Would Keynes Like the Trade Deficit?

            There were a couple of interesting articles in the media last week that call attention to our disastrous trade deficit.   One was a piece by Thomas Geohegan in the Oct 17 issue of The Nation Magazine entitled “What Would Keynes Do?”   It makes the point that Keynes’ ideas went far beyond “pump priming,” that is, deliberate deficit spending as an economic stimulus. If he were alive today, he might or might not be concerned about our budget deficit.   But he would be utterly appalled by the size of our trade deficit—and alarmed that few people in government, in the business community, or even in the economics profession seem to care.  Keynes felt that no country should ever run a large trade deficit or surplus except during a war or other temporary emergency.

            The global trading system we now have started in 1944 with the famous Bretton Woods Conference, and Keynes was one of the chief negotiators of that agreement.   He is often referred to as the architect of that agreement.  But what the world got out of Bretton Woods is far short of what Keynes had strongly advocated.   Keynes wanted a trading system where the currency moved between countries to settle balance of payments accounts would be a special international currency (he called it the Bancor) which could be used for no other purpose. And according to Keynes’ original proposal, if any country ran a large trade surplus in any year, they would be required to run a deficit the next year or pay massive punitive damages.  Private overseas investment by corporations would be prohibited.  Countries in need of capital could borrow from the World Bank only. But what Keynes wanted is not what we got.  We got a trading system where the U.S. Dollar became the main currency for international settlement. And the main source of capital for most countries is the private financial sector of some other country. 

            Keynes opposed trade deficits and sovereign borrowing from private banks for the same reason:  no society that owes money to foreigners is free—and he believed in freedom.  When any country runs a trade deficit, then someone in that country must incur debt to settle that deficit.  It works like this:   If we run a 400 billion dollar merchandise deficit with China, and China uses the money to buy 400 billion worth of U.S. Treasury bonds, then the balance of payments issue cancels out.  We bought something from them--and they bought something from us of equal value.  But someday those Treasury bonds will be cashed.  We owe that money.  But what if the Chinese purchased private sector corporate bonds instead?  Then our private sector would owe them the money.  Whether foreigners end up owning our government or our industry, either way we become further indebted as a society, eventually becoming a country of debt slaves.  Keynes understood this.

            Geohegan points out that another reason Keynes opposed trade deficits is that they undermine “pump priming” efforts,   because the Keynesian pump ends up leaking.   When the administration spent 700+ billion dollars on a stimulus, this probably helped.  The official unemployment rate is still 10%, but without the stimulus it could have gone much higher.  In the Hoover Administration, the gov’t took no action at all and the unemployment rate reached 25%.   And yet, if all that 700 billion had been spent on things made in the U.S., it surely would have been a much more effective stimulus. Our deficit spending still puts people to work, but not always in this country.  We have been running large merchandise trade deficits now for many years, and the resultant decline in American economic strength is nothing short of a disaster.

             Another article last week which touches on the trade deficit was a guest editorial in the Oct 16 Waterloo Courier by Coleen Rowley, the ex-FBI agent who wrote a “whistleblower” memo in 2002 and testified before the Senate Judiciary Committee concerning the FBI’s pre-9/11 failure to protect us.   Most of her article is taken up with statistics showing that our two wars have not made us any safer, but precipitously less safe.   But toward the end of the article she quotes Professor Robert Pape, the world’s foremost expert on suicide terrorism. Pape says, among other things, that our decline in safety is partly related to “America’s massive decline in power” since 9/11.

            Pape says, “A nation’s relative power is based on its economic wealth compared to the rest of the world.  In 2000, the U.S. controlled 31% of the world economy; in 2008, that figure had fallen to 23 percent and, according to the International Monetary Fund, the projection for 2013 is 21%.  In the past eight years, the United States has lost one-third of its economic wealth or, put another way, since 2000, the U.S. has lost nearly a third of its relative power in international politics while China’s has doubled and Russia’s has tripled. This decline represents the largest drop in the history books.”

