Trade deficit up in the first quarter of 2008 despite the falling dollar

The preliminary estimates for the overall US economy during the first quarter of 2008 are pretty dismal. Real GDP was up at a paltry annual rate of just 0.6% in the quarter for the second quarter in a row. The following graph shows the trend since the first quarter of 2000:


Gross fixed investment fell for the 8th quarter in a row, reflecting the continuing stagnation in business investment and the continuing decline in new residential construction:


Despite the falling dollar, the trade deficit turned upward for the second quarter in a row. It was 4.97% of GDP in the third quarter of 2007, 5.04% in the fourth quarter of 2007, and 5.20% during the first quarter of 2008 as shown in the graph below:


Some economists think that the falling dollar will correct the trade deficits. This is unlikely to happen so long as more and more countries pursue the mercantilist strategy of selling to the United States without buying from the United States.

Howard

Bush: "very difficult times, very difficult"

President Bush issued a gloomy assessment of the American economy at a press conference today. Here's a selection from a New York Times article:

With consumer confidence falling and gasoline and food prices at record highs, President Bush delivered an unusually dark assessment of the economy on Tuesday, saying the nation is in “very difficult times, very difficult.”...

“If there was a magic wand to wave, I’d be waving it, of course,” Mr. Bush said, referring specifically to gasoline prices, which have climbed $1.40 a gallon in 18 months. “But there is no magic wand to wave right now. It took us a while to get to this fix.”...

Mr. Bush has spent much of his presidency riding high on claims of solid job growth, but with nine months left in office, he has to confront a new reality. In recent weeks, he has said the economy is in a “rough patch.”

This month, he expressed optimism, saying, “I’m confident we’re going to come out of it.”

But his tone on Tuesday was more somber, reflecting a new report that found consumer confidence plummeting as home prices have collapsed more rapidly than at any time in 20 years....

President Bush thinks that current US economic problems are primarily cyclical in nature - that the United States is experiencing a temporary downturn. But high gas and food prices are only a problem because median American incomes are not rising as fast as inflation.

Our stagnant median income is not a temporary problem. I agree with Governor Huckabee when he recently wrote, "Our economic problems are structural and not just cyclical."

We are experiencing stagnant income and slow growth due to the lack of investment in American production, which in turn is due to our self-destructive tax system and foreign government mercantilism. The FairTax would solve our tax system problems and Import Certificates would end foreign government mercantilism.

Early this year, President Bush and the Democratic congress put in place a stimulus package that should alleviate the cyclical problem. We should have a burst of temporary growth when consumers spend their rebate checks and when corporations move up their 2009 investments into 2008 in order to take advantage of the temporarily accelerated depreciation schedule. But in 2009 we will return to slow growth unless we begin to address our long-term problems.

Howard

John Torinus: McCain gets an earful about so called "free trade" with China

On April 19, John Torinus, chairman of Serigraph Inc., wrote a great commentary in the Milwaukee Journal Sentinel about free trade, protectionism, and balanced trade. I couldn't agree with him more! He shares our stance that the key to solving our current problems is that the United States insist upon balanced trade. In one commentary Torinus shows:

• How China is stealing our manufacturing industries.
  
• That balanced trade is the middle-ground solution.
  
• That the Bush Administration's method of achieving balanced trade with China through talk ("jawboning") hasn't worked.
  
• That protecting specific industries, as in Bush's steel tariffs, will produce economic inefficiencies.

The only thing missing from his commentary is a plan for achieving balanced trade so that the United States can resume its economic growth. We supply that plan in our book, Trading Away Our Future. The key component of the plan is imposing Import Certificates, tied to exports, as a way to gradually balance our trade with the mercantilist countries.

He begins his commentary by discussing a confrontation between John McCain and the CEO of a mining equipment manufacturer who is about to have his sales to China eliminated because of the Chinese mercantilist practice of selling to us without buying from us:

Straight talk, John McCain style, met straight talk, Tim Sullivan style, in South Milwaukee last week on the issue of free trade that isn't always so free.

The presumptive Republican presidential candidate has distinguished himself from the two Democratic contenders with his posture as a free trader.

McCain found support for reducing tariffs through trade pacts from business leaders on two panels at Bucyrus International. But Bucyrus Chief Executive Officer Sullivan pointed out that there are still issues.

The issues put doctrinaire free trade, a Republican mantra, to the test.

Fresh from a business trip to China, Sullivan informed McCain that China had slapped a 40% tariff on the kind of giant mining equipment that Bucyrus makes in South Milwaukee.

He also said the Chinese had restricted foreign ownership in Chinese mining equipment companies to a minority position. In other sectors, a majority - even 100% - can be owned. Sullivan said his Chinese competitors are opening three new plants behind the protective tariff walls.

Obviously, such moves are far from "free" trade....

Then he briefly alludes the fact that tariffs lead to counter-tariffs, rather than balanced trade:

The Democrats' position is far from straight talk because their "fair trade" rhetoric is a union-backed euphemism for protectionism. If the unions favor protectionism here, what can they say about tariff walls in China that hurt steelworkers at Bucyrus?

