Worried that recent U.S.–China trade dialog sounds like a Mayweather–McGregor promotional tour? Concerned that we might be headed for a repeat of the Great Depression era’s race-to-the-bottom tariff wars? Or, maybe you’re relieved that diplomats are no longer being diplomatic? Maybe you think it’s about time Washington stood up for American jobs?
However you feel, we suggest stepping back to review your armchair-policymaker options. In particular, we recommend answering two questions, as in the table below:
We explain our mapping one quadrant at a time, starting with the lower-right (LR).
LR—Free trade is good, and it’s okay to run huge deficits. The lower-right claims the mainstream core of both major parties. Sure, mainstream politicians sometimes hop into the other quadrants, but usually for show. When the public isn’t paying attention, they normally hop right back. But they don’t pursue the pure free trade that many economists would like to see. All countries protect their businesses from foreign competition, and we’re obliged to do the same. What passes for free trade is a parade of bilateral and multilateral agreements that gradually knock down barriers. Whether you support those agreements depends largely on your comfort with 1) the political and often crony-capitalistic process involved, and 2) the skills of our trade negotiators. (You don’t think pundits actually read the agreements, do you?) But those factors depend, in turn, on your comfort with large trade deficits. By embracing the status quo, mainstream politicians signal that they support free(-er) trade and that they don’t mind that America imports way more than she exports.
LL—Free trade is bad, but deficits aren’t the issue. The lower-left bubbled up especially in 1999 and the early 2000s, when noisy protesters interrupted gatherings of the World Trade Organization (WTO). But protesters didn’t shout “Make America Great,” and they didn’t complain much about the unemployment rate in, say, Michigan. They focused more on working conditions in, say, Shenzhen. Although a diverse group, its core appeared to be anti-capitalist and especially anti the notion that developed nations force capitalism on the rest of the world.
UL—Trade needs to be less free, and largely because our deficits are killing us. Ten or fifteen years ago, the upper-left included much of Middle America and a few rogue politicians. Today it includes even more of Middle America and even more rogue politicians. And you may have noticed that the rogues have more power than they used to have. They’ve pulled the mainstream upward and leftward, to a degree. But let’s face it, they’re still rogues.
UR—Trade should be more free, but without allowing deficits to grow so large. We call the upper-right “home,” although we’re not entirely happy with our home. It lacks the lower-right’s authority, the lower-left’s energy, and the upper-left’s voice. Nonetheless, we suspect there are more like us—those who prefer the upper-right to the alternatives. That’s partly because we know people who see things as we do, but we’ve also noticed a change in the public debate. Certain pundits have started pointing out the downside to chronic trade deficits (often citing recent research but maybe also thanks to the rogues?), and without abandoning their support for free trade.
But the UR quadrant begs the question: How do you simultaneously constrain deficits and knock down trade barriers? We claim an answer in the table below (you might recognize a thinly disguised version of Warren Buffet’s proposal for import certificates), alongside policies to match the other three quadrants.
Tweaking Warren Buffet’s Import Certificates proposal
As noted above, we modeled our UR-quadrant policies after Buffet’s certificates. But we use the term import credits. (Who needs a paper certificate?) Also, our rationale for the approach is different than Buffett’s rationale, as we’ll explain shortly. First, here’s our version of how it might work:
- Businesses submit their exports to a recordkeeping system (or possibly a blockchain) that assigns credits (ICs) for the verified dollar amounts of those exports.
- When businesses import, customs agents debit their IC balances.
- Should an importer’s balance fall below some negative threshold, it faces penalties.
- Businesses are left on their own to trade the ICs, although using the recordkeeping system (or blockchain) to record transactions.
- Policymakers can uniformly debit importers for less than the dollar amounts of their imports, thereby assigning a non-zero cap to the overall trade deficit.
In other words, exporters receive ICs that they then sell to importers. Exporters earn extra revenue (encouraging exports), importers incur additional costs (discouraging imports), and policymakers constrain the deficit. One of the attractions to the approach, in our opinion, is that it can supersede traditional protectionism. After constraining the deficit, freer trade wouldn’t carry the same risk of domestic businesses being crushed en masse by predatory trade practices. We’d be in a better position to reduce tariffs, subsidies, and other protectionist policies that sacrifice competition while rewarding special-interest politics.