            Our two foreign wars and the fact that we are financing these wars by foreign borrowing rather than taxing ourselves is only one cause of this decline.   The other is our massive trade deficit.  But the two are inextricably related.  The hundreds of billions of excess American dollars which the Chinese invest in our government debt is what makes the budget deficit possible. Without this annual infusion of money, the U.S. could never borrow that much, and taxes would have to be raised to cover our war spending, our stimulus, our interest payments, and all other spending.  But all of the increase in taxation would have to fall on the top 1%, because those earning under $150,000 a year are already overtaxed, if payroll taxes, state income taxes, property taxes, sales taxes, and miscellaneous other taxes are considered. The only under-taxed wealth left in the country is held by the top 1%, and they know it. That’s why they don’t want to end the trade deficit.  Yet every time we move another million jobs to China, they become more of an 800 pound gorilla and we become more of an insignificant, comic opera state, trembling at the mercy of its foreign creditors.

             When Warren Buffett says, “The trouble with this country is that rich people like me don’t pay enough taxes,” he’s absolutely right.  At the end of the Eisenhower administration, the top marginal tax rate was 92.5%.  Today it’s 35%, which is the same marginal rate paid by most working people.  And of course, the billionaires don't even pay the 35%--they arrange their affairs so that all income is a capital gain, taxed at 15%. Granted, only a handful of billionaires paid at the 92.5% rate, and they often avoided this tax by giving most of their earnings to charity.  But most working people back then paid less than 10%.  In 1959, I had a good union factory job and my gross wage was exactly $100.00 per week.  One hundred dollars was a lot of money then. You could buy a new six-cylinder Ford pickup truck for $1,800.00.   But my take home pay, after federal income tax, state income tax, FICA tax, and union dues was still $89.00.  As a percentage of GDP, the government took in more tax then—but not from working people.  The failure of economic elites to pay serious tax is now the cause of most of our problems.  Our failure to invest in infrastructure, in education, and in advanced research is the most visible outcome.  But our trade deficit and general industrial decline is another.

            The economic elites (the people which Justice Wm. O. Douglas once called “organized money,”) have been accumulating wealth since the Reagan administration.  What, besides hoarding it have they done with it?  They have invested it very wisely.  Besides buying factories in low wage countries, they now own all major media outlets and most of the United States Congress.   (A wise investment indeed!)  More campaign money flows from Wall Street to both parties in Congress now than from all other sources combined.  This being the case, it is axiomatic that no serious action will be taken to end the trade deficit anytime soon.  But if, by some political miracle, the American people were to regain control of their country, would there be any action that could be taken to end the trade deficit?

            One thing that Keynes was very clear about:  tariffs  don’t work.  If two countries each start raising tariffs on arbitrarily chosen targets of their competitor’s goods, as each responds, tit for tat with additional trade restrictions,  the result is a trade war that hurts both workers and consumers on both sides. Keynes also did not approve of currency devaluation as a solution, because eventually every country in the world would respond by cutting their own currency value, till all currency everywhere is worth nothing.  It’s a race to the bottom.

            Keynes demanded a trading system where no country could run a surplus, but he ruled out tariffs and currency manipulation as tools to achieve this end.  Instead, he envisioned a world order in which trade surpluses were simply outlawed by a commonly agreed upon trade treaty.  Having failed to implement such a treaty, is there anything which we could do unilaterally at this point?  I believe there is.

            On Nov 10, 2003, Fortune Magazine published an article by Warren Buffett about the trade deficit.  He briefly outlined the damage now being done by our current trade policy, and the disastrous consequences which will result if we try to pursue this policy much longer.  Then he explained what our alternatives are. His suggestion is that we enact an “Import Certificate” plan.   In this plan, at some point in time, we would begin issuing to American exporters, certificates for every trade transaction in which American goods is sold to a foreign buyer. The certificates would be issued in proportion to the size of the sale.  Sell a thousand dollars worth and you get a one thousand dollar import certificate.  Then, a few months later, all goods entering the U.S. would have to be accompanied, dollar for dollar, by such certificates, to be surrendered to the U.S. customs service.  All other trade restrictions would be phased out.

