The Tax Plan's Impact on the Trade Deficit

I've argued previously that international accounts don't really matter and have no implications for aggregate demand, employment, well-being, etc. Though it must be said it that getting imports is the whole point of trade. By definition we make our own exports, so we it's not like we can't get our hands on them without trade. Whereas imports are products we don't make, but still want. They're the whole point. Basically imports aren't bad and don't reduce well-being, in fact they increase it by this logic.

Anyway, according to the Wall St. Journal, the tax plan could potentially halve the trade deficit by reducing the incentive of firms to artificially shifting profits abroad. "Independent research suggests the legislation could...deliver a one-shot 1% or greater boost to annual gross domestic product. This shift would be an accounting effect rather than a change in actual business or worker income." 

This is supposed to happen because some US firms, instead of creating a "separate" entity that "owns" the firm's intellectual property in a lower tax jurisdiction, for example, for the purpose of attributing profits to the entity outside of the US, will no longer play that shell game due to lower tax rates in the US. This means the official trade deficit figures are presently artificially inflated. So this is a good aspect of the bill if it works as predicted (sounds like a kinda big if to me), but it won't really make any Americans better or worse off. 

As far as the effect on GDP, if it reduces our current account (trade plus net investment income and transfers) deficit, our capital account (net foreign investment plus changes in official reserves) surplus must decrease by the same amount (they are always equal, its just accounting, see prior posts). Both investment and net exports impact GDP so I wouldn't expect much difference, unless I'm misunderstanding something.

Hopefully it will make the dumb fascist asshole president happy and temper his idiotic protectionist instincts. You did it sir! It worked. The jobs came back, now who cares about getting rid of NAFTA or the WTO or any of your other dumbass ideas? Unfortunately, his supporters may not notice that this is an accounting trick leaving them no better off and actually think that being a blowhard is all it took to reduce the trade deficit. But maybe they'll notice that it was a change in our own policies that did the trick and not tearing up international agreements that our own exporters would rather keep.

Happy 10 Years Since the Start of the Great Recession

     The Great Recession started 10 years ago! Where does the time go? It was really an amazing thing, in a horrible way. The next most recent recession that is comparable is the Great Depression, hence the naming. It was just as severe a blow to our economic system, and has many eerie parallels to the Great Depression, such as the rise of fascism afterwards. But because we have made undeniable and, dare I temp fate, irreversible progress, the impact on our economy in terms of the decline in GDP and employment were many times smaller. 

     Make no mistake, the asset market collapse and financial crisis that led to the Great Recession was severe enough to cause a Great Depression if not for the economic progress we've made. But we still have so far to go, as evidenced by the damage we were unable to prevent. I feel confident in predicting we will get better still; the next century's Great Recession will look like a small re-adjustment to us, while still being the largest economic crisis in the future's modern times.

Anyway, here's a graph of a few important macroeconomic indicators indexed to the fourth quarter of 2007, the prior economic peak:

Employment is total non-farm employment, Poverty is the # of people under the poverty line, Annual Average Wage and NGDP are in nominal dollars (not adjusted for inflation). Notice how employment took the biggest hit, longest time to recover, and slowest growth overall. That's not unprecedented, it usually takes longer to recover and is limited in the long term by population growth. 

Republicans Find 137 "Economists" Who are Sell-outs or Idiots

137 "Economists" signed a letter fawning over the Republican tax proposals. It is reproduced below with my comments in brackets.

Dear Senators and Representatives: [I think a comma is the correct punctuation here]

"Ask five economists," as the Edgar Fiedler adage goes, "and you'll get five different answers." [strong start]

Yet, when it comes to the tax reform package aimed at fixing our broken system, the undersigned have but one shared perspective: Economic growth will accelerate if the Tax Cuts and Jobs Act passes, leading to more jobs, higher wages, and a better standard of living for the American people. If, however, the bill fails, the United States risks continued economic underperformance.

[So I can buy that growth could be boosted – if the Fed doesn’t cancel out this fiscal stimulus with monetary tightening, which it probably will – and some higher wages and maybe jobs in the short run but as the economy basically at full employment it won’t do much.]