Then he mentioned the Bush Administration's failed attempt to achieve balanced trade with China through "jawboning":

Somewhere in the middle is the pragmatic position. Call it balanced trade. It is what the Bush administration has been trying to accomplish in the face of its failure to stem the relentlessly rising trade deficit with China. One price of that imbalance has been to accelerate the freefall of the U.S. dollar.

Treasury Secretary Henry Paulson has jawboned the Chinese on the deficit and gained only a grudging 7% hardening of the yuan. That helps, as do some subsidy reductions by the Chinese government for its exporters.

Then he gives an example which shows the economic inefficiencies that occur if tariffs are tried by the United States as the solution:

Another piece of straight talk from Sullivan put a harsh light on tariffs that Congress and the administration installed in 2002 on imported steel to protect local steelmakers - much to the disadvantage of steel users. Under foreign pressure, the tariffs were dropped in 2003.

Sullivan said the steel tariff protection has resulted in a virtual steel monopoly in the states. He now has two mills to buy from instead of six, and prices have jumped sharply, including 56% so far in 2008.

He continues with an example that explains the mechanism through which American manufacturers force their suppliers to move abroad:

Here's more straight talk on trade: Wisconsin manufacturing jobs have dropped from 550,000 in 2000 to less than 490,000 today. New layoffs make daily headlines.

I thought the shift of manufacturing jobs to low-cost countries would bottom out, but that's not happening. Multinational corporations continue to push vendors in their supply chains for "the China price." Lately, it's been "the India price."

Often, they mandate that parts come from low-cost countries. Not wanting to lose business, the vendors move to wherever their customers want them.

Further, if the component or assembly is compact and heavily labor intensive, it is almost impossible to compete with 50-cent- and dollar-an-hour wages. Shipping costs only disadvantage the bulky stuff.

Then he mentioned something that I don't know anything about:

One partial cure is the lean disciplines being implemented across Wisconsin. They spur productivity and offset the labor cost differentials. That didn't come up in the discourse with McCain.

The rest of his commentary is worth reading as well. Follow the following link to read it: http://www.jsonline.com/story/index.aspx?id=741187.

Howard

Obama's position on China trade

Like Senator Clinton, Senator Obama has identified some of the problems in US trade with China. Like Senator Clinton, he does not propose anything that would actually solve those problems. Here are Obama's remarks about China when he spoke to the Alliance for American manufacturing in Pittsburgh on April 14 2008:

For America to win, American workers have to win, too. If CEO pay keeps rising, while the standard of living for their workers continues to decline, that's not a win for America.

That's why I opposed NAFTA, it's why I opposed CAFTA, and it's why I said any trade agreement I would support had to contain real, enforceable standards for workers.

That's why I believe the Permanent Normalized Trade agreement with China didn't do enough to ensure fairness and compliance.

Now, you can have a debate about whether my position is right or wrong. But here's what you can't do. You can't spend the better part of two decades campaigning for NAFTA and PNTR for China, and then come here to Pennsylvania, and tell the steelworkers you've been with them all along. You can't say you are opposed to the Colombia Trade deal, while your key strategist is working for the Colombian government to get the deal passed.

That's not respect. That's just more of the same old Washington politics. And we can't afford more of the same.

We need real change, and that's what I'm offering. I'm offering a new, more transparent and more inclusive path on trade so we can help promote an integrated global economy where the costs and benefits are distributed more equitably. And it starts with a principle I've always believed in - that trade should work for all Americans.

That's why we need to finally confront the issue of trade with China. As I've said before, America and the world can benefit from trade with China. But trade with China will only be good for you if China itself plays by the rules and acts as a positive force for balanced world growth.

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.

It's not just that China is following the path taken by so many other countries before it, and dumping goods into our market while not opening their own markets, something I've spoken out against. It's not just that they're violating intellectual property rights. They're also grossly undervaluing their currency, and giving their goods yet another unfair advantage. Each year they've had the chance, the Bush administration has failed to do anything about this. That's unacceptable. That's why I co-sponsored the Currency Exchange Rate Oversight Reform Act. And that's why as President, I'll use all the diplomatic avenues open to me to insist that China stop manipulating its currency.

We also have to make sure that whatever goods we're importing are safe for our families. We all saw the harm that was caused by lead toys from China that were reaching our store shelves. A few months ago, when I called for a ban on any toys that have more than a trace amount of lead, an official at China's foreign ministry said I was being "unobjective, unreasonable, and unfair." But I don't think protecting our children is "unreasonable" - I think it's our obligation as parents and as Americans.

When it comes to trade, there's no one-size-fits-all approach. If countries are committed to reciprocity, if they are abiding by basic rules of the road, then we should welcome trade. Many poor countries need access to our markets and pose no threat to our workers.

But what all trade agreements I negotiate as President will have in common is that they'll all put American workers first. We won't ignore violence against union organizers in Colombia, or the non-tariff barriers that keep U.S. cars out of South Korea.

