RE: Owl 69, from your viewpoint.
Number one, we can't continue that trade imbalance. That has been my point for years.
Where I disagree with Fletcher is that it's not free trade that causes the problem. It's that the USA used to be the best and most profitable place in the world to do business, but it's not any more. In the 1950s, we had the largest contiguous market in the world, transportation and communication were not nearly as advanced as today so proximity to that market was a much bigger factor, we were the one developed country whose infrastructure had survived WWII pretty much intact, our education system was world class, and we had the lowest taxes in the world. OK, I know our highest rates were 90% until JFK dropped them to 70%, but everybody else was 95-100% plus their higher rates kicked in faster plus they didn't have the deductions and exclusions we did. So people came here to avoid higher taxes elsewhere.
Today, the EU is virtually as big a market as we are, and emerging countries like the BRICs offer more upside potential. Transportation and communication are miles ahead of where they were back then, so geographic proximity to market is not nearly as big a deal; think about the Internet and just-in-time inventory, for example. The infrastructure thing has turned into almost as much curse as blessing; Europe rebuilt new while we sat on our laurels and let things deteriorate, so they are ahead of us in a lot of areas now. If you went to France or Holland (or, OMG, Portugal) in the 70s or 80s, and came back today, you would not believe the infrastructure improvements. Or education system has slipped badly, despite the explosion in spending; obviously we are spending gobs and gobs of money on unproductive pursuits. And our taxes have gone from being lowest in OECD to basically highest. If you go to the OECD tax database (Google it as that) you will see that when Clinton got through RAISING our taxes, we were still among the LOWEST in OECD, but when Bush got through LOWERING our taxes, we were among the HIGHEST; that's how quickly the world changed around us. Reread that, think about what it means, and let it soak in; it's incredibly important to understanding the problem. And all those changes affected investment decisions in a major way. People were content with leaving the retail end here, close to market, because there's no profit in retail. The profit is in production, and those activities went overseas to get the lower taxes and other advantages. The problem is that the biggest wages are where the most profits are, so there went our middle class. You can't be a retail/service economy and have a strong middle class; retail/service don't support high wages.
All free trade does is try to get the best deal we can out of the problems that are hard wired in from before. The problem is that we are negotiating from a position of weakness, so there's a limit to what we can get.
Most of the problem is not China and the third world. The jobs that are going there are crap jobs that would be a drag on our economy if they stayed here. The problem is the high-paying jobs in fields like robotics and other high-tech stuff that are going to Europe and other places with similar pay structures (for similar skill levels). Comparative advantage says we let China sew up our Nikes and we compete with Germany and Poland for upscale jobs. We are not doing that. I will stop for a second to address the China thing because it is the left's favorite whipping boy. Let's say I can make a TV for $200 but I have a Chinese competitor who can make it for $100. Pure free trade, he takes all my business. But let's see what happens if we slap a $100 tariff on China. That makes us even in the US, but only in the US (and we are signed on to treaties that say we can't go over $100 in any event). Every other country in the world, my $200 TV has to compete with his $100 TV, and it can't. So I lose the rest of the world. Now he's selling way more TVs than I am worldwide, he's got more money to spend on R&D, his credit score is better so his financing costs are way cheaper, pretty soon he's making a way better product than I am and the $100 no longer covers the difference in price, so I'm not even competitive in the US. He takes all my business, just like in the free trade scenario. I go belly up, so the tariff did me no good whatsoever.
Now let's throw on one more factor. Europe has consumption taxes, 15-30% generally. That means they get to slap on 15-30% to the cost of everything I export to there, and that doesn't count as a tariff. So their free trade is actually a sizable tariff that I don't get to reciprocate because, since I don't have a consumption tax, treaty says no can do. But there's an even bigger factor. Because they have a consumption tax, they get 15-30% rebated on all exports. That's the "subsidy" that Fletcher mentions, and it's completely legal. Again we can't do that because we don't have a consumption tax. And if you don't think 15-30% doesn't change a lot of purchase decisions, you must not have priced many international goods lately. Now do you see why I'm such a huge proponent of a consumption tax?
Fletcher talks about industrial policy. That's really a bit too fascist for my taste, but what it points up is that they have generally a much friendlier attitude toward business than we do. You don't hear nearly as much complaining about "obscene" profits or the "1%" over there, and that makes a difference to investors. One place that really reveals itself is that even though things like safety standards and environmental laws are generally stricter there, the processes for enforcing them are much more cordial, and you can get answers much faster and with more certainty. And if there's one thing the corporate culture universally loves, it's quick and reliable answers.
One other thing that Fletcher mentions that is very interesting. Our trade deficit has to come back to us in some form or else it's just an Argentina/Zimbabwe asset drain. It comes back as foreign investment. But look at what they invest in--real estate (skyscrapers and shopping malls are big), Apple (and the like) stock, and lending us debt. What they're not investing in is production. OK, I know the car companies are all building assembly plants here, but that's because cars are one product that's big enough that shipping costs make market proximity a big consideration. In a world where we were competitive in production, they'd be building factories here instead of investing in passive stuff, and that would rapidly increase the volume of US goods going overseas (and reduce imports) and the trade deficit would go away.
What I'd do:
1. Cut our top tax rates to world levels and offset by eliminating deductions and exclusions (loopholes), the Bowles-Simpson and Domenici-Rivlin approach.
2. Institute a consumption tax to put us on an even footing with the free trade partners and balance our federal budget and possibly reduce our marginal income rates below the world; being a tax haven is not the worst way to foster growth;
3. Restructure our education system to incorporate best practices from the systems that kick our asses--tracking, vastly improved vocational education, for starters.
4. Vastly upgrade infrastructure; what I would do is privatize and let a new privatized portion of social security hold the stock and set the up to make a profit that the pays off our coming social security shortfall.
5. Streamline our regulatory scheme. Not dirty air or dirty water or unsafe working conditions, but fast and reliable approvals and answers to businesses and investors with questions.
I'm probably missing some things here, but this is at least an overview. That's my take, like Mach I'd like to hear ideas from others.
(This post was last modified: 06-27-2015 08:00 PM by Owl 69/70/75.)
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