            He then went on to explain that such a plan would have many advantages.   First, it recognizes the fact that trade is a multi-lateral exchange—not bi-lateral.   A country might run a large deficit with one country, but run a surplus with several others.  As long as the overall picture is in balance, there is no problem.  The import certificates would be negotiable, and could be traded on commodity markets like wheat or pork bellies.   Exporters could sell the certificates which they would accumulate to whoever wanted them, using the proceeds to lower the price of products offered to foreign buyers, thereby making American exports more competitive.  Another advantage is that such a plan would not subsidize or penalize any one particular industry or country.  What to buy and what to sell would still remain a market based decision.  But America as a whole would be exporting exactly as much as we would be importing. 

            One of the obvious flaws of tariff based strategies is that they are imposed piecemeal, and the tariffs which Congress is most likely to enact are those intended to protect the most vulnerable industry, usually an industry that might be in bad shape even without the unfair foreign competition.  And if our trading partner responds by a counter tariff on some American product, what will they target?  Probably the product that has penetrated their market most deeply, ergo, the product of our most efficient industry.   So we would end up punishing our most efficient industry to prop up one that will likely fail any way.              

            But the Import Certificate Plan would not do this—it would do the opposite.  If the demand for import certificates induces foreign companies buy goods from America, what will they choose to buy?  They would buy whatever is the best deal for the money, ergo, the product of our most efficient industry. And if a foreign competitor had to buy import certificates and add that cost to the price of his product, that fact alone would make American products more competitive at home, and allow some American manufacturers to stay in business who might otherwise fail. But if some American product were truly inferior or overpriced, it could still fail.  So an import certificate plan would boost our best industries, discipline our worst ones, and do so without having a trade war.

            Buffett concedes that such a plan might not be perfect, but our present deficit cannot continue forever.  When I first became aware of the Fortune article, I was quite surprised. A friend called me and said I would find it very interesting. That friend and I had been part of a grass roots effort twenty years earlier to prod Congress into doing something about the trade deficit—and we had proposed an initiative very similar to Buffett’s idea.  We sent copies of the plan to about fifty congressmen and a dozen senators.  Most of the replies were pro-forma responses, but a few were thoughtful replies that indicated that someone had actually read it and taken it seriously.  A few even suggested that if we ever get serious about solving the problem, this might be what we should try.

Listen up, Libertarians!

   This afternoon,  I was driving across a remote section Nebraska on I- 80, and my wife was using her laptop computer, equipped with an "air card,"  to access the internet for information on where to find a restaurant. Few activities so evoke images of modernity and personal independence as that of being able to surf the net while cruising the interstate at 75 mph, a hundred miles from nowhere.  And the acolytes of extreme private enterprise would surely cite this as the supreme example of the technological triumph of the free market.  No doubt, if they themselves were using the net while also using the interstate, the emails they sent would include political diatribes about how "big government" is the enemy of progress and individual freedom.  But is it?
     For the technological opportunity I just described to exist, a number of things had to occur.  First, the freeway system had to be built.   It was built by government.   In fact, it is the largest single engineering project in human history,  and except for WWII,  the greatest public expenditure in American history.  And the taxes raised to cover this expenditure may be the largest single act of taxation.   This taxation still continues today and will continue forever, since the maintenance and repair to keep this system in use will go on forever.  But if it had not been built, we could not be using it.
    Other things which had to occur were: 1. The development of the internet,  courtesy of the U.S Dept of Defense,  2. The development of geosynchronous communications satellites,  pioneered by the United States Army Signal Corp in the early 1960s,  along with the negotiation by our State Dept of numerous international treaties concerning the allocation and use of the frequencies involved, 3. The development of  cheap, small computers,  which needed, (first) the invention of the digital electronic computer itself,  first built  at Iowa State College in 1939 by Barry and Atanasoff, and paid for by state government, and (second) the "silicon chip," developed by NASA in the mid 60s.  (And of course the chip is merely an extension of the transistor, invented in 1948 by ATT/Bell Labs, which was then a government regulated monopoly.)
    Which of these things happened without massive government taxing,  spending, and regulation?    Private industry has always played a role, but that role in every case has been to wait until government had spent the major seed money to shepherd a new technology through the stages where there was no chance of making a profit---and then when it reached finally the stage where someone could make a buck--jump in and make that buck, and claim all the credit.  Private companies will pay for fine tuning an idea into something which they can sell.  But even today, only government will pay for ideas that will pay off forty years in the future.  Yet, forty years from now, we will surely need these things.  
   If an anti-government zealot who claims to be independent and self-sufficient lives in a log cabin in rural Idaho and hunts his own diner and wears buckskin shirts,  fine.   But if he wants a satellite link and a laptop,  give me a break!

