Deliverance from the Devastating Free Trade Hoax

My piece on trade is below this screenshot link to "Nine Minutes that Negate the Free Trade Nonsense," a rapid-fire montage of recent TV appearances . As you'll see, I frequently have sharp but fun debates with Fox Business/Fox News anchor Neil Cavuto, and call-out the elites, the establishment media, "mainstream" economists and misguided politicians.

Those who criticize President Trump’s tough trade policies and the whole idea of import tariffs are ignoring economic history and woefully out of touch with reality. 

This poll from top Republican pollster Ed Goeas shows enormous public support for tariffs, even if they result in higher consumer prices. This support for tariffs is particularly pronounced in states where President Trump received 55%+ of the vote. Apparently, average Americans “get” the tragic trade reality that eludes the elites.

The hysterical claims that our trading partners will retaliate with their own tariffs is laughable. The U.S. has an $800 billion annual goods deficit – so any import tariff construct will be decidedly to our advantage, irrespective of what other nations do.

This ridiculous “trade war” trope is fed by Wall Street and C-Suite fat cats and their economist, pundit and politician lackeys in both parties. And, sadly, their alarmist drivel is lapped-up by journalists too lazy to do their own research or question the establishment's conventional wisdom. Here’s the truth: the United States is already in a trade war, and we've been losing, disastrously.

Conveniently left out of the elite’s perfidious defense of our horrific trade policies is that only seven other countries in the G20 have a goods trade deficit and only three of those - the UK, India and Turkey - have one as large as ours relative to GDP. And our yawning trade gap has continued, uninterrupted, for an appalling 40 years.

It’s time that we obliterate the economic mythology surrounding free trade once and for all.

The United States has lost 5 million manufacturing jobs since China entered WTO in 2001. And our country has a stunning $400 billion annual goods trade deficit with China. 


Even accounting for our relatively small surplus with China in services - about $40 billion – the overall U.S. trade deficit with that trading tiger is $360 billion. So our trade deficit with China is more than twice its $175 billion defense budget. A terrifying fact, given that China is emerging as our nation's primary strategic threat.

Imports from Japan, South Korea, Germany and Mexico are also sucking vast numbers of well-paying manufacturing jobs out of the U.S. The frequently touted savings American consumers have realized from cheap imports are more than offset by job losses and wage declines, enormous increases in outlays for SNAP (food stamps), disability (off the charts, despite dramatic improvements in workplace safety), welfare programs and skyrocketing suicide and Opioid addiction rates. 

The "free trade" paradigm was constructed after World War II, when the U.S. was the only major nation whose manufacturing infrastructure wasn't in ruins. So tariffs weren't necessary to protect American manufacturing jobs.

In the 1970s and 1980s, the U.S. tolerated trade imbalances to shore-up the economies of key allies and emerging economies as the Soviet threat loomed. Our trade deficits with NATO nations and Japan (though minuscule compared to the present day) were tantamount to an investment in national defense.

Today, we’re in a totally different world. The Soviet communist threat no longer exists. Our country is in a brutal economic battle with Asian and European export titans bent on maintaining trade surpluses, guarding their industrial bases and nurturing their factory workers. 

The mercantilist policies pursued by our trading partners certainly don't seem to have impaired their standard of living, much less imploded their economies. It's the U.S. whose middle class has been hammered as its factory towns have been hollowed out.

Japanese, Korean and German companies build high quality cars and myriad other products in the U.S. This begs the question: why is there any need for large scale manufactured goods imports?

Indeed, the one high-value imported consumer product that does have a significant tariff - 25% - pickup trucks, is a huge U.S. economic success story on every front. Pickups provide the lion’s share of profits for U.S. automakers. And they certainly aren’t too expensive for middle class Americans to afford, as pickups outsell every category of passenger car. The Ford F-Series, Chevrolet Silverado and Dodge Ram trucks are the three most popular vehicles in the country. In order to avoid this tariff, Toyota, Nissan and Honda, build their pickups here in the U.S., providing thousands of wonderfully recompensed jobs to American workers. This is a real-world example of tariffs on a hugely popular, major purchase item. 

What prevents this same import tariff paradigm from working across the board?

