• Tag Archives economics
  • Yes, a Currency Devaluation Is Very Much Like a Tax

    Britax is a global corporation with a manufacturing hub in Fort Mill, South Carolina where it employs 300. It is there that the company creates car seats for children. Unknown is how long it will continue to.

    While it’s surely risky to draw immediate correlation, James Politi of the Financial Times recently reported that Britax is thinking about relocating. The impetus for relocation is the tariffs the Trump administration has levied on foreign goods.

    It seems the car seat business is a low margin affair, and beginning in 2018, Britax suddenly faced a 10 percent tariff on the textiles it imports to cover its seats. The tax moved up to 25 percent after a breakdown of trade talks this past May, and then this month a new, 15 percent tariff on metallic inputs such as harnesses and buckles was imposed. The taxes levied on imported inputs Britax relies on to complete its car seats has put it at a disadvantage vis-à-vis car-seat makers located outside the U.S. According to Politi, foreign producers of the seats enjoy a tariff exemption care of the “U.S. trade representative for some, but not all, safety products.”

    It’s all a reminder of the basic truth that tariffs are a tax, plain and simple. Not only do they harm the businesses they’re naively assumed to protect by shielding them from market realities, they’re paid for by other businesses reliant on imported inputs; meaning all businesses.T

    Figure that something as prosaic as the pencil is a consequence of global cooperation, so imagine by extension just how much a car seat is the end result of production taking place around the world. In this case, the Trump administration falsely “protects” textile and metal companies located in the U.S., and the bill for the protection is sent to companies like Britax. The tax paid by the latter has shrunk its already slim margins even more.

    Interesting about tariffs is that they bring about agreement among people with differing ideologies. President Trump’s NEC head Larry Kudlow strongly believes that tariffs are a tax, as does Democratic presidential hopeful, and frequent Trump critic, Pete Buttigieg. Tariffs raise the cost of doing business, which means they’re a tax on earnings. It’s all very simple.

    Which is why the quietude about President Trump’s dollar stance is so strange. As some know, Trump would like a weaker dollar. He incorrectly believes a debased greenback would make U.S. industry more competitive. Except that it wouldn’t, and one reason that a falling dollar wouldn’t enhance the health of U.S. corporations is because currency devaluation is 100 percent a tax.

    Tariffs raise the cost of importing simply because a 10, 15 or 25 percent tariff is a tax above and beyond the price of the imported good in question. When Trump imposes tariffs that are paid for by importers, the U.S. Treasury ultimately collects the proceeds of same.

    With devaluation, much the same is at work. In this case, devaluation of the dollar logically raises the cost of importing foreign goods. It also raises domestic prices, but that’s another piece of commentary for another day. For now, it should be said that money is an agreement about value. If the agreement is shrunk such that it means something different, or is exchangeable for less, it’s only logical that the cost of importing foreign inputs is going to rise unless foreign producers are willing to accept haircuts for what they send our way.

    And what about the U.S. Treasury. While it doesn’t collect the “proceeds” of dollar devaluation in the way that it does the false fruits of tariffs, the result is the same. A dollar is yet again an agreement about value. If the exchangeable value of the dollar is shrunk, so shrinks what Treasury owes.

    Devaluation is most certainly a tax, and it has a very similar impact on corporations as a tariff. Not only does it raise the cost of purchasing the inputs necessary to produce market goods, it at the same time shrinks company earnings. If the dollar is devalued, so must shrink the value of the dollars a corporation takes in.

    For those who think a dollar is a dollar is a dollar, think again. No one earns dollars, as much as they earn what dollars can be exchanged for. There’s a big difference. If the value of the dollar decreases, so must we decrease the value of a dollar earned by a business.

    The previous paragraph helps explain why periods of dollar devaluation (think the 1970s, think the 2000s) correlate with greatly subdued stock-market returns. If the market value of a company is a speculation by investors about all the dollars a company will earn in the future, it’s only logical that a devaluation of the currency unit that investors use to attach a value to corporations is going to negatively impact share prices.

    Taking the previous point further, companies logically grow via investment; be it in people, processes, and nearly always both. Investors, as readers of this column well know, are buying future dollar returns when they put money to work. Devaluation logically shrinks the exchangeable value of those returns. Again, it’s a tax.