Howard

Hillary's remarks at the Pennsylvania AFL-CIO on April 1

Of the three presidential candidates that are left in the race, Senator Clinton is the only one who is talking about the problems caused by our one-sided trade with China. Too bad none of the solutions she proposes would work. Here are some selections from what she said to the Pennsylvania AFL-CIO on April 1 2008:

And let me just say this, I am deeply concerned about acceleration of the outsourcing of production for essential defense material. I was in Indiana the last couple of days of last week - everywhere I went talking to good hardworking Hoosiers, I heard about how company after company that used to do defense work had either lost the work or the company was gone. One specific example just stuck in my mind. All of you have seen those pictures of the precision guided missiles, right? Going down chimneys, hitting targets thousands of miles away. Well, the targeting is dependent upon these magnets and the magnets used to be made in Indiana, the company called Magnequest. The company was bought out, jobs were eliminated, production was moved to China. Not only did we lose jobs, we lost essential, valuable information because you’re not going to tell me that the Chinese military doesn’t have exactly what it takes to make those magnets....

Yes, we will finally get tough on China. Right now, China’s steel comes here and our jobs go there. I testified before the international trade commission to try to put the breaks on the dumping of steel in our market. They manipulate their currency, they give illegal subsidies, they abuse workers’ rights. And what do we get in return? Tainted fish, lead-laced toys, and poisoned pet food and polluted pharmaceuticals. That is a bad deal for America. When I’m President, China will be a trade partner not a trade master. And we’re going to get that done.

Finally, we’re going to start investing in manufacturing again. Pennsylvania has lost 13,000 manufacturing jobs in the past year; nearly one-in-four manufacturing jobs since George Bush became president. Manufacturing thrived in Pennsylvania throughout the 20th Century. It can thrive again.

I disagree with people who say we can’t be a manufacturing company again because I believe you can’t have a strong economy if you don’t make things. I don’t believe you can support all these other jobs that you represent workers in if you’re not generating jobs from actually producing things. So, for me, it’s not just a question of what’s nice, it’s critical and essential that we bring manufacturing back. We also need it for our defense sector, as I mentioned earlier....

Howard

Economic Assumptions

In response to our World Net Daily article Anthony e-mailed the following question.

Sir, I realize that you're probably swamped, but I have a question: I constantly hear Dr. Walter Williams saying the exact opposite of what you do, and yet, when I read your points, I agree with them.

Are you familiar with Dr. Williams, and if so, how do we reconcile the fact that the two of you are both Professors of Economics, and yet have diametrically opposing views???

In other words, I guess, who's right and who's wrong??

Response:

I have a great deal of respect for Dr. Walter Williams. On most issues, we would be in agreement. We believe that the free enterprise system is the best of all possible economic systems. It has proven to be the most productive raising living standards for all of its participants, the most efficient, the most creative and innovative, the fairest, and the only one consistent with democratic freedom.

We differ on trade and taxes, evidently. I believe I can convince him that I am right on both. The doctrine of free trade is ideology not economic science. It works when all the participants are free traders and play according to the same rules. Free trade works in the USA because the Constitution forbids states from interfering with the free flow of goods across state lines, we have a single monetary standard, and capital and labor are free to move freely.

Our differences on trade are that I believe that trade is always beneficial when it is balanced. Most economists believe that trade balance is the rule and that free market forces automatically correct large chronic trade imbalances such as we have been experiencing. Market forces have not corrected the trade deficits and in our book, we explain why. Nations pursue policies that perpetuate trade surpluses. For decades Japan's economic ministry imposed trade barriers, subsidized exporters, and controlled the value of its currency to increase and perpetuate its trade surplus. American economists turned a blind eye even though the rules of trade authorized us to take counter measures. It became taboo for any economist to impose any barrier to trade even though other countries were imposing barriers to our exports.

Another difference is our views on taxation. Nearly all economists, including Dr. Williams believe in the Haig-Simons definition of income that income equals consumption plus capital accumulation, including capital gains and losses. I disagree. Income equals consumption plus savings. Rises and falls in the value of capital --stocks, bonds, real estate -- are not income. The only exception is capital gains that are consumed which should be taxed as ordinary income.

All of this is spelled out in our book, Trading Away Our Future. For more, see our website, http://www.idealtaxes.com/. Thanks for taking the time to ask your excellent question.

Raymond Richman.

Steven Pearlstein Column

In today's column in the The Washington Post, Steven Pearlstein correctly diagnoses the current credit crisis as a symptom of the broader imbalance. He even rightly attributes the easy credit to policies by U.S. trading partners to distort currency values.

What if, for the better part of a decade, the United States had been living way beyond its means, consuming more than it produced and investing more than it saved? What if China and Taiwan and Saudi Arabia and even Japan were willing to finance that trade deficit on easy terms because it allowed them to peg their currencies to the dollar in a way that generated higher job creation and economic growth in their home markets? And what if this mutually advantageous imbalance in trade and investment flows wound up creating a huge supply of cheap dollar-denominated credit that virtually invited the bankers and brokers and rating agencies and private-equity firms in U.S. markets to throw caution to the wind and make ill-advised lending and investing decisions?

