations. Here is a selection from what we wrote:

21. Rien Huizer Says: Great piece and interesting comments. Does anyone see a practical solution for how to get from 1.5 tr to .15 tr annual reserve growth?...

22. Howard Richman Says: Yes. We propose a new international system based upon balanced trade in our book, “Trading Away Our Future” (www.idealtaxes.com). The key is for the US to insist, unilaterally, on US trade with the reserve-accumulating countries moving toward balance over a period of 5 years. At the same time, the US has to take steps to enhance domestic saving. The immediate result of adopting such a policy would be a surge in investment in US exporting sectors.

23. Rien Huizer Says: Right, I guessed that you would suspend or abandon WTO. What about the FTA countries such as Australia and Singapore? And I guess that your program to boost domestic savings would involve reducing the gvt deficit by increasing taxes?...

28. Howard Richman Says: Rien,

You said: “Right, I guessed that you would suspend or abandon WTO.”

–> Although I would not object to the United States suspending or abandoning the WTO, that action should not be necessary. Article 12 of the Uruguay Round of GATT and the IMF agreement would both justify US action to balance trade.

You commented: “And I guess that your program to boost domestic savings would involve reducing the gvt deficit by increasing taxes?”

–>Reducing government budget deficits would certainly increase domestic savings, but that’s not what we recommend in our book. Our book reflects the lead author’s specialization in public finance. (He did his dissertation under Milton Friedman at the U. of Chicago.) In our book we recommend the following changes to the tax code to increase domestic savings:

1. Raising the capital gains tax to end the perverse incentive for corporations to buy back their own shares. We would accompany the tax hike with a provision that would allow taxpayers to reinvest their capital without paying tax, as homeowners now do when they sell one home and buy another. In other words, we would tax consumed capital, but not reinvested capital.

2. Reducing or eliminating the corporate income tax would help since corporations are doing all of the savings in America today. Doing so would not only enhance domestic savings, it would also reduce the opportunity cost of capital, thus enhancing fixed investment.

3. Moving away from income taxes and toward consumption taxes would help. We like the USA Tax, VAT, and FairTax. The USA Tax is the most progressive, but the VAT and FairTax have the advantage of being border adjustable, thus helping to level the playing field for American products.

The discussion continues from there. To read it all, go to: http://blogs.cfr.org/setser/2008/06/27/does-the-feds-mandate-now-extend-to-beijing-moscow-and-riyahd/#comments

Howard