Your new economic theory, for lack of a better term, is crap.
This is what happens when you run a prolonged trade deficit:
Posted on 10/20/2004 2:40:59 PM PDT by Willie Green
For education and discussion only. Not for commercial use.
If you think Pedro Martinez' numbers against the New York Yankees look bad (and they do), they're nothing compared with the government's latest monthly trade figures. Dismal as the Boston Red Sox ace's performance against the Bronx Bombers has been, he looks like a champion next to the trade numbers, which are one important measure of the U.S. economy's performance against the rest of the world.
Not that the trade surplus and deficit figures tell us everything we need to know about America's competitiveness. In particular, they compare apples and oranges – how U.S. products fare in overseas markets versus how foreign products do in U.S. markets. And even studying the trade figures industry by industry can be misleading. By definition, they can't shed light on which U.S. industries depend how heavily on exports and/or face major foreign competitors, and which U.S. industries sell mainly to the humongous U.S. market and/or face little import competition.
Still, according to mainstream economic theory, these trade balance figures say a great deal about the relative strength of America's economy, whether it is waxing or waning, and what its future composition will be. The reason? What a country trades most successfully – where it wracks up its biggest surpluses - eventually becomes what it makes most successfully and prolifically. And what it trades least successfully – where it wracks up its biggest deficits - eventually becomes what it makes least successfully and prolifically. That, in plain English, is what comparative advantage in all its forms is all about.
The deficits also show that the United States is a country that consumes far more than it produces. Although the economic price for this profligacy has appeared minor so far, anyone expecting the situation to last forever and is blasé about its worsening must believe there really are free lunches after all.
The August, 2004 trade figures released Oct. 14 by the Census Bureau show an overall U.S. deficit in goods and services of $54.04 billion, second all-time only to June´s $55.2 billion. This year´s January-August deficit level, as a result, is more than 19 percent larger than last year´s, meaning that the annual deficit figure is on its way to smashing last year´s $421 billion record total.
Even worse, the U.S. deficits keep soaring despite the soft patch recently encountered in domestic growth, and the gradual continued weakening of the dollar. The first is supposed to keep imports down and the second is supposed to buoy exports, but little of these macroeconomic effects are being felt.
Further, the closer one examines the deficit figures, the worse they look. Remember the rule that what a country trades most successfully it will wind up making most successfully? Well, by this logic, the United States doesn´t have much of a long-term future as a manufacturer. August´s manufacturing deficit was the second highest on record, and this year´s cumulative manufacturing deficit so far is more than 21 percent higher than last year´s January to August record total of $307.45 billion.
And don´t think that the problem is concentrated in so-called dinosaur, smokestack industries – which, incidentally, create most of America´s best-paying jobs on average. The $4.5 billion August deficit in advanced technology products set a new record, too.
Of course, many supporters of current U.S. trade policies see no special value in maintaining a world-class domestic manufacturing at all. But the August trade figures should scare them, too. America´s longstanding surplus in tradable services shrank by 19 percent, to $3.2 billion – the lowest surplus since the Census Bureau began tracking this trade in 1992. Since 2001, moreover, the January-August service surplus has declined a stunning 27 percent, to $33.07 billion. Still think that we can export our way out of our enormous national trade deficits and resulting debts by speeding up our shift to a service economy? Please!
Even more worrisome, much evidence indicates that the United States is also seeing its competitive edge erode in information technology and professional services – the supposed industries of the future, for which displaced manufacturing workers are supposed to reeducate and retrain themselves, and which America´s youth should target during their schooling.
The U.S. surplus in the “other private services” category, which captures trends in these sectors, did rise from $31.44 billion in the January-August, 2001 period to $33.15 billion in January-August, 2002. Since then, however, the surplus has fallen by 4.4 percent, including a fractional decrease in August, 2004, to $3.96 billion. In August, 2003, the surplus was $4.08 billion – 2.94 percent higher.
When America began losing older industries such as textile and apparel and steel, free trade cheerleaders predicted that the forces of comparative advantage would push the nation up the technology ladder to automobiles and ships and machine tools and consumer electronics. When these industries began faltering, Americans were told not to worry, for they would be freed up to concentrate on high tech goods like computers and semiconductors and aircraft and advanced telecoms equipment. When many of these industries began migrating en masse to high-income Japan and then low-income countries like China, professional services like law, engineering, and finance, and info-tech services like software writing were then declared the new economic future.