Not only is this a plausible explanation, but I think it is the underlying story. And if that is the case -- if the story of the credit bubble and its bursting is more fundamentally about macroeconomic imbalances than microeconomic failures -- that has very different implications for where we go from here.

For what it means is that things won't be "fixed" simply by having the financial sector write off its losses and bad loans and promise to do a better job next time with risk management. Rather, it will require a reduction in the overall standard of living in the United States so that the country as a whole begins to live within its means.

Having traded away our future for a mess of mercantilist produced pottage, the U.S. now must learn to live in it. Chapter 10 of Trading Away Our Future discusses what to do to end the currency manipulations and encourage domestic investment.

We're published today, "How to stop China from stealing our jobs."

We're published in the World Net Daily this morning. Here is how it starts:

On April 18, China won another battle in its one-sided trade war against the United States when America's last remaining motorcycle maker, Harley-Davidson, announced plans to lay off 730 workers. These workers will join the approximately 2.3 million Americans who have already lost their good-paying manufacturing jobs to the Chinese strategy of selling to the United States without buying from us.

American workers have less money to spend on motorcycles because they have been losing good-paying jobs in the U.S. manufacturing sector and taking lower-paying and less productive jobs in the service and government sectors.

The Chinese motorcycle market is huge, about 24 million sold in 2007, up about 15 percent from the previous year. If China were willing to let their people buy Harley-Davidson motorcycles, then Harley-Davidson's exports could keep its workers employed. Harley-Davidson would be expanding its sales with China and the United States economy would be growing with the Chinese economy.

However, even though Harley-Davidson opened a dealership in Beijing, China, in April 2006, sales are low because the Chinese government imposes three different trade barriers:

• China charges a 30 percent tariff on foreign vehicles, including motorcycles.
  
• China imposes what Forbes Magazine calls "ownership and riding restrictions in most large cities and on highways."
  
• China manipulates its currency to keep the yuan low compared to the dollar. The Chinese have already accumulated more than a trillion dollars as a byproduct of these massive currency manipulations.
  

The key trade barrier of these three is the third one, because without it the other two would not work. If China just imposed a tariff on vehicles, for example, without accumulating a massive amount of dollars at the same time, then their currency would have risen in value verses the dollar, and their attempt to win market share in vehicular sales would cause them to lose market share in other areas. Peking University economics professor Heng-Fu Zou explained how this barrier works over the long-term in a 1997 paper, but most American economists still haven't figured it out!

Predictably, these barriers and others by the Chinese government have been producing China's growing trade surplus with the United States that is shown in the graph below:

And here is how we finish:

With all but one of its factories located in the USA, [Harley-Davidson] is one of the few remaining American manufacturers that still produces almost all of its products here. But Hillary Clinton, Barack Obama and John McCain are all ignoring the mercantilism being practiced by China and other Asian nations. In effect they are joining the Chinese government in telling Harley-Davidson to move its factories to China.

As we make clear in our book, "Trading Away Our Future," there is a powerful way we could fight back. The international rules of trade allow the United States to impose quotas, tariffs or take other measures to correct a chronic trade deficit. In our book, we recommend the imposition of Import Certificates, a variation of a proposal made by Warren Buffet a few years ago, which would gradually limit our imports from China and other mercantilist countries to the level of their imports from us. China would have to dismantle its trade barriers, or they would lose sales to the United States.

Pacifism doesn't work when fighting military wars, and it doesn't work when fighting trade wars. The U.S. government passivity as the Asian governments have stolen industry after industry from us has placed the U.S. economy in peril. It's time that the United States started to fight back.

Follow the following link to read it: http://www.wnd.com/index.php?fa=PAGE.view&pageId=62298.

Howard

Balanced Trade

Supporters of free trade like to paint all with concerns about trade as against trade, or at least as protectionists or mercantilists. I am none of these.

Protectionists believe in restricting imports in order to protect inefficient domestic industries. I do not believe in supporting inefficient industries.

Mercantilists believe in building up exports in order to increase the power and productive capacity of their country at the expense of others. I don't like exploiting others any more than I like seeing the U.S. exploited.

Supporters of free trade believe that unfettered international markets will lead to the best outcomes at home and abroad.

With the free traders I believe that trade is potentially wonderful for the economy. I believe that without trade we would be poorer. BUT I recognize that trade can be distorted and manipulated. I recognize that the U.S. government, the Chinese government, the Japanese government and others manipulate capital flows and trade. I recognize that the massive U.S. trade deficits have hurt millions of American workers and reduced American economic power while creating massive imbalances that threaten our economy and those of other countries.

People used to say that a conservative is a liberal who has been mugged. I am a free trader who has been mugged. Therefore, I am a balanced trader.

I recently found some additional links for people advocating balanced trade.

Michael Pierce McKeever, Sr lays out an argument for balanced trade that complements that of Trading Away Our Future.

Jack Davis with Save American Jobs makes a related argument for balanced trade.

The authors of the blog Gone With the World also advocate efforts to keep trade in balance.

