John Hansen

  • Jeff,
    Excellent summary. Particularly important is your section on currency misalignment and the market forces that drive the dollar to such high levels that America’s producers cannot compete profitably at home or abroad.
    As you note, the current language totally fails to fix this problem. At a minimum the final agreement must not present any barriers to implementing the MAC in the near future. Even better would be language that endorses the MAC immediately.

  • Ms. Foroohar, as usual, is right on the money when she says, "there is an inherent tension between the goal of national security, and the goal of shareholder value maximization, which has been the defining principle for American firms over the last 40 years. "

    One of the best ways to eliminate this tension is to assure that the prices at which corporations purchase their inputs and the prices at which they sell their outputs are consistent with important public goals such as national security.

    This consistency has been missing for the past 40-plus years — largely because the overvalued dollar makes imports too attractively cheap and US exports too expensive to compete in global markets. This serious currency misalignment has produced excessive import dependency (including dependence on frenemies and enemies for goods critical to national security), and trade deficits that kill US jobs, close US factories, off-shore critical production capacity, and leave future generations burdened with debt while we live beyond our means, spending more than we produce.

    The best way to assure that the prices facing US producers (and other supply chain intermediaries) are consistent with important public goals such as national security is to move the dollar to its trade-balancing equilibrium exchange rate. This is best done by introducing and approving the Competitive Dollar for Jobs and Prosperity Act (CDJPA), legislation that would mandate implementing the Market Access Charge.

    The MAC is a simple, market-based mechanism that would, after more than 40 years, eliminate the serious devaluation that has been perhaps the most important cause of the “inherent tension between the goal of national security, and the goal of shareholder value maximization” about which Foroohar so wisely writes.

    John R. Hansen

  • The author basically says that maintaining an overvalued dollar, one that kills off American industry and agriculture to keep the dollar as the world’s premier reserve currency, is “A Trade War the U.S. Is Actually Winning,” No.

    Winning the reserve currency war means losing the far more important war — the war to assure America’s prosperity and security.

    If being the premier international reserve currency is such an “exorbitant privilege,” why has China been beating American growth rates and trade balances by such large margins for so many years?

    Premier reserve currency status is not an “exorbitant privilege.” It is an “exorbitant temptation.” It is a temptation, for example, to borrow from China to pay China to make goods that we could be making for ourselves, creating jobs and prosperity rather than unemployment and debt for ourselves and our children.

    Many countries around the world without premier reserve currency status have higher rates of growth, higher shares of manufacturing in total GDP, greater equity of income distribution, large external trade surpluses, and lower external debt burdens than the US.

    In short, the “exorbitant privilege” argument is a lie. America should stop obsessing about the dollar’s reserve currency status and start focusing on creating a strongly competitive dollar, one that will make the American economy strong again. This is the road to jobs and prosperity for all.

  • Peter,
    Excellent note. Good summary of the current state of play. Realistic view of the fact that China is not going to roll over and play dead in negotiations. They are proud; they already have what they want (a leg up on US competitors); and they are on a roll to get more.
    I’m intrigued by your idea of China-specific import certificates (ICs) — in effect, the Buffett plan writ small. I’ve been very skeptical of the Buffett plan as a general solution to US trade problems — too much bureaucracy; chance for evasion; and the risk that market intermediaries between those that earn and those that buy the certificates would rake off the profits, leaving little incentive to US exporters.
    As a China-specific plan, however, it makes more sense for the reasons you mention. Furthermore, it is more market-driven than outright tariffs and contains elements/benefits of quotas while being less rigid and more likely than quotas to benefit exporters rather than those who get import quotas through political influence.
    My primary suggestion would be that, since around 50 percent of our trade deficits are with countries other than China, a vital part of any US trade policy going foward must be a mechanism such as the Market Access Charge being promoted by the CPA as a market-driven tool that would allow US authorities to move the dollar to a fully competitive rate. The MAC would balance total/global US trade, thus making the imbalances with China less critical to the health of American manufacturing.

  • Jeff,
    A first rate piece that neatly bridges the transition between the realities of trade in the 18th century and in the 21st century. The widespread failure to respond with appropriate policies to the sharp differences between then now have inflicted heavy costs on America — as you show so clearly. Your survey of recent literature is most useful — informative and well documented.
    Now we face the task of getting national support for CPA’s “smart trade policies” — strategic responses to realities of the present including (a) targeted tariffs to fight trade cheating and (b) the CPA’s Market Access Charge.
    The latter is urgently needed to restore the link between exchange rates and balanced trade that existed in the 18th and 19th centuries, but was destroyed by the tsunami of global financialization during the past half-century.

  • Excellent, Michael. I hope the message is getting through in Washington — and that the government will stay open for you to talk with our Representatives. The message that Deficits Matter must get out — must become “accepted wisdom.”
    John Hansen

  • Jeff,
    Excellent piece. Bang on the mark. Hope you can get it published as an op ed in a major newspaper! Also, deserves to go to all members of Congress.
    John R. Hansen

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  • Jeff,
    A beautiful note. I wish I had known Baumol personally and not just through his excellent writing. We are following in his footsteps as we address the serious imperfections in global currency markets that have produced over 40 years of U.S. trade deficits, loss of industrial base, unemployment, and international debt, all of which will burden our children.
    The Market Access Charge (MAC) is an excellent example of what can be done when you recognize that markets are not always perfect, identify the problems, then design policies that restore consistency between private actions and the public good.

