Spieckerman Speaks

Tuesday, March 15, 2016

What The Elites Don't Get About Trumponomics

Six months ago – though I was still supporting and serving as Dallas County vice chairman for Jeb! – I felt compelled to send my friends in the conservative community a rebuttal of Steve Moore’s and Larry Kudlow’s assault on Trumponomics in a National Review op-ed. It was clear to me then that these esteemed economists just didn’t get it.

After watching the March 10 debate, it's apparent that Trump’s opponents don't get it either.

My comments on Steve’s and Larry’s piece are in blue bold below.

Donald Trump: A 21st Century Protectionist Herbert Hoover?

Here's a historical fact that Donald Trump, and many voters attracted to him, may not know: The last American president who was a trade protectionist was Republican Herbert Hoover. Obviously that economic strategy didn't turn out so well — either for the nation or the GOP.  

Does Trump aspire to be a 21st century Hoover with a modernized platform of the 1930 Smoot-Hawley tariff that helped send the U.S. and world economy into a decade-long depression and a collapse of the banking system? Actually, there’s little empirical evidence that Smoot-Hawley was a major factor in the first depression in the ’30s. It was the Fed's maladroit monetary policy that caused the economic calamity. Herbert Hoover’s inept attempts to address it - statist economic policies and confiscatory income tax rates - combined with his utter political incompetence, exacerbated it. Larry and Steve are confusing cause and effect; the contraction in global trade was much more attributable to the economic collapse than the increase in U.S. import tariffs.

It should be kept in mind that, during his first term, FDR did three things: suspended the gold standard (to facilitate an increase in the money supply), re-established confidence in the banking system with deposit insurance and other actions and spent about 3% of GDP on infrastructure, including Boulder – later, ironically – Hoover Dam. Most of this was productive investment and paid economic dividends for decades (by contrast, PBO’s ’09 “stimulus” spent 1/10 that much on infrastructure; far more was devoted to propping up bloated blue state budgets to protect the jobs of unionized bureaucrats). Results? From 1934-36, U.S. economic growth exploded – more than 10% annually (exceeding China’s growth during its recent halcyon years), retracing much of what had been lost 1930-33. Only when, in his second term, Roosevelt further increased taxes on higher incomes, began the Social Security payroll tax (without concomitant benefits payouts, as they were deferred several years from implementation),  fully implemented unprecedented government intervention into business and agriculture and the full effects of the Wagner Act were felt did we enter a second severe recession in 1937.

We can't help wondering whether the panic in world financial markets is in part a result of the Trump assault on free trade. Ridiculous. It has nothing whatsoever do with it.

Trump is also now running full throttle on an anti-immigration platform that could hurt growth as well and alienate Republicans from ethnic voters that the GOP needs if it is going to win in 2016.   Let’s see how that plays out. Trump is about as clever at pivoting as there is in politics. Imagine commercials with a montage of Latino workers at Trump properties and construction job sites saying, “Thank you/Gracias Mr. Trump!”

We call this the Trump Fortress America platform. He clearly sees international trade and immigration as a negative sum game for American workers.  Trump would say, with much justification, that he sees dumb international trade deals and uncontrolled immigration as a negative sum game for American workers.

He recently announced that as president he would prohibit American companies like Ford from building plants in Mexico. He moans pessimistically that "China is eating our lunch" and is "sucking the blood out of the U.S.?"