The point of balanced trade isn't to limit trade. It isn't to prevent the market from encouraging efficiency. Its goal is to prevent the market from being gamed. In the face of trade wars, free traders advocate unilateral disarmament followed by persuasion that arms should be laid down (trade agreements). Protectionists and mercantilists say we should start shooting. The balanced trade perspective is cooperative for mutual advantage but not willing to be exploited.

Trade Politics: Public Opinion

Do the American People believe that current trade policies are good for the U.S.?

The public is split on trade, and different questions elicit different answers. With most ways of asking the question, at least half of poll respondants believe that current trade policies are bad for the U.S. economy. The trend over the last few years is towards more opposition to trade.

However, many people have no idea what is going on. For instance, a 2007 Pew survey found that only 68 percent of Americans were aware that the United States had a trade deficit, down from 81 percent who knew of the deficit in 1989. (http://people-press.org/reports/display.php3?ReportID=319)

A selection of illustrative poll results.

Last October (2007) 59 percent of Republicans agreed with this statement:

"Statement B: Foreign trade has been bad for the U.S. economy, because imports from abroad have reduced demand for American-made goods, cost jobs here at home, and produced potentially unsafe products."

http://online.wsj.com/public/article/SB119144942897748150.html


In March 2008, 58 percent of respondants selected the "bad" option on this poll question: "Do you think the fact that the American economy has become increasingly global is good because it has opened up new markets for American products and resulted in more jobs, or bad because it has subjected American companies and employees to unfair competition and cheap labor?"

Ten years ago, only 48 percent selected the "bad" option.

Source: NBC News/Wall Street Journal Poll conducted by the polling organizations of Peter Hart (D) and Bill McInturff (R). March 7-10, 2008. N=approx. 500 registered voters nationwide.


In April 2006, 50 percent of respondants selected the "hurts" option on this poll question:
"Do you believe increased trade between the United States and other countries mostly helps or mostly hurts American companies?"

In 1999, only 39 percent of respondants selected the "hurts" option.

USA Today/Gallup Poll. April 7-9, 2006. N=1,004 adults nationwide. MoE ± 3.

See also: http://www.pollingreport.com/trade.htm

Colombia and China – Dems object to democratic Colombia, favor Communist China.

With the Democrats blocking a vote on the administration’s proposed free trade treaty with Colombia, a treaty which is desirable on economic and security grounds, one has to ask why they oppose the treaty. What do they have to gain? Is it simply an election ploy, pandering to an electorate that knows they have been hurt by the trade deficits? Are they really concerned about a possible loss of American jobs which is a legitimate concern. But, as we shall see, Colombia is no threat compared to China and other Asian countries. Is it the desire of the anti-capitalist left that now dominates the Democratic party to punish a developing country whose successful development strategy is free market capitalism? Has the leftist hate of America spread from opposition to war against Islamo-fascists to a desire to hand South America over to that admirer of Cuban Communism, Pres. Hugo Chavez of Venezuela?

Let us take a look at the job issue. Neither the Democratic majority in the House and Senate nor their leading candidates for President have raised serious objections to the loss of millions of manufacturing jobs to China, Japan, and other countries. As we point out in our book, Trading Away Our Future, those deficits are the source of the U.S.’s major economic problems: the falling dollar, wage stagnation, market bubbles they created, and recession.

Our trade deficit with Columbia in 2006 was $2.6 billion, with the rest of the world $760 billion, 290 times greater than the deficit with Colombia. Majority leader Pelosi denies that the Democrats were seeking to block the trade agreement. What the Democrats want, she says, is a timetable that was sensitive to the concerns of American workers. Where was their concern for the American worker when millions were losing their jobs as a result of the trade deficits during the past two decades. In his recent book, Lee Iaccoca asks, “Where are our leaders?” All of those seeking the presidency, Sen. Obama and Sen. Clinton express reservations about the treaty. Sen. McCain is a free trade advocate. What are they proposing to do about the trade deficits which amounted to 6.3 percent of our GDP in 2007?

Let’s look at the facts. In 2006, we imported $9.3 billion worth of goods from Colombia and exported $6.7 billion worth of goods for a trade deficit of $2.6 billion. Our trade deficit with China was $232.5 billion, a HUNDRED times greater. American workers in manufacturing in 2006 produced on the average $111 thousand worth of goods (value-added per worker). To balance trade with China by increasing U.S. exports to China would require the hiring of 2.2 million American manufacturing workers; to balance trade with the rest of the world require the export of American goods that would create the demand for 7.5 million manufacturing workers. To balance trade with Colombia by increasing our exports to Colombia would require the hiring of 0.23 million American workers. If the goal is to balance trade, Colombia is a small piece of the problem.

China's tariff on American motorcycles contributes to Harley-Davidson layoffs in Pennsylvania

A June 9 2004 issue of MotorcycleUSA.com reported that Harley-Davidson was hoping to export motorcycles to China without building a factory there. Harley-Davidson is one of the few American manufacturers that still produces its goods in the United States. It just has one foreign factory (in Brazil).