Restoring Old Wood

    In the past several years, a number of innovative products for restoring weathered and dry rotted wood have come onto the market.  I have recently used some of them.   It happens that the building I call home was at one time a school, and atop its clay tile roof sits a handsome cupola/belfry.  Through the bell is long gone, the cupola still functions as an attic ventilator,  and would, in any case,  be difficult to remove.
    The fancy wood trimmings on this structure are badly weathered and dry rotted.   I had carefully repainted all this twenty years ago,  but haven't painted it since. The scaffold required to access this cupola is a tricky affair, and takes a week to build and tear down.    So annual repainting is not an option.   Left unpainted for the last twenty years,  the dry rot is severe.
     For most of the trim parts, I simply took accurate measurements and made new ones.  But there were four upright posts which sat on pedestals,  and these pedestals were not easy to replace.  They were 9" by 9" by 2" blocks, and the outside edge was milled to a pear shaped curve.   I took them to a local millwork shop, and they said they could easily make them if they had they right cutter blade.  It turned out that they did not, nor could they order such a blade.   Unless I wished to have a machine shop custom grind a new cutter, I would have to re-use the old wood.
   The wood blocks had each split along the grain into three or four pieces, and had large areas where the wood was rotted so badly that it could be scraped out with a spoon.    I first assembled the pieces of each block and clamped them all together, and then drilled 3/8" holes across the grain, from one side of the block to the other. I filled the holes with Elmer's Wood Glue and drove 3/8" wooden dowels in.  When the glue was dry,  the result was a block that held together rather well.  I then held the block against a wire wheel to remove the rotted wood.

       And then I coated it all over with JB Weld brand Wood Restore Liquid Hardener.   As soon as this dried, I applied several  thin coats of JB Weld brand Wood Restore Repair Putty, until the putty was flush with the original surface.  (This product is similar to the body putty used to repair dents in fenders, and is worked with the same tools and techniques.)  I now had a block precisely the same shape and dimensions  as the original,  and very solid.  It will survive weather better than the original wood,  and once painted, it won't look any different.   But just to give an added measure of weather protection,  I covered each wooden part with wire mesh and then put a thin coat of the Repair Putty over the entire surface, and sanded it smooth.

Ten years ago, this kind of quick fix would not have been possible.

Poem of the Ponies

I seldom bet upon horses as they run around their courses.
The winner is impossible to call.
But if I have a little weakness, it's the Derby and the Preakness,
Though the Belmont Stakes hold no allure at all.

More Old Steam Engines

  For fairs which exhibit antique technology, especially agricultural technology, the Old Threshers' Reunion, in Mount Pleasant,  Iowa is the grand-daddy of them all.   Held every Labor Day weekend, it covers about two square miles, and is filled which every old tractor and steam engine imaginable.  Their own permanent collection includes a vintage railroad engine, pulling a train which hauls the public about the fair grounds.  Other conveyances available include three vintage electric trolleys.  Permanent buildings house a collection of old stationary steam engines, including behemoths  from power houses. You can also see a turn-of-the-century printing shop,  as well as an old machine shop, both powered off a line shaft run by a steam engine.  About a hundred threshing engines are usually displayed.  The have a carousel, powered by steam and accompanied by a large mechanical organ. And they have re-created an entire Old West town,  complete with railroad stations, a bank, blacksmith shops, and a saloon--all staffed with actors in period costume.  Food is provided at a reasonable price by several volunteer  organizations.  If there is one event in Iowa worth seeing--this is it.   And don't neglect to visit the theater museum.  At the beginning of the 20th century,  Iowa had over 700 opera houses, and the theater museum preserves this rich heritage.