But strategic tax cuts and regulatory relief after the anti-business rule-making assault by Obama, not trade and immigration barriers, are the solution to America's competitiveness deficit. Yes, disastrous government policies and choking regulations have enervated America’s economic strength. But anyone who believes China’s and Japan’s deliberate devaluation of their currencies and barriers to U.S. imports haven’t severely impaired American competitiveness and destroyed companies and even industries that would otherwise be viable is hanging out too much in Colorado.
A draft of Trump's 14-point economic manifesto promises that, as president, he would "modify or cancel any business, or trade agreement that hinders American business development, or is shown to create an unfair trading relationship with a foreign entity." Wow, Trump wants to undo bad trade deals? That’s a crazy idea. This from the same people who say the next President should summarily vitiate the Iran nuke deal, which (deplorable as it is), arguably, has a less deleterious impact on the U.S. in the near term.
His immigration stance would not just deport illegal immigrants, but even lock the golden doors to those who come lawfully for opportunity, freedom and jobs. At least quote Trump accurately. He’s repeatedly said that there will be “A great big door” in his wall for legal immigrants. This could hardly be further from the Reaganite vision of America as a "shining city on a hill."  Again, let’s get the facts straight. Unlimited immigration was never a part of Reagan’s platform. He tried amnesty coupled with border security to solve the growing illegal immigration problem. The border security never happened, as we all know. Reagan was also focused first and foremost on the Soviet threat, manifested in the Americas by its proxy Cuba, which was fomenting unrest across Latin America. He was willing to allow America to be a “safety valve” for Mexico’s problems to minimize risk that it would succumb to a Cuba-catalyzed coup. Obviously our geopolitical situation is totally different today.

"Decades of disastrous trade deals and immigration policies have destroyed our middle class," Trump writes in his latest policy manifesto. This "influx of foreign workers," he continues, "holds down salaries, keeps unemployment high and makes it difficult for poor and working class Americans — including immigrants themselves and their children — to earn a middle-class wage."

There's some evidence that competition for jobs in very low-skilled occupations holds down wages, There’s more than “some” evidence. How can the U.S. possibly absorb 10-15 million folks willing to earn less than minimum wage for arduous work, while major companies are constantly moving plants to or buying goods from countries with cheap labor, and it not depress wages in the U.S.? And Steve and Larry blithely ignore the fact that households which include illegal immigrants – even when some members of that household are legal and working – consume a much higher level of government benefits than do cohort households with no illegal immigrants. but for the most part immigrants fill niches in the labor market that natives can't or won't fill. That’s largely if not entirely because legal workers aren’t willing to work in those jobs for very low wages. Adam Smith and Keynes agreed on this: wages are pretty inelastic. People are exceedingly reluctant to take a pay cut for the same work. Add to that the point Milton Friedman made relating to immigration: we have a welfare state. So at least some American citizens at the lowest economic rung are better off taking government benefits than trying to underbid illegal immigrants for work.  They add to the overall productivity of the labor force while starting new businesses, and thus are net creators of jobs.  Here Steve and Larry speciously conflate the lowest wage illegal immigrants with legal foreign students who graduate from Stanford or Harvard. Undoubtedly, some illegal immigrants will go on to achieve legal status and live the American entrepreneurial dream. I’d even argue that having to endure the process of getting here illegally is a form of self-selection that weeds out the least hardy souls.  But it’s disingenuous for Larry and Steve to assert, with no data, that our current, atrocious immigration system is resulting in more job creation than would the policy Trump has propounded: strict enforcement combined with making it easier for foreign nationals who go to our colleges to stay here (they, overwhelmingly, are the job creators).

Tech CEOs will tell you there might not be a Silicon Valley were it not for foreign talent and brainpower. Ask those “Tech CEOs” what percentage of the immigrants who helped build Silicon Valley were illegal. This is another canard.