    Which leads to the final question of this piece: why do honest members of left and right readily acknowledge the tax that is the tariff, all the while ignoring the tax that is devaluation? In each instance policymakers are shrinking the value of individual and corporate work, all the while shrinking what individuals and corporations can get in return for their work.

    Yet Trump’s tariffs bring forth all manner of reasonable (and sometimes unreasonable) hand wringing, while his calls for a shrunken dollar happen mostly without comment. This despite them being the same. Yes, a tariff is a tax. And so is devaluation. Why don’t policy types and candidates for public office speak up about the other devaluation?

    This article is republished with permission from Forbes. 

    John Tamny

    John Tamny is Director of the Center for Economic Freedom at FreedomWorks, a senior economic adviser to Toreador Research & Trading, and editor of RealClearMarkets.

    This article was originally published on FEE.org. Read the original article.

  • 18 Facts on the US National Debt That Are Almost Too Hard to Believe

    At around $22.5 trillion, the United States national debt sits at 106 percent of Gross Domestic Product (GDP). There is no disputing that this gigantic debt will someday become due and payable. However, there is hesitation among the political class as to what must be done to pay down and eliminate this debt.

    Progressive lawmakers have largely refrained from discussing this liability, preferring to claim that the United States can continue to fund exorbitant government programs. Conservatives have unsuccessfully, on numerous occasions, attempted to limit federal outlays. With each failed attempt, conservatives instead continue to vote for spending increases. At the National Review, Michael Tanner writes,

    there is no effort to prioritize or make the difficult choices of governing, there is only…more.

    Each attempt to cut or reduce the growth of federal spending has been met with resistance and ferocious outrage.

    If there is any takeaway from these unsuccessful attempts to reduce spending, it is that federal spending has subsidized numerous projects or programs, which have grown dependent on the federal government. There may be many good uses of federal funds, but this does not provide lawmakers with a “Get-out-of-jail-free card.” For now, lawmakers continue to spend as if they are children in a candy store with no limit on their parents’ credit card. At some point, lawmakers must address the underlying problem: federal spending.

    Lawmakers are representatives for their constituents. This goes without saying, but lawmakers are unlikely to address the ever-increasing national debt until voters demand action. What remains unfathomable to many voters is how much money $22.5 trillion truly is. As Jon Miltimore has written, “the problem is that the human mind has trouble understanding a figure so huge.” Below are some facts that help put into perspective just how large is the sum of $22.5 trillion:

    1. In order to pay down our national debt you would have to combine the GDP of China, Japan, and India.
    2. The United States owes $68,400 per citizen.
    3. The United States owes $183,000 per taxpayer.
    4. The United States currently has $125 trillion (yes, trillion) in unfunded liabilities.
    5. According to the nonpartisan Congressional Budget Office (CBO), the US debt held by the public will reach 100 percent of GDP in 2028.
    6. In 2008, interest on the federal debt was $253 billion. Interest for Fiscal Year (FY) 2019 is roughly 89 percent higher.
    7. For FY 2019, interest alone on the federal debt is $479 billion. In 1979, total federal government receipts were $463 billion.
    8. In the year 2000, the federal debt was $5.67 trillion. In 2019, federal debt is 297 percent higher.
    9. At Forbes, Jim Powell writes that the old New Deal cost about $50 billion from 1933 to 1940, whereas the “future cost of old New Deal programs still in effect is reckoned at more than $50 trillion.”
    10. A recent analysis by the CBO projected that the federal budget deficit (deficit as in the difference between federal outlays and revenues) will grow to $1 trillion alone in 2020.
    11. As of December 2018, only ten countries have worse Debt-to-GDP ratios than the United States.
    12. At NPR, Danielle Kurtzleben writes that Senator Bernie Sanders’ “taxation-and-spending plans…would together add $18 trillion to the national debt over a decade.”
    13. According to the Center on Budget and Policy Priorities, roughly 24 percent of federal spending goes to Social Security, 26 percent to federal health insurance programs, 9 percent to safety net programs, and only 2 percent on transportation infrastructure.
    14. By 2025, the cost of servicing our national debt will exceed the cost of our military spending.
    15. The cost of implementing a Universal Basic Income, presidential candidate Andrew Yang’s central social program proposal, would cost $3.8 trillion per year or roughly 85 percent of current federal spending.
    16. It would take the United States 713,470 years to pay down the national debt if we paid $1 per second of the year.
    17. Modern presidents have doubled the national debt every nine years.
    18. The Federal Reserve “purchased large amounts of federal debt as part of its quantitative easing program,” thus cheapening the cost (decreasing the interest rates) of money.