The article reported that China had a 50% tariff on its imports of Harley-Davidson motorcycles. That tariff was scheduled to be reduced to 30% by January 2005.

An article in the March 23 2006 issue of Forbes Magazine reported that Harley-Davidson was set to open up its first dealership in China in April 2006. The article reports that China has other limitations preventing the sales of Harley-Davidson motorcycles which it calls "ownership and riding restrictions in most large cities and on highways".

Meanwhile, Harley Davidson announced plans to lay-off 730 United States workers today.

The Chinese strategy is to sell to the United States, but not to buy from the United States. The only way to change that would be for the United States to impose Import Certificates on China which would gradually (over a period of five years) reduce our imports from them to the level of their imports from us. We advocate this step in our book, Trading Away the Future.

Howard

An insightful analysis

In a recent article published in Spiegel Online Gabor Steingart provides an incisive critique of current U.S. policies.

The dollar is in a tailspin, the trade deficit is growing and a recession is on the horizon. The American way of life is in serious danger. But the head of the Federal Reserve keeps on pumping easy credit into the system -- a crazy policy that will worsen the crisis. (http://www.spiegel.de/international/business/0,1518,547317,00.html)

There is lots of happy talk among advocates of free trade about how the fall of the dollar is making U.S. exports more competitive. For instance Robert Samuelson wrote in the Washington Post a couple of days ago that: "The overall trade deficit is dropping and, except for higher oil prices, would be dropping faster." (http://www.washingtonpost.com/wp-dyn/content/article/2008/04/15/AR2008041502668.html?hpid=opinionsbox1)

Indeed the trade deficit was marginally lower in 2007 than in 2006. But the drop was small, and it isn't at all clear that it will continue. For instance, February's deficit of 62.3 billion was no cause for optimism. (http://www.census.gov/indicator/www/ustrade.html) If the trade deficit continues at this pace, the deficit for the year will be about 740 billion dollars.

Gas Tax Wiffleball versus Fuel Price Hardball

By Raymond Richman and Jesse Richman

Not long ago, Sen. McCain humbly admitted that economics was not his forte. This week in Pittsburgh, he proved it. Indeed he proved that none of his economic advisors knew any economics either. Worse, he also proved that he and his advisors knew very little about taxes either. He proposed eliminating the federal gasoline tax of 18.4 cents per gallon during the coming summer months of June, July, and August. (Presumably he would like the states to follow suit.) This is bad economics and bad policy. Ineffective and lacking heft, it is gas tax wiffleball. We need to play hardball.

Why is this bad economics? The resulting reduction in price would encourage more trips and therefore greater consumption of gasoline. Such an increase in consumption would tend to raise the price of oil and worsen our trade deficit. We want consumers to consume less not more gasoline. Such a reduction in gasoline consumption would tend to bring the price of oil down. Indeed, because of the inelasticity of the supply of oil, the increased demand for gasoline and the resulting increase in the price of oil would likely cause oil prices to rise, offsetting in part the intended effect of the tax holiday.

At best, the reduction will have a barely noticeable effect on price. The Federal gas tax is now only five or six percent of the cost of a gallon of gasoline. In the face of recent and anticipated price increases, the share accounted for by the tax is minor.

But of greater concern is the fact that the gasoline tax is a user tax, the proceeds dedicated to the construction and maintenance of roads, highways, and public transportation systems. Do we really want to cut back on such expenditures during a recession? The transportation authorities should be accelerating their expenditures not postponing them.

To reduce the price of gasoline, we need to reduce the price of oil, now exceeding $110 per barrel with the price of gasoline at $3.45 per gallon. The problem of the high price of imported crude oil and the high domestic price of oil products including gasoline is the damage it is doing to our economy. We do not need to submit passively to the high price of imported oil, but McCain’s plan will not help. Playing hardball on fuel prices requires the U.S. to make real choices on both the demand size and supply side, choices that decrease demand and increase supply.

Supply side: remove unnecessary restrictions on drilling for oil. For instance, Sen. McCain should announce that he will permit drilling in the Arctic National Wildlife Refuge (ANWR) and other public lands. Just announcing that we will do so could cause the price of oil to fall. The benefits would be considerably greater than costs. According to the 2003 National Academies of Science report to Congress, the environmental costs associated with drilling on the North Slope have so far been quite minor. The oil that is foregone by the current restrictions on drilling likely has a market value of billions of dollars and the exploration, drilling, and pipelines would provide many thousands of good jobs directly and indirectly. Longer-term, we should continue to seek alternative sources of motor fuel as we are now doing.

Demand side: He should also give notice to the Organization of Petroleum Exporting Countries that we consider their cartel to be illegal and that we intend to take countermeasures. OPEC restricts the output of oil in order to raise prices and we have done nothing to prevent the practice. If our exports to them were equal to our imports from them, the high price of oil would have little impact on us economically. The problem is that they do not import as much from us as we import from them. Rising oil prices exacerbate our trade deficit which helps drive down the dollar, and leads oil prices to rise still higher. OPEC countries could break this cycle by increasing imports from us. The alternative is for the U.S. to decrease imports from OPEC. One approach would be a large gas tax, but this would hurt the poor in particular. Another approach would be gasoline rationing as proposed by Martin Feldstein in 2006. This would share the pain more equally. Both approaches would impose pain, and neither should be taken lightly. However, reducing consumption might well have benefits.