In the 1980s and '90s the United States admitted nearly 20 million new legal immigrants — one of the largest waves of newcomers in our nation's history. Over that time period, the U.S. created nearly 40 million new jobs, the unemployment rate plunged by half, and the middle class saw living standards rise by almost one-third (from 1983-2005). Ok, that’s terrific. Now all we have to do is bring back Ronald Reagan, catalyze the collapse of a wicked world power that had tyrannized hundreds of millions of people and calcified 1/3 of the world’s productive capacity – enabling us to cut military expenditures the equivalent of $200 billion per year – then recreate the Internet boom, and everything will be back on track. Most of America’s economic travails have occurred since 2005. Sure, it’s convenient to blame it all on Pres. Obama – and, as I’ve frequently commented on Fox News and elsewhere, he bears much of the blame for making things worse. But only an idiot would deny that the ability of U.S. businesses to almost seamlessly access much cheaper labor in other countries through imports/offshoring and the flood of illegal immigrants hasn’t eroded our workers’ incomes. You don’t have to endorse autarky to understand that much of the savings American consumers have realized from the resultant lower priced goods and services are offset by the job losses and wage declines alluded to above, enormous increases in outlays for SNAP (food stamps), disability (off the charts, despite dramatic improvements in workplace safety) and other welfare programs. Not to mention the American spirit-sapping impact of teems of people not having decent paying jobs. 

I’ve often said that this is the first time in human history that almost any nation can trade itself out of want, largely eliminating the incentive for them to conquer and plunder, and that the economic interdependence of the U.S. with China and even Russia has probably saved us untold lives and treasure by making direct military conflict economically untenable. But that doesn’t mean we can’t be decidedly more aggressive in our negotiations with foreign nations and think more holistically about the impact deals with low wage nations can have on America’s job situation, welfare outlays and long-term economic health – not to mention our collective psyche.

When Washington gets the macroeconomic policies right — on taxes, trade, regulation and the dollar — economic opportunity flourishes. That’s a tautology. Obviously, Trump believes the current policies aren’t right. Are his ideas any worse than the claptrap we’re hearing from most other candidates?
Free trade is also one of these prosperity building blocks, and Trump's call for tariffs as high as 35% are worrisome in the extreme. We want Americans and workers all over the world to have access to the best-quality products at the lowest possible price. This is the centuries-long economic law of comparative advantage first taught to us by David Ricardo. Comparative advantage is an abstraction that’s often fallaciously invoked to justify unfettered trade with almost any country, no matter how detrimental it might be to our economy and national security in the future. I’d argue that the United States’ unique combination of rule of law (once it resumes), capacity for innovation, infrastructure, natural resources, diversity of people and culture gives us a comparative advantage in virtually every area of economic endeavor. That’s not jingoism, it’s demonstrable. For instance, there’s no reason iPhones can’t, in the foreseeable future, be 3-D printed here instead of assembled by thousands of Chinese workers at Foxconn. I’m all for “free trade” with nations that share our values – but not nations which are bent on our destruction, aiding our enemies, systematically stealing our intellectual property and sabotaging our IT infrastructure.

Take the Ford plant in Mexico. If it's more profitable for Ford to produce trucks in Mexico, fine. As the supply of Mexican trucks goes up, this creates higher income for all Mexicans who then go out and spend the new money, not just at home, but in purchasing U.S. goods and services available on the market. And the purchase of American goods and services builds up the U.S. economy. It's win-win. U.S. companies building plants in other countries to serve those markets often makes perfect sense. U.S. companies building plants in low wage countries so that their output can be imported into the U.S., displacing American workers, is a pernicious paradigm. Again, Steve and Larry gloss over the huge negative implications of sending U.S. jobs to other nations. I’m sorry, but the movement of currencies is not paramount. People are.

Trump is correct that there are unfair trading practices around the world. We know, for example, that China pirates U.S. technologies and patents. They counterfeit our goods. That’s the understatement of the year.

But slapping Trump's punitive tariff on imported Chinese goods will hurt America at least as much as it does Beijing. The same is true for rolling back the Reaganite NAFTA — a great success. Mexico is now our second-largest export market. China is No. 3.

China is our No. 1 import market, with Canada second and Mexico third. Those three countries together lead our total trade. Do we really want to pick an economic war with them? Conveniently not mentioned is the huge trade deficits we have with China and Mexico and, as noted earlier, the corrosive impact this has on workers in our country. And Larry and Steve offer no evidence to support the statement that a tariff on Chinese and Mexican goods would hurt us as much as them. How can that be when exports to the U.S. are the fulcrum of their economies but our exports to them are a relatively small share of ours?