In today's globalized economy, capital is mobile in its pursuit of lower tax jurisdictions. Yet, in that worldwide race for job-creating investment, America is not economically competitive.

[The second sentence is complete crap. In the worldwide race for investment, the US has a large and persistent capital account (investment) surplus. Real interest rates in the US are at historic lows, which means we aren’t starved of capital or access to financing for investment. How the hell any economist could miss this is beyond me.]

Here's why: Left virtually untouched for the last 31 years, our chart-topping corporate tax rate is the highest in the industrialized world and a full fifteen percentage points above the OECD average. As a result of forfeiting our competitive edge, we forfeited 4,700 companies from 2004 to 2016 to cheaper shores abroad. As a result of sitting idly by while the rest of the world took steps to lower their corporate rates, we lowered our own workers' wages by thousands of dollars a year.

[This is the part I find most agreeable, which isn’t saying much. Our statutory corporate tax rate is the highest in the OECD. When it was first set there it was among the lowest. It should be reduced for the sake of competitiveness. However, basically no corporation pays the statutory rate – its full of loopholes, deductions, credits, etc. So many corporations in fact pay little tax. A bill that eliminated loopholes while reducing the statutory rate would increase efficiency, competitiveness, and simplicity without necessarily reducing revenue. As all taxes eventually fall on a person, this can be done without reducing progressivity. None of the Republican proposals do this.]

Our colleagues from across the ideological spectrum – regardless of whether they ultimately support or oppose the current plan – recognize the record-setting rate at which the United States taxes job-creating businesses is, either significantly or entirely, a burden borne by the workers they employ. The question isn't whether American workers are hurt by our country's corporate tax rate – it's how badly. As such, the question isn't whether workers will be helped by a corporate tax rate reduction – it's how much.

[I don’t understand how the burden could be entirely borne by workers. The share of total income going towards capital owners is increasing over time. Some of the burden would have to fall on labor, some on capital, unless they think shareholders are workers. These are the worst economists ever.]

The enactment of a comprehensive overhaul – complete with a lower corporate tax rate – will ignite our economy with levels of growth not seen in generations. A twenty percent statutory rate on a permanent basis would, per the Council of Economic Advisers, help produce a GDP boost "by between 3 and 5 percent." As the debate delves into deficit implications, it is critical to consider that $1 trillion in new revenue for the federal government can be generated by four- tenths of a percentage in GDP growth.

[This is complete bullshit. Not seen in generations? So we’re going to grow faster than we did after WWII when the workforce was rapidly expanding and we were much poorer than today? This is insane. I wouldn’t make such a claim about policies I like. As far as the GDP boost, I don’t see how it will improve long run growth. But whatever. That “3 to 5 percent” figure is in the “long run”. The $1 trillion figure is over 10 years, the cost will be ongoing beyond the 10 years. They’re comparing apples to oranges here. These economists are either dumb or unethical sell-outs.]

Sophisticated economic models show the macroeconomic feedback generated by the TCJA will exceed that amount – more than enough to compensate for the static revenue loss.

[Maybe some models do but not any of the ones any credible analysts who specialize in tax policy use (such as the CBO and JCT). Also, the $1 trillion figure is what the JCT came up with after doing dynamic scoring, not static scoring. Again, dumb as fuck or shameless liars.]

We firmly believe that a competitive corporate rate is the key to an economic engine driven by greater investment, capital stock, business formation, and productivity – all of which will yield more jobs and higher wages. Your vote throughout the weeks ahead will therefore put more money in the pockets of more workers [Oh well if they firmly believe it].

Supporting the Tax Cuts and Jobs Act will ensure that those workers – those beneficiaries – are American.

[UUUGGHHHH. 1, it doesn’t fucking matter what nationality beneficiaries are so long as the economy is improved and 2, they won’t all be American regardless. Large corporations are typically multinational, with multinational owners who will benefit from a lower corporate tax rate.]