The latest trade figures show that these sectors won´t be saviors for the vast majority of America´s workforce, either – leaving two obvious alternatives. Americans´ comparative advantage will be in sales – hawking to each other the wares of other nations. Or maybe we´ll just all go back to the farm. But the only problem with that scenario is that farming is also under intensive attack from foreign competition.
US subsidiaries do not pay tax on foreign income if that income is not "effectively connected" to the parent company's operations. Those that do, receive a Foreign Tax Credit for that portion of their tax liability that is equal to the tax they owe to the foreign jurisdiction. Foreign companies pay tax on their earnings in the U.S., period.
I have long thought that, but never could quite form the logic to make the argument. It makes sense, though.
The "external" debt (debt owed to foreign countries) is extremely troubling.
As a US citizen, it means that your tax dollars will go to make interest payment to those foreign countries before supporting out own government.
"Think what you do when you run into debt;
you give another power over your liberty."-- Benjamin Franklin (1706 - 1790)
Your new economic theory, for lack of a better term, is crap.
This is what happens when you run a prolonged trade deficit:
Wow, the economy is tanking faster then a pat buchanan for president effort. Terrible, terrible, terrible.
I heard this same crap when Reagan was President and Bush I was President.
And when Carter was president, and Ford, and Nixon, and Johnson, and JFK, and Eisenhower, and Truman and FDR.....
I am not a CPA or tax lawyer, and I certainly don't practice in international taxes, but I believe that all of your points are all correct: (1) U.S. subsidiaries do not pay tax on foreign income that is largely unconnected and is not repatriated (2) U.S. entities, both corporate and personal, receive a foreign tax credit on taxes paid to foreign governments, and may be eligible for other types of tax benefits (for instance, if I remember the details, U.S. citizens who are domiciled outside of the U.S. for 330 days in a year do not have to pay any U.S. taxes on something like the first $80,000 of international income) (3) Foreign companies pay taxes in the U.S.
I am not sure how (2) and (3) are germane to my mention of the "Invest in the USA Act" which affects the repatriation of profits that were previously untaxed by the U.S. government, but this is out of my area and I am missing something obvious, which has certainly been known to happen.
(1) is clearly germane, but appears to me to have left out the additional caveat that profits not be repatriated, which was central to my point about repatriation.
It appears that we will get to find out the effect of the act; I checked, and apparently the legislation passed as part of the "American Jobs Creation Act of 2004" just this month. The expectation is that hundreds of billions of profits will be repatriated due to the much lowered tax rate (I believe that the original proposal was to drop it to 5% as opposed to the usual corporate rate of 35%); it appears that we will soon get to see the results.
Assuming that this is correct, then I think it would be great if the Republicans hold it up high as another tax cut that should have great promise to stimulate the economy. The nice thing is that while it is technically a tax cut, in actuality we would not have any expectation of seeing any tax dollars at all since those profits would have most likely continued to stay overseas. Accepting a reduced rate in order to get them to come back at all seems to me to be a good move.
Funny it was quiet under slick...
Papa Bush rejected the Gipper's leadership on this issue, and got tossed out of office on his butt.
He started the credit bubble as part of his 1995 re-election effort. The first phase of inflation is fun...the later phases are not.
Very convenient charts. How about showing the period when we had increasing trade deficits while the dollar was strong and oil was dropping.
Wait a minute. I thought the trade deficit was going to kill us during the Reagan era. Now, all of a sudden, he's a protectionist? He did a mighty poor job, then.
Funny, it's from the same libertarian source as yours.
Bush I called Reagan's good economic plan "voodoo economics" but the voodoo economic plan gave us prosperity all the way up to the early 90's which is when this poor economy began.
Reagan's voodoo economics (trickle-down economics) was about giving American businesses some good tax cuts and the prosperity would trickle down to all Americans through increased hiring and better pay --- now the prosperity can't trickle down to Americans, it trickles over to China instead.
Right. Personal Wealth: all time high. Home Ownership: all time high. Employment: at or below historical average. My fingers tire.
Oh, come on Willie. Do you honestly think we should be concerned about how many US government bonds foreign governments own? Those bonds have no indentures or leins. What would you do? Prohibit them from owning them? You are mister nut case. Not one part of this post is legitimate. Go away and may you lick the chains that bind you. Good grief!
Imagine if tomorrow the government cut back welfare program and other handout programs to pre 1960's rates. I think we'd immediately know how disguised downward social mobility really is. Imagine the housing market if government housing subsidies were not $400 to $700 a month.
Oh my. We have a liberal here. "Voodoo economics." "Trickle down economics." Shuuuuuudddddeeerr! How would you propose to create jobs? Government?
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