Recent Articles
- Economic Nationalism: The Current Account Deficit #2: Savings and Investment November 3, 2024
- Economic Nationalism: The Current Account Deficit October 27, 2024
- Now Let’s Get Rid Of The Income Tax October 16, 2024
- Trump’s Tax Plan Will Be Fine October 8, 2024
- Monetary Economic Nationalism October 6, 2024
- Good Reasons For Tariffs #2: Foreign Exchange October 1, 2024
- Good Reasons For Tariffs September 22, 2024
- Economic Nationalism #3: Bad Economic Nationalism September 8, 2024
- Economic Nationalism #2: Good and Bad July 27, 2024
- The New World Economics Guide to Spending It July 21, 2024
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Economic Nationalism: The Current Account Deficit #2: Savings and Investment
We have been discussing the Balance of Payments, or one aspect of it, the Current Account deficit (or surplus), in the context of Economic Nationalism. Economic Nationalism series The easiest way to understand the Balance of Payments is to look at the Balance of Payments of an individual, or an individual household. October 27, 2024: Economic Nationalism: The Current Account Deficit It might seem at first that this is a sort of analogy, or metaphor. But, it is not. This is the actual Balance of Payments of an actual economic entity, in this case an individual or household. There are other kinds of economic entities, primarily businesses or government entities, whether the Federal Government or the local public library. Basically an “economic entity” has a bank account, buys and sells, makes and receives payments, holds assets or engages in liabilities. The Balance of Payments on the “national” level is actually the aggregate of these individual entities. There is no “national balance of payments,” except perhaps in the case of the Soviet Union where it really was the central government that engaged in all external trade. The “national balance of payments” is simply the aggregate of the individuals that are categorized as having that “nationality.” The “United States” does not sell automobiles. The Ford Motor Company sells automobiles. “China” does not buy US Treasury bonds (except perhaps the central bank). Chinese entities buy US Treasury bonds. So it is perfectly normal to use the example of a household, because this is the reality of trade, rather than the abstraction of statistical aggregates. You could create another statistical aggregate, of blue-eyed left-handed Catholics; and they would also have an aggregate Balance of Payments, equally legitimate (although less useful) than the official statistics for the national level. We saw that the Current Accounts
Economic Nationalism: The Current Account Deficit
Unfortunately, legitimate issues regarding foreign trade often become mixed up with talk about the “current account deficit,” which is mostly fallacious and erroneous, and which has served as a do-anything catchall over the decades (actually centuries) for whatever it is that you want to do. Trade is always balanced. There is no “trade imbalance.” Never has been, never will be. “Unbalanced trade” is a gift — which is also perfectly fine, and bigger than you might think, in the form of official foreign aid and also overseas remittances. But these gifts too are “balanced” in the sense that there is no particular problem with it, or some residual issue that needs to be resolved in the future. However, as is the case with many economic statistics, the Balance of Payments may reflect some other problem. This other problem’s effects show up in the Balance of Payments. To understand what the Balance of Payments actually is, let’s imagine an individual. This individual (or family) is engaged in “trade” with the “rest of the world,” i.e, the economy. We will imagine that this individual primarily “exports” employment labor, for which they are paid. Then, the individual “imports” whatever they spend their money on, at Walmart or Amazon for example. Even in this case, there is quite a bit of a “domestic economy,” or productive activity within the household. This might include making dinner, raking leaves and cleaning the toilet. So, there is both “domestic” and “foreign” trade in our example. Let’s say that this individual runs a “current account surplus.” They receive money from their employer, but they do not spend all of it on current consumption. There is something left over. This is “savings.” This “savings,” from the start, takes the form of some kind of financial asset. It might be
Now Let’s Get Rid Of The Income Tax
