Thursday, May 15, 2008

McCain's Dream Team: Paul, Huckabee, Buffett

We discuss the reasons why President Bush's economic policies failed in our World Net Daily commentary today. Here is how we start

Sen. Obama is currently claiming that President Bush's economic policies are the cause of the stagnating U.S. economy. He is correct. Obama also claims that Sen. McCain will continue Bush's failed policies, and to win McCain must show that he understands where Bush went wrong.

There are four major Republican economic ideas. Two of them work and two of them don't. Unfortunately, President Bush chose the two that don't work, and that is the reason for the current U.S. economic stagnation. These two Republican economic ideas work:
  • Reduce the size of U.S. government.
  • Cut business taxes.
These two Republican economic ideas don't work:
  • Cut capital gains taxes.
  • Welcome foreign investment that costs jobs.
We then go on to explain why each of these ideas works or doesn't work. In our section about the capital gains tax, we wrote:

President Bush cut the capital gains tax from about 20 to 15 percent as part of his 2003 tax cut. He thought that doing so would encourage investment in our country's future. The result was the opposite. Fixed investment declined in each of the last eight economic quarters and has been so dismal that the United States economy grew by less than 1 percent during each of the last two quarters. Instead of reinvesting profits, corporation after corporation has been buying back its own stock, partly in order to artificially produce capital gains. Both parties are half blind respecting the taxation of capital gains. The advocates of capital gains tax cuts fail to see that a low rate of taxation on capital gains encourages the consumption of capital. They point to the increased revenue that results whenever the capital gains tax is reduced as if the consumption of the society's wealth were a good thing. The low capital gains tax rate has caused the extremely low savings rate among the rich in our society today. We are consuming our countries' future, and the advocates of capital gains tax cuts applaud!

Obama wants to raise the capital gains tax. The advocates of raising capital gains taxes, including Obama, expect to get increased revenue. They are in for a surprise. Although they will get increased savings by the rich, which is a good thing, they will cause a different sort of problem, a locked in effect in which the owners of capital are tied to poor quality investments because changing from one investment to another requires the payment of a huge capital gains tax.

In our book, "Trading Away Our Future," we propose the same exemption from the capital gains tax that is already in place when you sell one home and buy another with the proceeds. We advocate that capital gains be taxed at the same rate as all other income, except when you sell an income-producing asset to buy another income-producing asset – in which case, the reinvested capital gain would be subtracted from the basis of your new asset and the capital gains tax would be postponed until the second asset is sold and its proceeds are consumed.

In our section about welcoming the foreign investment that costs jobs, we wrote:

When foreigners lend us money or purchase our existing assets, they bid up the dollar in foreign exchange markets and bid down their own currency. The result is that our businesses have more trouble competing with their businesses. An important economics paper in 2006 by three International Monetary Fund economists demonstrated that the more a developing country borrows from abroad, the slower its economic development because of the harm to its exporting industries.

In 1984, President Reagan's secretary of the treasury wanted to run a big U.S. government budget deficit without raising the interest rate, so he got Congress to pass a tax loophole making interest earned by non-resident foreigners tax-free. The predictable result was that the increased foreign loans caused increased U.S. trade deficits.

The goal of welcoming foreign loans, no matter what the source, soon became conservative mantra. In 2001 and 2002, the IRS wanted to report the amount of interest being earned by foreign tax cheats, but Daniel J. Mitchell of the prominent conservative think tank the American Heritage Foundation, went so far as to claim that reporting interest income to foreign governments "threatens [our] economy and financial markets."

In the meantime, foreign governments, beginning with Japan, discovered that the American government welcomed their purchase of U.S. government bonds and private financial assets. By supporting the dollar and keeping U.S. interest rates low, they followed a mercantilist strategy of exporting to the United States without importing from the United States, and they succeeded at stealing industry after industry from America.

A few smaller countries soon adopted Japan's mercantilist strategy, but things did not get completely out of hand until China adopted it. During the Bush administration, the Chinese government loaned over a trillion dollars to the United States. Our trade deficits in goods and services with China predictably worsened while China stole industry after industry. Each billion dollars of our trade deficit with China, shown on the graph below, represents about 9,000 well-paid U.S. manufacturing jobs lost. (Each U.S. manufacturing worker produces about $111,000 of value-added.) By 2007, China had already stolen about 2.25 million jobs through these loans.

Our current trade agreements are not helping because we don't insist that trade be balanced. At best such deals nibble away at foreign tariffs, but do nothing about their damaging loans. All we need to do to reverse the hemorrhaging of American manufacturing jobs would be to impose Import Certificates on the mercantilist countries that would gradually balance our trade with them over a period of five years. That strategy was initially proposed by Warren Buffett, and we have elaborated on it in our book.

If Import Certificates are adopted, then China will have to import from us in order to continue to export to us. They will remove their 30 percent tariffs on Michigan auto parts, their 30 percent tariff on Harley Davidson motorcycles, and their 40 percent tariff on Bucyrus mining equipment. The result would be a prosperous economy led by a U.S. manufacturing boom.

And finally we conclude that McCain should pick Representative Paul for his financial team to cut government spending, Governor Huckabee on his team to reform taxes, and Warren Buffett on his team to implment Import Certificates to balance trade:

Rather than repeat the Bush policies, McCain needs to make it clear that he has no intention of continuing them. He can do so by announcing at the Republican convention that Rep. Paul, Gov. Huckabee and Mr. Buffett will be on his economic team.

Our suggestion would be the choice of Huckabee as his running mate, and put in charge of tax reform; Paul could be director of management and budget in charge of finding ways to cut federal spending; and Warren Buffett could be the secretary of the treasury with instructions to implement Import Certificates to balance trade. If Sen. McCain picks this team, not only would he win the presidential election, but he would also preside over an economic boom after the election.
Follow the following link to read the entire commentary:


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