What is a German Accent?

   In my earlier post,  Conversion of a Spelling Reformer, I mentioned that the upper midwest was settled in the mid to late 19th century by immigrants from everywhere except England.   Today, they all speak only English,  but few of them came from England, though many came from Ireland.  My own people were Luxembourgers,  (both French speaking and German speaking,) and also Czechs, Austrians, Swedes, and Norwegians.  Two of my grandparents were born in Europe and spoke German as their first language.  But my mother,  brought up with Luxembourg German as her first language,  spoke no German as an adult, and by the time she died, had an excellent command of the English language and had no German accent that any Iowan would have noticed.   And I certainly never imagined that I had a German accent.
      When I was about thirty,  I went to Kansas City, Missouri to find work in the electrical trade.  The union hiring hall sent me out to a job site at Kansas City International Airport, which was then under construction.  The general foreman spoke to me for a few minutes, and then took me to my new foreman. He said,  "Here Jim;  I got another Iowegian  for you."   "Iowegian," I asked?.   He said, "I mean "Iowa German."    I asked, "What makes you think I'm German?   My name is has an English spelling."   He replied, "I could tell by your German accent."     I said, "Wait a minute.  I know what a German accent is.  Two of my grandparents had a German accent.  They would say diss und dat  instead of this and that. But my pronunciation of all English consonants is absolutely standard."   The general foreman replied,  "If you do not have a German accent, then how did I know that you are German?  You are of German extraction, are you not?"  "Yes,"  I confessed.   "But what did I say that you thought was so German?"   He said, "I asked you a question and you said 'ja.'   We do not say 'ja.'   We say yes or we say yeah--but we don't say 'ja.'   'Ja' is a German word."   I protested that I had said "ya,"  but not "ja."  The general forman couldn't see much difference.   I said, "But where I come from,  everyone says ya, and half of them are Irish."    The general foreman replied, "Yes, but they are Irish who were raised among Germans."
        This was not the first time I'd been away from Iowa.   I'd lived in California for four years, and had spent three years in the Army.  I had been stationed near New York City, and had served with people from all over the U.S.   And no one had ever commented on my use of the word "ya."    They say "ya" in California, New York,  and everywhere in the country I had ever been.   But they don't say it in Missouri.

Modern Agriculture

 

Last weekend I attended the "Old Time Power Show" at Antique Acres, near Waterloo, Iowa.  This is a living museum whose annual exhibition showcases the development of modern agriculture, from horse drawn equipment and steam powered threshing engines to present day diesel tractors.   I wrote a Facebook post encouraging all my local friends to attend this event and take their kids. Why?   I believe that the three most important events in human history are (1) The discovery of the use of fire,  (2)  The invention of agriculture, and (3)  The mechanization of agriculture.   If you feel that item 3 does not merit a place alongside the other two, then consider this:    In the U.S. in 1800,  90% of the population farmed to feed themselves and the other 10%.   Today in the U.S.,  less than 1% still farms, and yet we are the world's largest exporter of grain.
     The discovery of fire and the invention of agriculture did not happen within the memory of people still living and did not happen in Iowa.   But mechanization of agriculture did.   The very first tractor factory in the world opened in 1892--in Waterloo, Iowa.  When I worked at John Deere Tractor works in 1958, they made only relatively small, two cylinder tractors and a typical farm was 80-160 acres.  Today, one of my neighbors farms over 6,000 acres, and the countryside is becoming as depopulated as the moon. This is the most radical transformation in human history and it began within my own great grandfather's lifetime.  
   No matter where you live, it there is some museum near you which displays the agriculture methods of the recent past,  go there and take your children.  What they will see is the change that defines the modern world.   Because very little of what we call the modern world could exist if 90% of the population still was needed for food production.