That said, our solution converts the overall deficit to a public policy decision while still leaving doors open for politicking. For those reasons, it doesn’t score points with free-market economists. For it to gain acceptance, free-market thought leaders would need to change their positions on the meaning of large trade deficits. They would need to jump from the lower-right to the upper-right, lending the upper-right some authority. And there’s not much chance of that happening. Attitudes about trade restrictions are a bit like anchovies—you either like them or they disgust you, and you’re not likely to wake up one day and switch from one camp to the other. Switching camps may even require turning your back on patrons, followers, and a portion of your published works. What’s more, we’ve been verbally bashing our trading partners as much today as ever before, and yet import credits rarely enter the discussion.
Nonetheless, we’ll play the Lloyd role in Dumb and Dumber (“So you’re telling me there’s a chance!”) and say our piece.
As above, we’re not pushing Buffet’s rationale for constraining the trade deficit. He points out that foreign countries accumulate American assets by selling more to us than they buy from us. He then predicts that foreigners will eventually dump their American bonds and acquire American land instead, which he calls colonization “by purchase rather than conquest.” That’s an interesting idea, but it seems overblown to us.
Beware the double slam
We’re not as concerned about “colonization” as we are of what exactly happens when deficits drain dollars from our real economy and then recycle them back to our financial economy. The dollars that leave our real economy carry significant opportunity costs. If those dollars were used to buy American goods and services, they would boost profits, create jobs, and lift wages. When the same dollars flow overseas instead, profits, jobs, and wages suffer.
And how about the equal amount of dollars that flow into our financial economy, as foreigners purchase American assets with the money they’ve accumulated? In the best case, foreigners use their dollars to invest directly in America, hiring local workers and injecting money back into our real economy. We shouldn’t be bothered by foreign direct investment—notwithstanding Buffet’s argument—nor should portfolio investment bother us if the proceeds are used to build capital and create jobs.
So what exactly is it that should bother us?
The problem is that most of the dollars that trade-surplus nations accumulate are then lent back to us to finance either public spending or private consumption. That’s the piece that pundits who back pure free trade tend to gloss over, often appealing to the theory of comparative advantage. But it’s not an advantage that separates foreign savers from our spenders, it’s an attitude. In place of comparative advantage, we should think of our trade deficit as vendor finance. The vendors are the trade-surplus nations that build savings as we accrue debt, thereby financing our habit of spending more than we bring in. Vendor finance helps us kick the can down the road, making our economy more vulnerable to financial, debt, and fiscal crises. It might also amplify the business cycle.
In other words, we get slammed by the trade-deficit dollars that depart our real economy (lower business revenues, fewer jobs, weaker personal income) and then slammed again on the rebound when those dollars reenter our financial economy (overspending, vulnerability to crises, economic volatility). That’s the risk of running large, chronic deficits—a vicious double slam. Imagine stepping into a knock-out punch and then, as you fall, banging your head against the canvas.
The double slam explains our affinity for the upper-right quadrant in the tables above. We think free trade is generally good, but it’s not okay to run large deficits. Therefore, we see drawbacks to both mainstream thinking and traditional protectionism. Which brings us back to the question we began with: Where in the foreign trade debate do you belong? Which of the quadrants do you like best?
Ex-Bosnian Serb commander Mladic faces verdict in genocide trial
THE HAGUE (Reuters) – The U.N. tribunal on war crimes in former Yugoslavia hands down its final verdict on Wednesday in the genocide trial of Ratko Mladic, the ex-Bosnian Serb general accused of ordering the massacre of 8,000 Muslim men and boys at Srebrenica.
Prosecutors demanded a life sentence for Mladic, 74, who was the Serb army commander in Bosnia’s 1992-95 war and is also charged with crimes against humanity over the siege of Sarajevo in which 11,000 civilians died from shelling and sniper fire.
The Srebrenica slaughter was Europe’s worst atrocity since World War Two. Mladic faced 11 charges in total and pleaded not guilty to all of them. He is expected to appeal if convicted.
Srebrenica, near Bosnia’s eastern border with Serbia, had been designated a “safe area” by the United Nations and was defended by lightly armed U.N. peacekeepers. But they quickly surrendered when Mladic’s forces stormed it on July 11, 1995.
The Dutch peacekeepers looked on helplessly as Serb forces separated men and boys from women, then sent them out of sight on buses or marched them away to be shot.
A bronzed and burly Mladic was filmed visiting a refugee camp in Srebrenica on July 12. “He was giving away chocolate and sweets to the children while the cameras were rolling, telling us nothing will happen and that we have no reason to be afraid,” recalled Munira Subasic of the Mothers of Srebrenica group.