    Lawmakers and political pundits continue to insist that federal revenues are the real issue despite continuous growth in federal revenues. Heated rhetoric over federal tax cuts ignores the reality that federal spending increases continue to outpace federal revenue increases.

    At some point, purchasers of US treasury securities may request a higher return, materializing in higher interest rates, unless lawmakers address our growing national debt. For now, it is up to voters to demand that lawmakers implement responsible policies that protect our nation’s financial security.

    Mitchell Nemeth

    Mitchell Nemeth holds a Master in the Study of Law from the University of Georgia School of Law. His work has been featured at The Arch Conservative, Merion West, and The Red & Black. Mitchell founded the Young Americans for Liberty chapter at the University of Georgia.

    This article was originally published on FEE.org. Read the original article.

  • Economics Lessons for Bernie Sanders

    It’s hard to tell at this point if Bernie Sanders’s presidential campaign is faltering because his ideas have gone from bad to worse or if his ideas are getting worse because his presidential campaign is faltering. Causality notwithstanding, both things are undoubtedly true. Just three months ago Sanders was solidly in second place with 24 percent support. That number has now dipped to under 17 percent. Over that same period, Elizabeth Warren has gone from about 6.5 percent to more than 16 percent, just half a percentage point below Sanders.

    It is clear that Sanders’s best chance at the White House was four years ago, and his 2016 run is not translating into success this time around. As that becomes more apparent, Sanders is becoming increasingly desperate to recapture the momentum he once had. All he can do now, though, is point the finger of blame at a growing list of villains.

    This time, it’s “big media.” More specifically, and predictably, it’s Google and Facebook.

    In a late August Columbia Journalism Review op-ed, Sanders opined that the United States doesn’t have “enough real journalism” because “many outlets are being gutted by the same forces of greed that are pillaging our economy.”

    The error lying just beneath the surface of this claim is the same error that causes all of Sanders’s economic proposals to go off the rails. Bernie Sanders simply has no idea what role profit plays in an economy. Because of this, he naively equates “profit” with “greed.”

    Of course businesses pursue profits; they always have. They did before the current higher education bubble, before the housing bubble of the 2000s, before the stock market bubble of the 1990s, and before the precious metals bubble of the 1970s. Businesses even pursued profits before the Industrial Revolution—a time, presumably, that Sanders would not characterize as being “gutted by greed.”

    Sanders loses his way, regardless of what kind of greedy person he happens to be demonizing, by ignoring two important facts.

    First, businesses will always pursue profit because the human beings who run them want things. This is true regardless of whether the political system embraces free markets or requires complete socialism. Why? Because it is human nature to want things, and profits, regardless of how those profits are acquired, make it possible for people to get what they want.

    Second, there are only two ways a business can obtain profit. One is to offer consumers products they like so much that they willingly hand over their money. The other is to offer politicians favors, contributions, and considerations they like so much that they take consumers’ money and to hand it over to the businesses the politicians prefer. Incredibly, every one of Sanders’ economic proposals involves the latter approach.

    Are media outlets pursuing profits? Yes. What else would they do? But to achieve profits, they have to give people what they want. If there is a problem with the media, it doesn’t originate in the media but in people’s preferences.

    Sanders points to the 1,400 communities that have lost local newspapers as proof positive that the government needs to intervene in the news market—something he promises to do if elected president. What he doesn’t seem to understand is that these news outlets went out of businesses precisely because people in the communities in question did not support the outlets. Why not? Because those news outlets were selling things that people simply did not want to buy. Now, Bernie Sanders wants to spend tax dollars to support these newspapers, thereby forcing people to pay for news products they have already demonstrated they don’t want.

    He is saying, in short, that he knows better what people should want than do the people themselves. But he doesn’t know better, and he proves as much regularly, which is why his campaign is faltering in the first place.

    This article was reprinted from Newsday.

    Antony Davies

    Dr. Antony Davies is the Milton Friedman Distinguished Fellow at FEE, associate professor of economics at Duquesne University, and co-host of the podcast, Words & Numbers.

    This article was originally published on FEE.org. Read the original article.