When you hear anyone from the big multinationals or Wall Street using the word “reform,” watch out! The way they use the word, it means give them more and We, the People get less. They want to “reform” Social Security, “reform” Medicare and “reform” the income tax code. And now they want to “reform” the taxes corporations pay on money made outside the US. It’s like “reforming” an oak tree with an ax.
$420 Billion In Taxes Owed
American corporations are holding a lot of (their shareholders’) cash “outside of the country.” (But not really outside.) HOW much money are we talking about? Approx $1.2 trillion as of last March. This is money these companies have made in international profits, owed to their shareholders or potentially used for investment in US jobs, facilities and equipment. But they won’t bring the money back to the US because they would have to pay taxes if they did. Instead they are holding it “outside of the country” and pushing for “reform” — meaning let them out of their tax bill. If this $1.2 trillion were repatriated and taxed at the full corporate tax rate of 35% this would bring an additional $420 billion to the treasury for We, the People to use to rebuild our infrastructure, etc.
A huge part of the reason we can’t get out of this unemployment slump is the trade deficit. We don’t buy American and neither do our “trade partners.” We buy from them, they sell to us — that’s not “trade.” Stimulus means we buy from them. Cutting taxes means the extra cash buys from them. Nothing we try brings jobs here because we don’t buy enough here that’s made here and they don’t either. If we want to fix employment we have to fix trade.
The current unemployment crisis results, at least in large part, from the trade deficit. This has been masked by bubbles like the tech bubble and the housing bubble. Economist Paul Krugman explains, in a blog post, The Return Of Secular Stagnation,
But then the question is, why do we find it so hard to achieve full employment even with saving somewhat low by historical standards. And the answer seems clear: it’s the trade deficit. America in the 70s and 80s could have high savings, not hugely strong investment, but still have full employment because trade deficits weren’t as large compared with the economy as they are now.
And this in turn means that the savings glut possibly making the natural real rate negative is actually originating abroad, not at home.
Krugman is taking issue with the economist argument that we have a problem of too much savings without investment, using a chart showing savings declining. (Note that the inflection point is right as Reagan’s policies start to hit.) He explains how this demonstrates that the problem is really our trade deficit.
Easier to understand: We have to fix trade if we are going to fix the economy.
China has accumulated more than a trillion dollars by selling to us and not buying from us. Think about what would happen to our economy if China used that money to place orders for US-made goods. Factories would be opening up, people would be hired, stores would be humming… When you think about how much good that would do, you are understanding the harm their sell-only trade policy has done. They were supposed to buy from us, too, because that is what trade is. But they didn’t, and here we are.
Now, think about how much good it would do for China’s economy, if our economy was humming from all those orders for our goods! When you think about that, and realize that China is not doing that, you might start to think that this is not an economic game China is playing. If it was about economics, they would use that money to place those orders, to revive our economy, which would mean we would be placing even more orders from them.
But they aren’t. Why is that? This post originally appeared at Campaign for America’s Future (CAF) at their Blog for OurFuture. I am a Fellow with CAF. Sign up here for the CAF daily summary.
The Establishment Rethinks Globalization.
Short version: Our trade deals are transferring “wealth-generating productive capacity” to other countries, which weakens America.
It’s not just that we no longer make stuff, it’s that we’re transferring the capacity to make stuff, along with the higher-paying jobs that tend to be located where the stuff is made. Shoes are one thing, and you can start making shoes again in a relatively short time if you have to. But LCD screens and computer chips are another thing entirely. The technology advances rapidly. When you transfer that it’s gone and very hard to get back.
“The question is where do you put your technology and knowledge and investment? These other countries understand that. They have understood the following divergence: What countries want and what companies want are different.”
Americans can choose to blame China or disloyal multinationals, but the problem is grounded in US politics. The solution can be found only in Washington. China and other developing nations are pursuing national self-interest and doing what the system allows. In a way, so are the US multinationals. “I want to stress it’s a system problem,” Gomory says. “The directors are doing the job they’re sworn to do. It’s a system that says the companies have to have a sole focus on maximizing profit.”