“After the cameras left he gave an order to kill whoever could be killed, rape whoever could be raped and finally he ordered us all to be banished and chased out of Srebrenica, so he could make an ‘ethnically clean’ city,” she told Reuters.
The remains of Subasic’s son Nermin and husband Hilmo were both found in mass graves by International Commission of Missing Persons (ICMP) workers. The ICMP have identified some 6,900 remains of Srebrenica victims through DNA analysis.
Mladic’s lawyers argued that his responsibility for murder and ethnic cleansing of civilians by Serb forces and allied paramilitaries was never established beyond reasonable doubt and he should get no more than 15 years if convicted.
The “Butcher of Bosnia” to his enemies, Mladic is still seen as a national hero by compatriots for presiding over the swift capture of 70 percent of Bosnia after its Serbs rose up against a Muslim-Croat declaration of independence from Yugoslavia.
Prosecutors said the ultimate plan pursued by Mladic, Bosnian Serb political leader Radovan Karadzic and Serbian President Slobodan Milosevic was to purge Bosnia of non-Serbs – a strategy that became known as “ethnic cleansing” – and carve out a “Greater Serbia” in the ashes of old federal Yugoslavia.
In arguing for Mladic to be imprisoned for life, prosecutor Alan Tieger said anything else “would be an insult to victims and an affront to justice”.
Mladic was indicted along with Karadzic in 1995, shortly after the Srebrenica killings, but evaded capture until 2011.
His trial in The Hague took more than four years in part because of delays due to his poor health and will be the last case – barring appeals – to be heard by the International Criminal Tribunal for the former Yugoslavia (ICTY).
“From the legal point of view we expect the court to release the general,” Mladic’s son Darko told Reuters. “During the trial we have not seen any evidence against him. What we are worried about now is his health.”
Mladic has suffered several strokes, though U.N. judges rejected a flurry of last-minute attempts by defense lawyers to put off the verdict on medical grounds.
But his lawyers faced an uphill battle, given a mountain of evidence of Serb atrocities produced in previous trials. Four of Mladic’s subordinates have received life sentences, while Karadzic was convicted in 2016 and sentenced to 40 years.
Milosevic, who defended himself, died in prison in 2006 before a verdict was reached in his case.
Mladic’s lawyers argued that Sarajevo was a legitimate military target as it was the main bastion of Muslim-led Bosnian government forces. They also asserted that Mladic left Srebrenica shortly before Serb fighters began executing Muslim detainees and was later shocked to find out they had occurred.
However, prosecutors argued that under war crimes law, even if Mladic did not directly order the killings, he should have known what his subordinates were doing, and would be liable for failing to punish those who committed atrocities.
The ICTY indicted 161 people in all from Bosnia, Croatia, Serbia, Montenegro and Kosovo. It has convicted 83, more than 60 of them ethnic Serbs. Tradebuddy.onlineL8N1NL7ZT]
Reporting by Toby Sterling, Stephanie van den Berg and Ivana Sekularac; editing by Mark Heinrich
Budget Preview: Chancellor Philip Hammond’s Impossible Task To “Square The UK’s Circle”
At lunchtime today, Philip Hammond will give the weakened Conservative government’s first budget in the new parliament.
Against a likely backdrop of downgrades for the economy from the OBR, the Chancellor will be under immense pressure to provide a sound plan going forward on many issues. As Statista’s Martin Armstrong notes, the NHS has already had its call for an emergency boost of £4 billion rejected, but there will need to be at least some answers to the problems surrounding health and public services funding.
As a new survey by ComRes shows, this topic is one of particular importance to the public, with 67 percent saying that there should be more investment in these services, with a slight majority even saying they would personally be prepared to pay more taxes to enable it.
Clearly, this is a highly significant budget and we would be greatly surprised if it’s considered a success. As we noted yesterday, Reuters columnist and former European economics editor of The Economist, Paul Wallace, believes:
Few British budgets have mattered as much as the one that Philip Hammond will deliver to the House of Commons on Nov. 22. The chancellor of the exchequer must shore up Theresa May’s perilously shaky government ahead of a vital Brexit summit of European leaders in mid-December. At the same time Hammond has to keep a grip on the public finances.
However, it’s worse than that, as the Chancellor is also under pressure from senior members of the Conservative party, never mind UK citizens, to increase spending amid widespread fatigue with austerity. Here is the Financial Times on the stiff challenge Hammond is facing.