(This item originally appeared at Forbes.com on October 16, 2024.) Presidential Candidate Donald Trump recently floated the idea of getting rid of the Income Tax completely. I think this is a great idea — and so did the Founders themselves, who effectively barred Direct Taxes in the Constitution, including the Income Tax, until it was legalized in the Sixteenth Amendment of 1913. Before 1913, there was no Income Tax in the United States. Now you know why it was called the “Land of Freedom and Opportunity.” Trump mentioned that the Federal Government could raise revenue via tariffs instead, as it did before 1913. But, the Federal Government is much larger today, and also, we really don’t want to go back to the horribly contentious and overcomplicated system of individual item-by-item and country-by-country tariffs that people were eager to get rid of in 1913. Trump’s recent proposals are along the lines of uniform flat-rate tariffs, perhaps 10% or 20%. But, I think that Trump is intentionally stirring the pot for a much more important discussion, which is to eliminate the Income Tax entirely in favor of a Value Added Tax, or VAT. For decades, conservatives have avoided the VAT in the US because of the danger of ending up with both a VAT and Income Tax, the common situation in high-tax socialist Europe — the same high-tax socialist Europe that is now having a discussion about why their economy is so bad. However, the idea of replacing the Income Tax with the VAT — including a full repeal of the Sixteenth Amendment, and probably a new Amendment overtly banning a Federal Income Tax and maybe State income taxes too — has been popular among conservative economic experts for some time. President George W. Bush’s economic advisor Lawrence Lindsey recommended it in
Trump’s Tax Plan Will Be Fine
(This item originally appeared at Forbes.com on October 8, 2024.) The Great Depression got started with the passage of the Smoot Hawley Tariff in the United States, by the Republican Party, which immediately set off a cascade of retaliatory tariffs worldwide. This alone did not cause the Great Depression, but it did cause the initial downturn. This was followed by a long string of bad decisions in reaction to that downturn, such as Republican Herbert Hoover’s 1932 tax increase which took the top income tax rate from 25% to 63%. After World War Two, the whole world came to recognize that the Trade War of 1930 was a major contributor to the Great Depression. At the 1944 meeting in Bretton Woods, New Hampshire, they began a long postwar movement toward Free Trade, with a proposal for an International Trade Organization, to go along with the International Monetary Fund and World Bank also established at the same time. The ITO was not passed, but evolved into the General Agreement on Tariffs and Trade, which then became the World Trade Organization in 1995. Conservatives thus have some trepidation when they see presidential candidate Donald Trump, representing the Economic Nationalist wing that includes Patrick Buchanan, move again toward tariffs and restrictions on trade. The reasons for this are well known, and include the corrosive effects on the US’s middle class since China entered the WTO in 2001; or arguments that the US, as a continental superpower, needs to retain a large measure of self-sufficiency in key industries including electronics. Tariffs are taxes; basically, they are a variant of sales taxes. Trump’s proposals, mirroring those of Patrick Buchanan, are for a single-rate across-the-board universal tariff of 10% or perhaps later 20%, instead of the troublesome item-by-item and country-by-country approach of the past. This is
Monetary Economic Nationalism
In the past, “Economic Nationalism” sometimes had a monetary component. Basically, this was a currency devaluation. “Easy money” and devaluation has been part of the Keynesian macro-manipulator handbook since the Ancient era, and more recently, since the Great Depression significantly undermined the Stable Money consensus of the 19th century. In the 1930s, devaluations were undertaken basically to “relieve debtors,” and also, reduce effective wages through the devaluation of the currency in which wages are paid. This would presumably allow greater employment. Also, exporters would get a direct advantage. Domestic industries would get an effective advantage since, from their perspectives, products from foreign competitors would become “more expensive” in terms of the devalued currency. October 2, 2016: The Interwar Period, 1914-1944 (contains extensive forex information) “You can’t devalue yourself to prosperity” has been a timeless adage in economics. It makes sense that you don’t make