The incessant claim that import tariffs are "a tax on consumers" is mendacious. Any taxes a company and its employees pay is a cost of doing business that's embedded in the price of the products. Workers gauge their compensation based on net pay after taxes, so their wages must be grossed-up by the employer to account for those taxes - which is added compensation expense that's priced-in.  

Of course, companies can avoid the tariffs by doing what pickup manufacturers do - make it in the U.S.A. And unlike income taxes, consumers can avoid tariff costs by buying American!

President Reagan used to say that when you tax something, you get less of it. Tariffs (taxes) on imported goods will mean less of them over time - but more well-paying American manufacturing jobs and more domestic investment. As outlined later, even if all politically plausible spending cuts are enacted, the federal government will still need more revenue in coming years. Far better that it come from import tariffs than income taxes!

Import tariffs were the federal government’s primary source of revenue for the first 125 years America’s existence – during which we built the mightiest economy and highest standard of living in human history.

As President Trump pointed out during the campaign, tariffs were the keystone of the “American System” initiated by George Washington and Alexander Hamilton and bedrock Republican philosophy, beginning with President Abraham Lincoln.

It’s amazing how many politicians and journalists embarrass themselves by promulgating the Smoot-Hawley myth. That tariff increase – from levels already dramatically higher than today’s – had little, if anything, to do with The Great Depression. The collapse in world trade in the 1930s was an effect of that international economic calamity, not a cause. Dartmouth economics professor, author and trade expert Douglas A. Irwin writes : "most economists, both liberal and conservative, doubt that Smoot Hawley played much of a role in the subsequent contraction."  An opinion also held by Nobel Prize in economics laureate – and conservative icon – Milton Friedman.

The Great Depression came in the wake of a financial crash which was triggered by an obscenely over-leveraged stock market rife with fraud, and the near-collapse of our frightfully unsound banking system. What might have been a short cyclical downturn was grossly amplified by the Federal Reserve's stunningly maladroit monetary policy. It was further exacerbated by President Herbert Hoover's huge hike in income tax rates in 1932, ill-conceived, statist economic programs and a crisis in American confidence due to his political incompetence.

When Franklin Roosevelt took office, he revived America's collective psyche and moved quickly to rationally restore the American economy. FDR suspended the gold standard - allowing for desperately needed monetary expansion - shored-up and rebuilt confidence in the American banking system through implementation of deposit insurance and other measures, and spent a sizable sum on needed infrastructure (a far higher amount, on a relative basis, than did President Obama's 2009 "stimulus"). Tellingly, FDR's program didn't include a massive reduction in import tariffs. FDR wasn’t even given the authority by congress to change tariff rates until 1934 - all of which had to be reciprocal. As late as 1946, the average U.S. import tariff was still 25.3% - more than 10 times what it is today.

Despite little change in import tariffs, from 1934-36, U.S. economic growth exploded to more than 10% annually (exceeding China’s growth during its recent halcyon years), retracing most of the 1930-33 GDP decline. Only when, in his second term, FDR further increased taxes on higher incomes, began the Social Security payroll tax (without concomitant benefits payouts, as they didn't kick-in until several years), and fully implemented unprecedented government intervention into business and agriculture, did we enter a second severe recession in 1937. That recession ended in 1939, as our economy was substantially boosted by FDR's massive re-armament program leading up to World War II.

In all of American history, there is not one example of trade tariffs catalyzing an economic contraction - quite the contrary.

The hyperbolically named "Tariff of Abominations" in 1828 was followed by a multi-year U.S. economic boom, which was a major factor in President Andrew Jackson’s re-election in 1832.

The high import tariff regime championed by President William McKinley was instrumental in ending the crippling recession which followed the Economic Panic of 1893 – and it catalyzed a sustained period of robust economic growth.

The Fordney-McCumber Tariff of 1922, conceived by the greatest secretary of the treasury after Hamilton, Andrew Mellon, ushered in a seven-year expansion of unprecedented magnitude, "The Roaring '20s."

Mellon combined the tariff increase with significant income tax rate reductions, focused on the lowest income taxpayers. A great model for us to emulate today.