There are plenty of big economic questions that will be answered in 2007. Will there be a global trade deal? Can the German economy shrug off the impact of higher taxes? Can China continue to grow at 10% a year? Will oil prices stay high or come crashing down? But they are all sideshows to the main event. The really crucial question for 2007 is whether it is the year when there is a run on the dollar. There are plenty of people out there – me included – who think the US currency is going to take a beating over the next 12 months.
… A high dollar meant exports into the US were cheap, and that kept both inflation and interest rates low. Easy credit terms meant that the US has had not one but two speculative booms over the past decade, the first in dot com shares, the second in the housing market. Growth has been artificially boosted and the trade deficit has exploded.
Now, though, things have started to change.
The dollar tumbled to a fresh 20-month low against the euro Tuesday after a government report showed demand for U.S.-made durable goods declined much more than forecast last month.
But the U.S. currency edged slightly higher versus the yen after data showed an unexpected increase in sales of existing U.S. homes in October and a solid reading from the Richmond Fed’s manufacturing index.
Analysts say sentiment toward the dollar remains negative.
One of the enduring oddities of the international economy is the willingness of foreign investors — both private, official, and quasi-state — to hold dollar assets despite the very low returns on such assets, even when comparing in common currency terms. It is this anomaly that Krugman disucusses in an academic paper asessening the possibility of a dollar crisis.
Concerns about a dollar crisis can be divided into two questions: Will there be a plunge in the dollar? Will this plunge have nasty macroeconomic consequences?
The message appears to be that the dollar’s value is out-of-whack–too high–because nobody expects it to decline by a lot in the near future, and that expectation means that demand for dollar-denominated securities is high because U.S. interest rates are higher than interest rates in Japan and Europe. One again, it looks like there may well be lots of money left on the table.
In other words, we can avoid a recession even as we move to fiscal restraint if we allow currencies to float.
When the dollar falls, it means that everything from other countries costs much more. This supposedly is great for American manufacturers because our goods will cost much less to others, and we can start exporting (and hiring) again. Possibly even heading off a recesion. But my question is, how much has our manufacturing infrastructure eroded? CAN WE start manufacturing for domestic and export to pick up the opportunity of a plunging dollar?
Growing pessimism over the dollar facilitated a sell-off Friday that plunged the greenback to a 19-month low versus the euro and a nearly two-year low against the U.K. pound.
[. . .] There is also mounting concerns that central banks around the globe might begin to aggressively diversify their foreign reserves into euros and away from dollars, the long-standing reserve currency of choice.
On Friday, China warned other countries that holding excessive dollar reserves may not be a good idea.
Wu Xiaoling, a senior People’s Bank of China official, said Friday that continued weakness in the U.S. dollar poses a risk for East Asia’s foreign-exchange reserves, Market News International reported.
If we have “free trade” with partners in a “free market” why do we have a massive trade deficit? If it really was a “free market” wouldn’t our trade “partners” use the dollars we give them when we buy things from them to buy things from us?
The idea of “free trade” is that things are supposed to balance out. We buy things made there, at a cost of jobs for people who had been making things here. But the whole idea is that they get dollars from that exchange, and then can buy things made here, bringing different jobs to the people who are not longer making the things made in China. That’s why it’s called TRADE — we TRADE things made there for things made here.
But that is not what is happening. We are not TRADING. We buy goods manufactured in China. China accumulates dollars. But those dollars are not buying things made here. If they were, there would not be a trade deficit with China. So it is not balanced. And there is more than a trade deficit, there is a huge job deficit. The only thing we are TRADING is our jobs for their things. And we are borrowing the money to do that.
But it’s worse than that. There is also depreciation of our manufacturing infrastructure. I mean investment in new manufacturing is occurring in China and not here. So not only are we sending jobs to China, we are sending our ability to make things away to China as well. We couldn’t just start making things now because we have closed our factories, not bought the latest equipment, etc. We would have to invest in new, modern equipment and train workers in new techniques.
Free trade requires that both trade partners play the same game following the same rules. That is obviously not what is happening today. We are losing our jobs, our pensions, our health insurance , wages are dropping, those with jobs are working longer hours and taking fewer vacations. And we are borrowing massive amounts of money to accomplish that. We have been sold out – literally.