people wealthier by devaluing their wages. But, during a time of recession or crisis, it has been a stopgap that governments have grasped for over and over again, over the centuries. These effects seem to provide an “advantage” to the “nation” (illusory of course), while also creating an artificial “disadvantage” to the rest of the world, who has to deal with artificial competitive issues, plus huge losses on investments in the devalued currency. “Relieving debt loads” just means a partial default to creditors, and this is particularly apparent to foreign creditors, who take immediate losses on their devalued assets. People today don’t sense what a catastrophe the devaluations of Britain (and many others) in 1931, and the US in 1933, were to the rest of the world. The Rest of the World (which included the US in 1931), took mammoth losses on what was then considered the “risk free asset,” British and US government bonds. This
Good Reasons For Tariffs #2: Foreign Exchange
We were listing some good reasons for significant tariffs. September 22, 2024: Good Reasons for Tariffs Mostly, this was on the topic of a certain amount of Economic Independence, often agricultural, but for the US perhaps chip manufacturing is at the top of the list today. Also, we discussed the difference between moving an auto factory from Detroit to Georgia, and moving it from Detroit to Mexico. Today, we will talk about the fact that we live in an environment of floating fiat currencies, where “unfair advantages” and “unfair disadvantages” can easily come about due to foreign exchange swings. On January 1, 1994, the North American Free Trade Agreement came into effect, dramatically liberalizing trade between the US and Mexico. Wikipedia on NAFTA. In the 1980s, Mexico had hyperinflation. Like other Latin American countries, this settled down in the early 1990s, and in 1993 Mexico had what appeared to be a reliable dollar peg, at 3.1 pesos per dollar. NAFTA was signed. In the middle of 1994, this peg broke and the peso began to slide lower. At the end of 1994, there was a collapse, which ended up taking the peso to about 7.5/dollar in 1996. What a coincidence! Many think it was not such a coincidence, but planned. Many US businesses were demolished by the combination of free trade with low-labor-cost Mexico, and also, the unexpected devaluation of the peso (and, in effect, Mexican wages). In the 1992 election, in opposition to NAFTA, independent candidate Ross Perot called this the “giant sucking sound” of capital moving to Mexico to take advantage of low-cost labor. So imagine the sucking when the peso’s value was cut in half. This was, I think, a major episode in the long deindustrialization of America, and the decline of the lower middle class. The
Good Reasons For Tariffs
We’ve been talking about Economic Nationalism; in particular, tariffs. July 27, 2024: Economic Nationalism #2: Good and Bad Economic NationalismSeptember 8, 2024: Economic Nationalism #3: Bad Economic Nationalism The basic concept of Economic Nationalism is that a policy is good if it benefits members of the Nation, which basically means the members of commonwealth, or State. If it doesn’t benefit the members of the Nation, then what makes it good? For example: Let’s say that there’s an automobile factory in Detroit. But, Ford decides that it would like to build its newest factory in Georgia, not Detroit, for whatever reason. This might be bad for workers in Detroit. But, it would be good for workers in Georgia. We calculate that, since both Georgia and Detroit are part of the Nation, then it is something of a zero-sum, at worst. Workers in Detroit can even just move to Georgia and work in the new factory. But, competition between Michigan and Georgia is also good, because it tends to lead to better outcomes overall. More factories is good, overall, because it means more productive workers, and more employment, at better wages. The Capital/Labor ratio improves. In terms of Economic Nationalism, it is a positive. But, let’s say that Ford wants to build a factory in Mexico. Now Mexicans benefit, from more good-paying jobs, and Americans do not benefit, although you could argue that they benefit a little bit from perhaps lower selling prices of Ford automobiles. Unemployed factory workers in Michigan cannot easily migrate to Mexico; nor would they want to, given the low wages in Mexico. However, all economists agree that wealth comes from Production and Productivity, and we have just made Americans less productive, because they no longer have a factory to make cars, and are instead standing around unemployed.