Because the U.S is the hub of the global trading system, a lurch toward protectionism in America would give other nations an easy excuse to erect higher trade barriers and the domino effect could shut down the global trading system. No wonder financial markets are so jittery. Again, it’s silly to ascribe recent market gyrations to investors worrying about the prospect of a Trump Presidency. If the U.S. sets an example of forging savvy trade agreements, it’s hard to see how that will destroy the global trading regime. More likely it will rectify some of the unsustainable imbalances, which would be good, over the long term, for every country.

Trump's idea of a 35% tariff on imported goods would be the biggest tax increase on U.S. consumers in modern times. This won't help the poor. Wal-Mart has been one of the greatest anti-poverty programs in world history, and it has achieved the "everyday low prices" that greatly benefit the poor and middle class in part through low-cost imports. One could argue that China’s and Japan’s devious, decades-long scheme of massive devaluation of their currencies combined with systematic suppression of U.S. imports has been the biggest tax increase on U.S. consumers in modern times, by dent of the jobs it’s destroyed, the incomes it’s diminished and the explosion in social welfare spending it’s induced. For a long time, the patina of low prices and the propaganda extolling frictionless world trade obscured this economic havoc, which Trump is finally laying bare. I’m a big fan of Walmart. Perhaps if more of its customers weren’t competing with Chinese sweatshops and illegal immigrants, it could raise prices a bit and source more from the U.S. (something Walmart used to tout in its ads back in the day).

But trade is also surprisingly vital to American jobs. A Heritage Foundation study finds that "international trade has boosted annual U.S. income by at least 10 percentage points of GDP relative to what it would have been without global trade, which translates into an aggregate gain of at least $1.7 trillion in 2013, or an average gain of more than $13,600 per U.S. household per year." What’s surprising, given all the free trade disinformation that’s been disseminated to the American people, is that exports are such a small percentage of our GDP. But I don’t recall Trump or any other rational person calling for an end to international trade.

Free trade is also the greatest antidote to world poverty and deprivation in world history. Over the past three decades, according to the World Bank and other sources, the spread of free trade has lowered abject, dollar-a-day poverty by nearly 1 billion people.

Hundreds of millions have moved into the middle class primarily in China, India and elsewhere in Asia, in parts of Latin America and in sub-Saharan Africa — a phenomenal achievement, underscoring the benefits of free trade and open markets. I submit that the collapse of communism and the proliferation of market-based economic systems have been primarily responsible for the attenuation of global poverty over the past 30 years. What Larry and Steve call “free trade” is an Orwellian slogan for a rubric that’s allowed other nations to vastly expand exports to the U.S. while severely constraining imports from us. While this formula might have been an “antidote” for countries like China and Japan, it’s abetted the disease of stagnant incomes, unemployment, underemployment and wealth inequality in America. Larry and Steve imply that the more evenhanded, pro-U.S. export strategy Trump endorses would increase global poverty, which is laughable. To the contrary, it would make America more robust and our people more optimistic – enabling us to look outward and do more to reduce poverty in other nations.

To his credit, Trump accurately recites many of the terrible problems afflicting the American economy:
"Today, nearly 40% of black teenagers are unemployed. Nearly 30% of Hispanic teenagers are unemployed. For black Americans without high school diplomas, the bottom has fallen out: more than 70% were employed in 1960, compared to less than 40% in 2000. Across the economy, the percentage of adults in the labor force has collapsed to a level not experienced in generations."