  • Excellent note. America must get its trade deficit under control or we will face Buffett’s squanderville. Speaking of Buffett, while understanding his import certificate (IC) plan and sharing his enthusiasm for fixing the US trade deficit, I would be very skeptical of the IC plan for several reasons. For example: How would the American government validate “exporter” eligibility for ICs to avoid corruption? Would ICs go to the factories that produced the exports or to the traders who sell the exports? Would profits that are supposed to go to exporters from their sale of ICs to importers be siphoned off by the traders who would actually match buyers and sellers? How would the IC system, which by Buffett’s own admission is basically a quota system, be scaled to fit the size of the US deficit? And most importantly, the IC plan has no exit strategy — it would have to go on forever.
    Especially for the last reason, I favor a variant of Peter’s proposal to tax the conversion of currency into yuan. Instead of limiting this proposal just to currency conversions with China, tax all inflows of debt-generating, asset-shedding borrowing and selling to foreigners that America does in exchange for the money that allows us to live beyond our means. This would moderate the value of the US dollar, making America’s goods and services more competitive in domestic and in foreign markets. This is the way for America to shrink its overall trade deficit. This can easily be accomplished with a Market Access Charge (MAC) on all incoming foreign capital flows.
    John R. Hansen
    Americans Backing a Competitive Dollar – Now!

  • Jeff and Michael,

    First rate article. Well researched. The clearest explanation, and put-down, of the border adjustable tax proposal that I have seen. Furthermore, your proposed solution make very good sense — combine two different BATS: (1) a border adjustable consumption tax and (2) a border adjustable profit tax, then scrap the current business income tax system in favor of a new form of profit tax based on the sales factor apportionment (SFA) system.

    Your article has important implications for the Market Access Charge (MAC) that Jeff described in his CPA article of February 14 entitled “Fixing the Bloated Dollar.”

    First, although changes in tax systems such as the proposed BAT may temporarily help improve the US trade balance by stimulating exports and constraining imports, exchange rate changes will gradually nullify their impact because the tax changes do little or nothing to change the economy’s basic savings/investment balance. To get lasting improvements in the trade balance, America needs to implement a policy like the MAC that has a direct and lasting impact on the S/I balance. The MAC would do this by keeping the dollar’s exchange rate close to levels consistent with an S/I balance.

    Second, the MAC should not be sold as a quick fix for America’s trade deficits. As your quote from William Lee indicates, when exchange rates respond to shocks like new economic policies or circumstances, it typically takes around five years for the adjustment to be completed. In the case of the MAC, the dollar’s value move to a more competitive level in response to the MAC charge on excessive capital inflows during the first part of the adjustment period. During the second part, US importers and exporters, along with their foreign counterparts, would gradually respond to the new price signals generated by a more competitive dollar. During this period, buyers and sellers would run through existing contracts, identify new suppliers for inputs, develop new markets for outputs, and in some cases, create the new production capacity needed to respond to the opportunities generated by a more competitive dollar.

    By creating a permanent link between the value of the dollar and balanced trade for America, the MAC would assure that US trade remains reasonably balanced, that growing trade would support the profitability of America’s farms and factories, and millions of well-paying jobs for America’s workers.

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  • James, I am actually very much on the same wavelength as you and Edwin. I have long objected to the mechanical linkage of exchange rates to fixed quantities of physical gold — and to other variants such as gold-exchange standard and gold-dollar standard under the Bretton Woods agreement. Likewise, I object to the opposite — the complete lack of a system linking exchange rates to some stabilizing anchor. And that is exactly what we have had since the world moved to floating rates in the 1970s after the gold-dollar linkage collapsed.

    Trade balances are driven by differential rates of change across countries in key areas such as productivity; labor force size, training and participation rates; rates of monetary and credit expansion; rates of inflation; and exploitable resource endowments to name but a few. With all of these moving parts, it is wrong to think that national and global trade balances can be maintained with exchange rates that are rigidly fixed.

    Likewise, given the extreme volatility in global capital markets made possible by electronic communications and many related factors that can drive trillions of dollars across borders in a single day, it is wrong to think that a floating rate system with no anchors will produce the stable growth needed for shared national and global prosperity.

    I therefore created the Market Access Charge (MAC) to establish a dynamic but stable link between exchange rates on the one hand and trade balances on the other. Like biologic systems, the link — the rate of the MAC charge — varies depending on global financial and economic conditions, which are always changing. But the link is stable because it always moves the system back to balanced trade — just like living creatures constantly adjust to maintain a stable body temperature.

    The MAC is not just a “new financial widget” created by some financial engineer. In fact, it represents a profound systemic change in the way global financial flows adjust to accommodate physical and other changes in global trade.