A reduction of our imports of oil by ten percent would require the reduction of imports from current levels of 9.3 million barrels per day to 8.4 millions. Although it has been shrinking, the U.S. share of the world oil market remains very large. Reducing our imports ten per cent would probably cause a dramatic fall in world oil prices.

If Sen. McCain is serious about reducing the price of gasoline and oil, he should put forward an effective proposal, one that increases supply or decreases demand. Cutting prices and thereby increasing demand is unlikely to help much.

The costs of imbalanced trade

In today's column, David Brooks quotes from a recent study by Robert Lawrence to make a common but misleading claim about the impact of trade on inequality. Brooks writes:

Economists differ over how much outsourcing will change the American job market in the future, but there is little evidence that trade has been a major cause of job loss or even wage stagnation so far. As Robert Z. Lawrence of the Peterson Institute for International Economics wrote in a recent study: “The recent increase in U.S. inequality ... has little to do with global forces that might especially affect unskilled workers — namely, immigration and expanded trade with developing countries.”

The Peterson Institute study Brooks cites does not focus on the trade deficit.

The trade deficit is associated with a substantial decline (several million) in the number of manufacturing workers employed in the U.S., as we discuss in Trading Away Our Future. The decline in manufacturing employment due to the trade deficit has effects that extend well beyond the manufacturing sector. In particular, unemployed manufacturing workers (and those who choose not to pursue a manufacturing career) compete with those in other sectors of the economy.

Would eliminating the trade deficit end economic inequality? No. Would it make a difference? Probably. It would bring manufacturing employment back towards its 1965-1995 historical range of about 17 million workers. It would make a difference. (http://www.epi.org/content.cfm/bp171)

More confirmation that Obama's Fair Trade rhetoric is mere pretense

The following quote was reportedly said by Senator Obama at a San Francisco fundraiser:

You go into these small towns in Pennsylvania and, like a lot of small towns in the Midwest, the jobs have been gone now for 25 years and nothing's replaced them. And they fell through the Clinton administration, and the Bush administration, and each successive administration has said that somehow these communities are gonna regenerate and they have not.

And it's not surprising then they get bitter, they cling to guns or religion or antipathy toward people who aren't like them or anti-immigrant sentiment or anti-trade sentiment as a way to explain their frustrations.

For more about Obama's phony pretense that he would actually do something about the US loss of industry to foreign government predations see our March 3 commentary Obama's NAFTA Hoax.

It is also worthwhile to observe that all of the presidential candidates, especially the Democrats, are being strongly supported by the Wall Street banks. Here's a selection from an April 11 Wall Street Journal article:

The race for president follows [the pattern of more Wall Street contributions to Democratic candidates than Republicans], with Democratic candidates Sen. Hillary Clinton of New York and Sen. Barack Obama of Illinois greatly outraising Arizona Sen. John McCain, the pending Republican nominee. Sen. McCain raised about $3 million from employees of securities and investment firms through February compared with $6.6 million for Sen. Clinton and $6.7 million for Sen. Obama. But Sen. McCain may be able to close the gap: According to names released by the campaigns and gathered by Whitehouseforsale.org, a research Web site maintained by the nonprofit, nonpartisan group Public Citizen, Sen. McCain counts an army of Wall Street executives among his most prolific fund-raisers, suggesting he will be able to tap them in the future.

At the same time that the Democratic candidates are receiving heavy contributions from Wall Street banks who want increased inflows of foreign savings, they are being supported by industrial unions who want to keep the jobs that are being destroyed by the inflow of foreign savings.

I don't think that the industrial union leaders understand what is happening, but the Wall Street banks do. As we noted in our commentary It's a Wonderful Life revisited: Morgan Stanley just sold out to Potter:

At the short-sighted urging of Treasury Secretary Donald Regan back in 1984, the withholding tax on interest earned by foreigners was eliminated so that the United States could get more foreign loans. At the hearings on Regan's proposal, unprincipled Morgan Stanley, represented by John C. Evans, endorsed Regan's proposal, while their responsible sibling Morgan Guarantee, represented by Roberto C. Mendoza, warned that it would cause trade deficits. Bob McIntyre of Citizens for Tax Justice went even further, pointing out that Regan's proposal would "cost thousands of Americans their jobs in export- and import-sensitive industries." He predicted that the United States "will soon move into a position of being a net international debtor – along the lines of Third World countries." McIntyre was correct. The United States became a debtor nation in 1985 and has since lost industry after industry to these foreign loans.

Those union leaders who don't understand the connection between foreign savings inflows and loss of U.S. industry, should read union lobbyist Bob Mcyntire's 1984 testimony. He explained it succinctly in this passage (quoted from page 45 of Trading Away Our Future):

(I)n deciding what to do with the dollars we are sending overseas to buy imports, foreigners have two choices: They can either buy our goods or they can buy our assets. That is, they can either spend dollars on the products that Americans make or they can lend dollars back to us...

