Trumponomics: End globalization and bring the jobs home
from L. Randall Wray
Trump has put forward a number of proposals related to the theme of ending globalization – including renegotiating NAFTA and pulling out of the TPP – many of which were directed at China and other exporters. Like many American politicians, Trump has claimed that China is a “currency manipulator” and promises to pursue an investigation. He’s proposed large tariffs to be slapped on imports (variously suggested as 45% on Chinese exports to the US, 20% on all imports, and 35% on Mexican imports), and particularly on American firms that move jobs overseas (proposing a 15% tax on firms that do so). As mentioned, he promised to create 25 million good jobs over the next decade, many of those by bringing the jobs home. One of his first acts was to “save” jobs at Carrier that had been destined to go to Mexico – supposedly proof of his touted negotiation skills – and suggests he will continue to put pressure on individual firms to stay put.
At the same time, Trump has proposed to reduce the tax burdens that presumably discourage job creation and encourage tax avoidance (including corporate inversions). He has variously proposed a flat tax on firms of 15%, and a one-time repatriation of corporate profits at a special 10% rate. Here’s a better idea: eliminate the corporate income tax. Economic theory suggests that the tax is largely passed forward to consumers or backward to workers. It induces firms to make many decisions – such as location of headquarters as well as taking on debt – on the basis of tax avoidance rather than sound business principles. To the extent that profits are paid out in the form of dividends, they get taxed as personal income. In theory, we should also tax retained earnings to the extent that these drive up share prices and hence increase personal wealth – otherwise elimination of the corporate income tax might increase the incentive to retain earnings and thereby exclude them from ever getting taxed (except for capital gains, which are taxed at a lower rate than income). In practice, imputing retained profits to individuals so that they can be taxed as income might be too difficult. In this particular case, the good should not be seen as the enemy of perfection: let’s just drop the corporate income tax, reducing the incentive to make and report profits, as well as eliminating the disincentive to seek low tax havens.
With regard to the promise to punish “currency manipulators”, this is as silly as punishing countries that are “fiscal policy manipulators” (who, for example, keep domestic unemployment high and wages low so that they can export), or punishing “monetary policy manipulators” (who use interest rate policy to pursue perceived self-interest). I am sympathetic to those who call for pushing “fair trade” over “free trade” – we should not accept the exports produced by slave or child labor, or by labor working in dangerous conditions or below subsistence wages. However, the exchange rate is a legitimate policy tool in the same way that interest rate targets or inflation targets or fiscal balance are used to pursue national economic interests. While the US has embraced floating exchange rates as useful in promoting its national interests, many nations (rightly or wrongly) see control over exchange rates as necessary to promote theirs. In truth, China has been letting its exchange rate rise (the recent large capital outflow reversed course) while pursuing a strategy of rapid wage increase in spite of trend inflation.
Trump needs to understand that the US issues the international reserve currency – the dollar. The rest of the world wants and needs dollars and so will operate domestic policy to ensure dollar inflows. No matter how many tariffs Trump imposes and no matter how much he tries to keep jobs in the US, the US current account balance largely will be determined by the rest of the world’s desire for dollars. Making them scarce by restraining imports will only increase global efforts to undermine Trump’s policy. “Bringing the jobs home” will not be a significant source of job creation anyway – we need to focus on creating new jobs at home, not on enacting penalties or tariffs. The US is too big (and too rich) to engage in beggar-thy-neighbor policy.
And we need to provide decent pay for those new jobs. There might be some role for trade policy to promote “fair trade” in specific instances to protect American wages. Trump is right to reject the claim that “free trade” is always good, and to insist that domestic policy should consider the interests of American workers. That is what democratic representation is all about. read more