Economic Nationalism #3: Bad Economic Nationalism
We’ve been talking about Economic Nationalism. July 27, 2024: Economic Nationalism #2: Good and Bad Economic Nationalism Let’s get into some aspects of Bad Economic Nationalism. Mostly, this has to do with Tariffs. Tariffs were a core component of tax systems in the past, whether the Federal Government of the 19th century, or the British government of centuries prior to that. Their important revenue role was largely surpassed by the development of alternative taxes, in particular the Income Tax (1842 in Britain), the Retail Sales Tax, and the VAT. You might also include the Payroll Tax, although that is typically conceived as a direct funding mechanism for socialistic programs such as Social Security, rather than as some funding alternative to Tariffs. June 16, 2020: The Evolution of Tax Technology Tariffs have been part of some pretty big disasters over the years, so let’s look at what they were. In US History, the biggest disasters were the Civil War and Great Depression, both of which had Tariffs as a core component. These days, there is a certain group of Southern intellectuals that perhaps want to overstate the importance of Tariffs in the outbreak of the Civil War. Let’s be clear: I think the main reason for the Secession of the Southern States, and consequently the Civil War, was not Tariffs, but of course Slavery, in particular the question of the expansion of slavery in new States beyond the original 13 Colonies, that took place in 1789-1860. In the original Constitution, a compromise was enacted where importation of new slaves would be eliminated in twenty years, or 1808. At the time of the signing of the Constitution, it was thought that this would lead to the eventual elimination of slavery entirely. However, it didn’t work out that way. Slavery continued after 1808,
Economic Nationalism #2: Good and Bad
In the past, I began discussing the topic of Economic Nationalism. Then, mostly, I avoided it, because I think I would become unpopular among my friends as tariff supporter. Nevertheless, I think we can make some arguments in favor of Economic Nationalism; so let’s see what those arguments are. With Trump and JD Vance likely to become president and VP, we have the risk now of bad economic nationalism. We should have good economic nationalism. How are they different? January 10, 2021: Economic NationalismMarch 18, 2018: Economic NationalismOctober 24, 2021: Rationalizing TariffsAugust 1, 2021: Stagnant WagesMay 16, 2021: The Current Account DeficitFebruary 7, 2021: The Bottom 30%January 24, 2021: Adam Smith On The Capital/Labor Ratio I was thinking of writing a book about this. I would spend some time accumulating information and doing research on all the related topics, and reading all the most common existing arguments on both sides, so I could make an informed presentation. But, things are progressing faster than I can write books. So, let’s continue with discussing the topic, in the typical website mode of collecting interesting bits along the way, as a process of discovery and ongoing discussion. The Free Traders tend to talk about “general economic principles.” Free Trade (no taxes on trade) is obviously better, at least in some ways, because, as a “general economic principle,” business goes more smoothly when the government doesn’t step in to take people’s money. As a general economic principle, if people make a voluntary decision to trade something, that is a good thing and both are better off, because otherwise why would they do it? Plus, there are a lot of historic problems with tariffs, as we’ve discussed in the past. This is the nature of “general economic principles.” They are a distillation of insight for
The New World Economics Guide to Spending It
There are wealthy people, and very wealthy people, and people who have so much money they don’t know what to do with it. Literally, they don’t know. I don’t mean business — these people are often good at business and investing. But, that just makes more money. I mean spending it, just on fun stuff. Like people in every age, I am a little appalled at what wealthy people spend their money on. It’s OK with me if they have a little fun for their money, but they seem to have so little fun for so much money. It was this very wealthy class that made possible the art of the Renaissance, or the music of Mozart. Often, this was royalty — and their support of artists was not only a personal interest, but also a kind of national ambition. The Vanderbilt family, which was the wealthiest family of the late 19th century (due to their control of the railroad business), felt a real obligation to use that wealth for something like National Artistic Ambition. The Vanderbilts built Grand Central and the original Penn Station in New York, among their many ambitious undertakings. The Breakers in Newport, RI was a rather absurd project for a summer beach house that only got used 10 weeks a year. But, it stands today as an extraordinary and wonderful accomplishment, somewhat ridiculous as personal lifestyle adornment but actually in line with royalty in Europe at the time. (Today, you can rent nearby Rosecliff and Marble House for your weddings and events.) Andrew Mellon, one of the wealthiest men of the 1920s, built the National Portrait Gallery in Washington DC, with his own money, even as Franklin Roosevelt was trying to take it from him. If the very wealthy of the late 19th century were