But the American problems that Trump complains about — stagnant growth and wages and slow job growth — can be found principally in Washington, D.C., not Beijing or Mexico City. Actually, responsibility for these problems can be found on Wall Street, K Street, Pennsylvania Avenue and Capitol Hill in the U.S. – but also in other nations which have profited handsomely from our maladroit trade policy. Our country has seen a decoupling of the entrepreneurial, investor and management sectors of our population (and the political class beholden to them) from the rest of our citizens that’s unprecedented, at least since WWII. The trade deals negotiated to make Goldman Sachs and the CEOs of big companies happy are both a contributor to and a symptom of this disquieting and politically destabilizing dilemma. Given the pain American workers are enduring, it’s little wonder that Bernie Sanders – not to mention Trump – are gaining traction.

Start with substantially cutting or even eliminating the corporate tax. Then stop the double tax on multinational profits by moving to a territorial system, like everyone else in the world. Also, shift to full cash expensing for new investment in plants, equipment and building structures. Most of this is sound policy - when did Trump say otherwise?  However, eliminating the corporate income tax is probably more problematic than panacea. Corporations treat income taxes as just one of their costs of doing business and embed them in the prices of the goods and services they sell. So, in effect, the corporate income tax has roughly the economic impact of a value-added tax. Since G.W. Bush removed so many Americans from the income tax rolls, the corporate income tax, indirectly, is the only federal tax collected from low income consumers and those in the shadow economy. So instead of eliminating the corporate income tax, let’s just make sure it's internationally competitive.

Then reform the personal tax code by lowering the rates, getting rid of corporate cronyist deductions, simplify the whole system and rip out tens of thousands of regulatory pages from the IRS code. We prefer a flat tax structure.  Again, something we can all support, except for the flat tax structure. Those who reach “critical mass” economically should pay a higher rate than those barely making ends meet. Nothing at all un-American or socialist about that.

We have seen firsthand companies from Medtronic to Burger King flee the U.S. for lower tax nations because our tax rates are 10 and even 20 percentage points higher than nations like China, Canada and Ireland.

This is like imposing a tariff on our own goods and services. The real victims, according to a study by the American Enterprise Institute, are American workers who earn lower wages and find fewer jobs. As I understand it, Trump supports bringing the U.S. business tax burden into line with our international trading partners.

Next, a pro-America energy policy that expands the North American shale oil and gas revolution, ends the war on coal states, builds pipelines, drills on federal lands and allows the export of our vast oil and gas sources — in other words, the precise opposite of the Obama energy strategy — will create millions of new jobs. I thought Steve and Larry were debating Trump, not Pres. Obama. Trump has made it clear he supports all-out U.S. energy production and energy independence.

Then tackle America's massive regulatory burden, which under Republicans and Democrats has expanded exponentially — ObamaCare, Sarbanes-Oxley, Dodd-Frank, the Consumer Financial Protection Bureau, EPA and the National Labor Relations Board — the incredible maze of licenses and regulatory codes that pose a huge barrier to small new-business startups. Without question, America has reached regulatory entropy. Our nation is living under tyranny by regulatory complexity. There must be at least a biennial sunset and reset on all regulations. Again, when has Trump expressed support for Obama’s heavy-handed regulatory policies?

Finally, a strong and stable dollar policy that ensures that the value of tomorrow's greenback will be the same as today. In the 1970s and 2000s, the collapse of the dollar led directly to the collapse of the economy. Right now, the unstable dollar is a huge deterrent of future investment from abroad or at home.
Ideally, Fed monetary policy should aim at a commodity price rule bolstered by forward-looking inflation-sensitive market prices. Props to you for not endorsing the gold standard. I assume Trump is also in favor of a stable dollar.

Trump says his goal is a pro-business policy that rewards companies that "invest in America, return to America, or stay and thrive in America." Let us add, "create in America." The good news is that the draft 14-plank economic plan that we have seen from Mr. Trump contains variations on most of these ideas. They worked. Growth exploded.

That happened under Republican Reagan and Democrat Clinton. And both were free traders who favored legal immigration. This is a gross oversimplification of what did and did not work under those administrations.
And, the last two words say it all: legal immigration.

• Moore and Kudlow are co-founders with Arthur Laffer of the Committee to Unleash American Prosperity.


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