X

Can this president change the direction of our economy?

February 07, 2017

ralph_gomory.jpg

Our economy has suffered through thirty years of very slow growth. The median wage has stood still and almost all our economic gains have gone to the top one percent.

[Ralph Gomory| January 26, 2017 |The Hill]

This is not the economy we want. But if we want something better, we will have to change some widely held beliefs.

First of all we have to realize that the world that we live in is not a world of free trade; it is a world of mercantilism, a world in which many foreign governments do whatever it takes to make their industries succeed.

And in that world of mercantilism there is a fundamental conflict between the goal of building strong, widely shared prosperity in the United States, and the current actions of our corporations, whose aim is to maximize their profit first and foremost.

They believe it is someone else’s job to take care of the American economy.

Today our great American companies can often maximize their profits by taking their technology and know-how to Asia. There they get subsidies in the form of underpriced currencies, ready-built factories, tax incentives, and sometimes cheap labor.

A country like China can add enough in subsidies to make outsourcing to China much more profitable for our companies than making things in the U.S.

The result is that subsidized imports have often harmed our domestic industries in one sector without being balanced by increased exports in another. So we end up sending wages and technology overseas. We get in return only an increase in profit for the shareholders and top management.

This results in unbalanced trade, now at about $500 billion dollars a year.

If we go on imagining that we are in a free trade world our economy will not improve. And outside of the presidency, signs of change are few and far between.

Currently, Republicans are advocating a border adjustment tax. They discuss and argue about the consequences of, for example, putting a 20 percent tariff on all incoming goods. Would it make imported goods more expensive? Would it make the dollar stronger or weaker? Would a stronger dollar mean cheaper goods? Would the border adjustment tax balance trade or have no effect?

While there is no agreement about the effect of the border adjustment tax, it is clear that they are still discussing and arguing about a world of market forces, not a mercantilist world.

There is no discussion of the fact that if they wind up with a border adjustment tax of 20 percent, the Chinese government can simply up its basket of subsidies by 20 percent and we are back where we started.

If we go down this path we will once more wait years for an improved economy that never comes.

But there are actions we can take that will have a positive impact. I will only mention two, but once you start thinking realistically there are many more.

First, we can simply and directly balance trade. Fortune recently republished Warren Buffet’s 2003 article in which he proposed “Import Certificates.” The essence of his proposal is this: If you are an exporter, the U.S. government gives you Import Certificates to the amount of your exports. You are free to sell these certificates. An importer cannot import into the U.S. without buying import certificates to the amount of his imports.

This immediately balances trade no matter what your trading partner does. Imports simply cannot exceed exports, and market forces are left to decide who on our side decides to export.

We can choose to make this change gradually. We may choose to treat different industries differently, but import certificates would do the job. It is in our power to balance trade.

Here is another direction: We traditionally use R&D tax credits to spur research and development. Why not tax credits for companies with high value added in the United States? Let us make the corporate income tax lower, but let’s make it lower proportioned to the productive activity that companies have within the United States and not outside our borders.

So even in this mercantilist world we can act in ways that are good for the country if we choose to open our eyes to reality.

As president-elect, President Trump already, in his own way, put pressure on companies to change their direction. Now as president he has ended our participation in the TPP. Can he prevail against the usual forces that are now moving toward the border adjustment tax?

I hope he can.

Ralph Gomory is a research professor at New York University’s Stern School of Business and a recipient of the National Medal of Science. He is a former president of the Alfred P. Sloan Foundation and former director of research at IBM.


Showing 5 reactions

Please check your e-mail for a link to activate your account.
  • >This is not the economy we want. But if we want something better, we will have to change some widely held beliefs.<

    This has not happened in 33 years…I doubt, it will happen now with serious Lawyer-Politicians as Kings a bay. We can try
  • Any sort of tariff, whether it be “scaled” or “dynamic,” would hurt millions of Americans before we saw a single manufacturing job come back.

    Also, tariffs would invite hundreds of special interests to lobby for their own particular piece of the pie. The whole mess would get so cumbersome and politicized that it would be crushed under its own weight.

    The only possible way to bring back millions of manufacturing jobs would be to implement Buffett’s “balanced trade” plan, using import certificates, or some other equally clever — but as yet un-thought of — mechanism.

    It only muddies the water to talk about our trade deficit with Germany, Canada, or (for crying out loud) Viet Nam. If you have ever walked through a department store and checked out the country of origin of the various products, I can assure you that CHINA is where our jobs went. Most of the apparel, electronics, toys, sporting goods, automotive accessories, hardware, cheap furniture, luggage, housewares, bath and bedding, appliances, kitchen gadgets, and seasonal bric-a-brac, is manufactured in China.
  • Very well stated and accurate, Ralph. I would like to remind you however, that the Buffet I/E Certificate marketplace is but one form of “closed loop”or “feedback” regime for countering mercantilism and achieving near-balanced trade. And it has a fundamental flaw in that it would affect trade with good trade partners like Canada as much as with China, Germany, etc. I would suggest that either the Richmans’ “Scaled Tariff” or this author’s Free, Fair and Balanced trade regime are superior approaches in that they impose a dynamic tariff on a bilateral basis with each trade partner that is proportionate to the imbalance in that trade relationship. China at 4:1 trade ratio with the US and Germany at a 2.5:1 ratio would be highly affected; Canada only marginally affected. Being based on closed loop principles (a la your home thermostat), these automatically adjust to counter any retaliatory tariffs or currency movements (or SOEs or quotas or the myriad other tools in the mercantilist tool kit). They are unilaterally implementable without negotiation (and good luck with that!), promote true free trade by supplanting all the picking of winners and losers of NAFTA/TPP style agreements, self-sunset as trade ratios approach zero and present a sound rational for being WTO compliant. Either encourages trade partners to end dumping, prioritize exporting what they do best and importing more of what America does best. They lend themselves to gradual phase-in over perhaps 4 years to allow for early investment planning and minimize market disruptions. The challenge is getting such closed loop regimes into the public debate. Individual feedback and ideas welcome and more information on the FFB plan available. fpkirkland@gmail.com
  • Excellent article. I am glad to hear that Fortune has republished Warren Buffett’s 2003 article on “balanced trade.” That is the only way we can bring back a significant number of jobs from China. We could have a 100% tariff on Chinese goods, and it wouldn’t be enough to make U.S. manufacturers competitive. Also, the Democrats will scream bloody murder as soon as any tariffs are imposed because those tariffs will start hurting poor Americans long before any jobs are brought back.

    Forcing “balanced trade” via import certificates, phased in over five years (as Buffett suggested), will definitely bring back the jobs, and in the order that makes the most sense. You can Google “Balanced Trade” for the whole story, including a link to Buffett’s original article.

    The arguments about automation and robotics having taken our jobs are hogwash. I was in manufacturing in the eighties, before we started importing goods from China. Most of the automation and robotics that took U.S. manufacturing jobs was in place by 1985. And, in fact, cost reduction through automation often resulted in increased sales and a net increase in jobs.

    The argument that labor is only 15% of product cost, and therefore cheap Chinese labor is not that significant, ignores the fact that all of the other cost factors are as cheap as the labor in China. If you break down the cost factors in material, overhead, energy, and compliance, you will find that these are made up largely of cheap wages and cheap salaries. And, as to compliance costs — there aren’t any in China.
  • Wonderful short essay. One strength in particular is it avoids demonizing other countries by making mercantilism the norm. I believe FDR thought of the New Deal as a time of bold, persistent, experimentation. Bringing our trade deficits back under control will require a similar approach.