Howard

The Blame Game

The US financial system is in trouble, and with it the world financial system. Why?

The IMF says that the problem is that the U.S. delayed joining its financial review mechanism. Many argue that the problems are due to the lack regulation in U.S. mortgage markets, and so forth.

George Soros correctly puts the current financial crisis in the context of a longer run set of problems. Soros describes this as a 'super-bubble' that began in the 1980s and is now beginning to deflate.

http://www.nytimes.com/2008/04/11/business/11soros.html?ref=business#

Some basic principles from Trading Away Our Future:

Markets do not rapidly reach an efficient equilibrium, particularly when governments actively distort markets.

The rise of the U.S. trade deficit was aided by U.S. government borrowing, the removal of witholding taxes, and dollar mercantilism.

But eventually what isn't sustainable isn't sustained.

Our book was reviewed by Elaine Meinel Supkis on her Money Matters blog

Elaine Meinel Supkis just reviewed our book, Trading Away the Future on her Money Matters blog (http://elainemeinelsupkis.typepad.com/money_matters). She is pessimistic about the possibility that our proposals can get enacted. (We propose to balance trade with Import Certificates; tax foreigners on interest earned in the U.S.; enact the FairTax or another consumption tax to increase American savings.) She thinks that our political elites have sold out to the point where there is no possibility of enacting legislation to fix the problems. This could explain why the FairTax did not get a fair hearing in establishment Republican media during Governor Huckabee's presidential campaign. Specifically, she wrote:

The one weakness of this book which is very good in its own way is what motives me to write every day: understanding the real underpinnings of this whole system. Understanding why treason has replaced patriotism. Why schemes to fix this mess don't fix it at all. And why bills that are perfectly sensible are not passed by Congress nor signed by Presidents. And why all the 'cures' for what ails us, kills us.

As I often say, if one doesn't understand the dynamics of imperialism, one can't understand current events. For the last 10,000 years of human history, the growth and collapse of one empire after another has built a huge historical record of how the dynamics of imperialism works. And of course, if one can understand this history, one can see how America can save itself from collapse. The cure isn't simple. Indeed, it requires first, admitting we are a global empire in its final stages of decay. And hanging onto this rotted empire is impossible....

At the same time, she is very positive about our book and our proposals:

This book is a very good chronicle of what we should do to stop much of the trade mess. But the authors despair that even the smallest tax code changes suggested will never see the light of day. Tax cuts, yes. But taxes designed to cut back on offshore goods produced by US corporations ending: no way in hell.

Click here to read sample chapters from this book

I must add here, the writing is excellent. For non-experts, the three authors are careful to not use any tricky 'insider' talk so beloved by economics professors. They are quite clear about the intentions of the authors and they try to offer more than one escape from the trap we are in. They are hopeful but pessimistic. They figure, if we fail to stop things from continuing, we will have a 'hard landing' but will recover from it.

She disagrees with our hope that America's economic problems would be solved by a hard landing:

Alas, one problem with world-girdling empires crashing is, this always leads to a global struggle for dominance by rising empires. And the home base is destroyed by invaders, revolutionaries and military insurrections. The history of the total collapse of security within an empire as it collapses is crystal clear: ALWAYS the dying empire is dismembered INTERNALLY. And thoroughly, I might add....

The entire review is well worth reading: http://elainemeinelsupkis.typepad.com/money_matters/2008/03/book-review-tra.html

Howard

Our book was just reviewed by World Net Daily

Here´s how the review starts:

WASHINGTON – America is selling its birthright not for a mess of pottage, but for a mess of Chinese junk, and the resulting "unsustainable" trade deficit is leading "to the collapse of the dollar, depression and conversion of the United States to a second-rate power," says a new book written by three generations of a family of economists.

"Not only will the United States feel the pain, but other countries will as well," write Raymond, Howard and Jesse Richman in "Trading Away Our Future." "Because other countries are dependent upon the U.S. dollar as a reserve currency and because they are dependent on exports to the United States to sustain their own economies, the eventual collapse of the dollar could wreak havoc on the economies of the whole world."...

Follow the following link to read the entire review: http://www.worldnetdaily.com/index.php?fa=PAGE.view&pageId=61121

Howard

Our Recent Commentaries

Here are some of our most recent Internet commentaries:

• Obama's NAFTA hoax (Enter Stage Right, March 3, 2008)
  
• Private Sector: How to avoid recession and expand the economy (Pittsburgh Post-Gazette, February 12, 2008)
  
• An economic stimulus for China (Enter Stage Right, February 11, 2008)
  
• The tax break China gets but you don't (World Net Daily, February 9, 2008)
  
• FairTax cut for 2-parent Families (World Net Daily, January 19, 2008)
  
• The Club against Growth (World Net Daily, January 8, 2008)
  
• It's a Wonderful Life Revisited: Morgan Stanley just sold out to Potter (Enter Stage Right, December 31, 2007)
  

Howard