UK Chancellor Philip Hammond is under pressure from all sides as he prepares to deliver his second Budget on Wednesday. The first Budget of a new parliament is traditionally the time for chancellors to take bold decisions about taxes and spending. But the economic forecasts are likely to be difficult, public services are under strain, and pro-Brexit MPs are increasingly turning on the chancellor over his support for a “soft Brexit”. If Mr Hammond produces a safety-first Budget, he squanders his opportunity to decisively shape Britain’s future. But boldness risks backfiring, and steering a middle course threatens to satisfy nobody.
The FT notes that the Chancellor’s statement will “serve a cold dish of downgrades for the UK economy” from the independent “Office for Budget Responsibility” (OBR). This year’s growth forecast is expected to be cut from 2.0% to 1.6% and for 2018 from 1.6% to 1.4%. The medium-term forecasts depend on the OBR’s assumptions on productivity growth, which it has already flagged will be cut “significantly”. The FT expects that.
That means growth figures for 2020 and beyond will be closer to 1.5 per cent a year, compared with the 2 per cent that the fiscal watchdog had previously forecast.
Paul Wallace highlighted productivity as Hammond’s biggest problem.
But the gravest challenge he faces is economic: Britain’s persistent productivity blight…
Other advanced economies have also experienced setbacks to productivity growth following the financial crisis. Where Britain stands out is in the severity of its reverse. The shortfall in productivity is the main reason real wages are now 4 percent lower than 10 years ago, a potent reason why the leave campaign prevailed in the Brexit referendum.
While public finances look slightly more robust in the near-term, the outlook is deteriorating 3-4 years out, as the FT explains”
Tax revenues have been stronger than expected this year, alongside lower-than-expected public spending. As a result, this year’s expected public borrowing will fall by about £8bn. The debt burden will begin to fall next year, giving Mr Hammond the opportunity to boast that he has turned the corner on public finances. But good news in the short term disappears towards the end of the forecast horizon, as weaker economic forecasts bear down on projected tax revenues. Before any accounting or tax changes, the deficit forecast in 2020-21 is likely to rise by more than £10bn compared with the March forecast. The government has already said it wants to reduce borrowing to under 2 per cent of national income by 2020-21, but Mr Hammond’s headroom is likely to roughly halve, from £26bn to about £13bn, in that year.
However, he does have one thing up his sleeve…an off-balance sheet accounting gimmick.
The chancellor wants to signal that after a difficult year, things are looking up, with debt falling and Brexit-related uncertainties lifting. To offset bad news in the medium-term public finances, he will use a £5bn-a-year accounting change — by taking housing associations’ borrowing off the government’s books — to free up more money for housing, wages and healthcare.
Affordable housing is a major problem for Hammond and Prime Minister Theresa May. According to the FT:
Fixing the “broken housing market” is the government’s biggest domestic priority. The chancellor wants to make rents more affordable and ease the path to home ownership for younger adults who have deserted the Conservative party in recent elections. Mr Hammond has already set a target of 300,000 new homes per year, but has also insisted there is no “single magic bullet” to solving housing problems.
He will announce a housing package on Wednesday that is likely to include commissioning of new building on public land and funding for local authorities to construct homes. He will also reaffirm the Tories’ promise from last month’s party conference to commit £10bn more of Help to Buy equity loans, and set out plans to lower stamp duty for some first-time buyers. There will be no big reform of planning laws for the “greenbelt” of protected area outside of London, but local authorities could be given more powers for compulsory purchase of land.
In its budget preview, the left-leaning Guardian newspaper highlights the deteriorating outlook for public finances due to the productivity problem.
Lower expectations for the output per worker will have an impact on the gross domestic product, cutting the amount of economic output available for taxation. The Institute for Fiscal Studies reckons the downgrade will contribute to a £20bn black hole in the public finances, limiting Hammond’s spending power if he wants to stick to his pledge to remove the deficit by the mid-2020s. John McDonnell, the Labour shadow chancellor, seized on the October data to argue that seven years of spending cuts had “caused pain and misery for millions with little to show for it”.
As if “Fiscal Phil” Hammond didn’t have enough on his plate, he’s also been lambasted for his gaffe that “there are no unemployed people” in Britain, in a television interview at the weekend. Disliked by the pro-Brexit side of his party, Hammond’s budget speech is being viewed by some as the “make or break” moment of his career. We concur.
Meanwhile, Bloomberg has been doing some sleuthing on budget preparations by government departments and think tanks. It identifies six things to look out for when Philip Hammond stand up in parliament to deliver his speech.