In addition to bringing tremendous prosperity, the Mellon regime slashed the federal government's enormous WWI debt by a whopping 40%.

As I wrote a few months before the 2016 election, an American economic horror story commenced in the late 1970s – when the United States began running trade deficits for the first time in the 20th Century:

The contraction in labor force participation, the collapse of salaries and wages as a percentage of GDP and the historically high level of profits, the dramatic distension of American income inequality – so often treated as a perfect storm of mysterious origin by economists and politicians – are, in fact, concomitant with our monstrous trade deficits.

The carnage wreaked by America’s catastrophic trade policies extends beyond the jobs lost directly to rampant importing and offshoring. Our nation’s middle class is trapped in a disastrous wage decline vortex.

Walmart has 1.2 million non-managerial employees, more than the total number of U.S. auto and auto parts manufacturing workers. The average wage for the Walmart workers? $14, with little or no benefits. The average American factory worker wage? $24, most with full benefits. That’s more than a $20,000 per year difference.

No wonder so many rich investors and corporate executives extol the free trade fantasy. It has vastly expanded corporate profits while American workers have been hosed. Meanwhile, a lot of the trade surplus lucre that piles up in foreign countries flows back to Wall Street banks to be invested - generating huge fee revenue while goosing stock prices. 

Our atrocious trade policies have hit African Americans particularly hard.

Henry Ford, the father of automobile mass production, was one of the first large employers to hire African American workers. The rest of the automobile industry followed, which contributed mightily to the massive migration of African Americans from the Jim Crow south to Detroit and other northern industrial cities in the early 20^th Century. This did much to germinate the black middle class in America. 

But the import-driven decline of American manufacturing has left many of the descendants of those who were part of the great African American migration in despair. In 1975, 40 percent of young Midwestern black men were employed in manufacturing; by 1990, that proportion had dropped to just 10 percent. 

Now, the company founded by Henry Ford is moving most of its small car production to Mexico, in a new $1.6-billion-dollar plant that will employ thousands of workers in that country – instead of more African American workers in our country. This outrage exemplifies how disastrous Wall Street-designed trade policies, favoring China, Mexico and many other countries, have ravaged the African American community.

Incredibly, many elites claim that the American importing and offshoring orgy is no problem because “manufacturing jobs are yesterday’s jobs.” Somebody’s human hands are making all those cars, car parts, flat screen displays, computer chips, machine tools and iPhones that are flooding into our country. Why can’t a lot more of them be Americans, during the long transition towards a more automated, 3-D-printed manufacturing future? 

Even if new U.S. factories are laden with robots, there will still be many well paid U.S. workers to manufacture and maintain the robots and oversee them in plants. The free trade prevaricators fail to note that China’s population is almost five-times ours; we don’t need to create nearly as many additional manufacturing jobs to have a dramatically positive impact on our middle class and overall economy.

And speaking of robots, a lot more of those Fanuc robots should be made on our shores and many more U.S.-based robotics companies should be in a position to compete with that Japanese behemoth.

Yes, the U.S. has surpluses with many countries on services. While that’s nice, it’s important to note that the services sector entails a much smaller proportion of well-compensated middle-income jobs than does manufacturing. Services include Wall Street banks and financial firms, where an inordinate percentage of the compensation flows to a tiny cohort of traders and executives that are among the top 5% in earnings and wealth (many in the top 1%). So, while services are important, they’re not America’s ticket to mass job and income expansion.

Our terrible trade policies have also imperiled American national security. Our military contractors are frighteningly reliant on other countries - including China, increasingly an adversary - for key components, largely because the deluge of cheap imports has forced so many U.S. suppliers out of business.

So, clearly, President Trump's aggressive trade stance is vital to both rebuild the American middle class and strengthen national defense. But a trade policy overhaul is also essential to avoiding an economic cataclysm. 

The Congressional Budget Office projects exploding government deficits – driving government debt to a Post-War high of 100% of GDP by 2028 – and a backsliding to sub-par GDP growth of below 2% beginning in 2020. Even if the Republicans’ rosiest scenarios come to pass over the next decade, hundreds of billions more in federal tax revenue will be required to rescue America from fiscal ruin.