The U.K. budget is usually a mixture of measures that have been heavily trailed in the run-up by various government ministers, with a liberal sprinkling of surprises. In the past six months there have been myriad consultations and papers on everything from the offshore oil to air pollution that hint at possible measures in the works. Bloomberg trawled through that documentation, as well as recent announcements, to identify six areas that are likely to get a mention when Chancellor of the Exchequer Philip Hammond lays out his economic blueprint.
1. Stamp Duty and the Housing Crisis
Prime Minister Theresa May last week pledged that it’s her personal mission to “build more homes, more quickly.” To that end, the budget is likely to include a number of measures to encourage construction and enable younger people to get on the housing ladder. Asked on the BBC on Sunday about whether the home-buying tax known as stamp duty would be cut for younger buyers, Hammond declined to discuss tax matters, but didn’t deny he was looking at the measure.
“We recognize the challenge for young first-time buyers, that in many parts of the country deposits are now very large,” Hammond said. “Nobody is saying we’ve done enough. We must do more. We recognize there’s a challenge there and on Wednesday I shall set out how we intend to address it.”
2. North Sea Oil and Gas
Whilst remaining committed to its climate-change goals, the U.K. is also trying to extract as much value from its waning oil and gas fields in the North Sea. The industry is crucial to the economy in Scotland, which would be grateful for any assistance to a financial lifeline even as it remains angry at the Conservatives for taking it out of the European Union.
At the last budget in March, the government published a “discussion paper” that examined allowing transfers of tax history between buyers and sellers of oil and gas assets — a measure designed to make it easier to buy and sell the fields, and keep them producing for longer. It would allow buyers to get a tax refund as a result of any costs incurred decommissioning the field at the end of its life.
Hammond told the Sunday Times he’s “looking at” a possible change in the tax rules, which is “the No. 1 ask of my Scottish colleagues.” Even so, he did issue a note of caution, adding that the Treasury needs to ensure the reform “is robust and that we don’t inadvertently create scope for gaming on a grand scale in the tax system.”
3. Boosting Research & Development
May on Monday said the government aims to increase public and private research and development spending to 2.4 percent of economic output by 2027, and beyond that to 3 percent. “This could mean about 80 billion pounds ($106 billion) of additional investment in the next decade,” she said.
As part of an announcement the same day linked to her government’s Industrial Strategy — due to be published next week — she said that would begin with a commitment for an extra 2.3 billion pounds of investment in the 2021-2022 tax year, taking total public investment to 12.5 billion pounds that year. The government also signaled plans for a 1.7 billion-pound fund focused on improving regional transport links.
4. Shale Wealth Fund
In another measure aimed at boosting the fossil-fuel industry — in this case by making it more palatable to local communities — the government promised at the last election to overhaul a pledged fund worth as much as 1 billion pounds to distribute some of the profits from hydraulic fracturing.
The aim is to ensure “a greater percentage of the tax revenues from shale gas directly benefit the communities that host extraction sites.” The government last week responded to a consultation on the issue pledging the fund will initially consist of as much as 10 percent of tax revenues from shale-gas extraction, with proceeds to be spent on projects ranging from play parks for children to improved transport links and restoring historical sites.
5. Air Pollution Tax
Diesel vehicles have become a political football of late. For years, governments ignored evidence that diesel is worse for air quality and encouraged its use because the fuel is less damaging to the climate than gasoline. With air pollution now under the microscope in London in particular, the government published an air-quality plan over the summer and is likely to include measures in the budget designed to help clean up the air in Britain’s cities by encouraging cleaner vehicles.
Possible measures include raising the sales tax on diesel cars, known as vehicle excise duty, or raising taxation on diesel fuel itself, which is currently taxed at the same level as gasoline, at about 58 pence per liter. The government has also said it will consider programs to encourage motorists to trade in their older, more polluting cars, for newer, cleaner ones. Ministers also stepping up efforts to encourage the use of more electric vehicles by supporting the development of batteries and the deployment of charging points.
6. Fund for Start-Ups
In August, the government proposed a new National Investment Fund that would help start-ups access the “patient capital” funding they need to develop into so-called “unicorns” — innovative companies valued at over $1 billion. A consultation on the proposal closed in September, and Hammond is likely to propose a confirmed plan of action in the budget.
The consultation suggested funding should come from the British Business Bank, replacing the backing currently received from the European Investment Fund. One of the reasons this could get a mention is that the the government is keen to demonstrate that London can attract Big Tech even when it’s no longer in the European Union.
Although the view is hardly unique to this government, a mere 22 percent said that they feel taxpayers’ money is currently being spent wisely.
Whether this percentage will go up or down after the Chancellor’s statement today, remains to be seen.
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