To meet these daunting fiscal, economic and national security challenges, we should go a step further than the president already has by imposing a 15% a tariff on all imported goods.

This December 2016 Congressional Research Service analysis reinforces the President’s authority to impose such a tariff. Beginning with the Reciprocal Trade Agreements Act of 1934, a cascade of laws and federal court decisions have provided the President with almost unfettered authority to impose import tariffs. Indeed, simply by declaring our nation's dire, unsustainable trade situation a "threat to national security," President Trump would gain the authority to impose the comprehensive 15% additional goods import tariff under Section 232 of the Trade Expansion Act of 1962.

This case is further reinforced by the point outlined earlier: our gargantuan trade deficit with China is funding a significant portion of its defense budget. So we are foolishly financing the military of the nation emerging as the greatest strategic threat to our country and our Asian allies.

This 15% additional tariff would yield $3 trillion in incremental revenue over 10 years, allowing congress to make the newly enacted Trump tax cuts for the middle class permanent. There would be sufficient remaining revenue to fund a real Obamacare repeal and replace, seed a massive public-private infrastructure bank and avoid the trillion-dollar-plus annual deficits currently projected.

In addition, over the long term, the upsurge in American jobs resulting from fewer goods imports would cut social welfare costs while increasing income and payroll tax revenues.

Let’s keep it real; we have two choices: an import tariff regime that will generate substantial additional government revenue - which is consistent with the policy America has had for most of its history - or, a huge hike in income taxes that would have to extend far beyond the wealthy, plus excruciating cuts in Medicare, Social Security and discretionary spending.

So, those who lambaste import tariffs must be asked: do you have a better plan? 

My proposed 15% goods imports tariff represents just a fraction of the 35% - 40% rate that candidate Donald Trump said would be appropriate, given the decades of job theft that’s been perpetrated by many of our trading partners. And it’s also a much lower tariff than the average from our nation’s founding until after World War II.

And what a coincidence – almost all of our non-China goods trade deficit is with “friends and allies” who’ve been taking advantage of the U.S. for decades by not paying their fair share for defense.

For Japan, South Korea and NATO countries, the 15% goods trade tariff will be far less financially onerous for them than if we push for those countries to spend as high a percentage of their GDP on defense as we do – which is not the 2% NATO obligation but 3½%!

And we couldn’t ask for a better macroeconomic environment in which to introduce these tariffs.

We’re in the midst of global disinflation. Near deflation (U.S. grocery prices are now actually declining). This, and our cutthroat international economy, will induce companies abroad and at home to slash costs and compress margins to minimize tariff-related price hikes.

One of the more ridiculous arguments against import tariffs is that they would raise costs to American manufacturers because so many components are made in other countries. That’s one of our biggest trade problems! The massive offshoring of component manufacturing – from auto and wind turbine parts to computer chips to flat screen displays – has had a devastating impact on American workers. As White House trade advisor Peter Navarro aptly stated, we must “Repatriate the American supply chain.” The Trump tariff will jumpstart that effort faster than anything else we can do.

Imposing the uniform tariff on all imported goods eliminates the need for our government to figure out and challenge the devious labyrinth of tariffs, imported goods regulations, currency manipulations, subsidies and other industrial policies our trading partners have put in place to stimulate their exports while stifling American imports.

My proposed uniform import tariff also takes our government out of the business of picking winners and losers among specific industries affected by imports.

The U.S. may have to demand an overhaul of the WTO rubric – or even unilaterally abandon provisions that preclude imposition of the goods import tariff. As President Trump has frequently said, no international body or agreement supersedes the interests of American workers or our national security.

The 15% imported goods tariff would be the greatest social program in at least a generation. It would catalyze creation of millions more well-paying American jobs - reducing welfare and Social Security disability outlays; stop the import- and offshoring-driven downward middle class wage vortex; foment an American manufacturing renaissance that would help rebuild our inner cities and bring hope to small towns in our rural areas; and supercharge domestic investment. 

This tariff would also be a fiscal savior, generating trillions in additional government revenue without raising income taxes.

America must finally stop kowtowing to the elites who have benefited so handsomely from the free trade hoax, and stop financing the increasingly menacing Chinese war machine.