Tag Archives: labor

North Korea

The conflict with North Korea is based on deception and fear.

North Korean leadership has deceived their population into believing that America started the Korean War and killed hundreds of thousands of Koreans. Based on this belief, North Koreans fear that Americans will attack and kill them. Their nuclear agenda may have started as part of their conflict with South Korea, but it has evolved into a defense against a perceived American attack.

To avoid war and encourage positive change, the US and the rest of the world should make an effort to integrate North Korea into the economic landscape. Companies and governments should offer to pay North Korea for exports — clothes, pots and pans, and basic manufactured goods to start. If the North Koreans can develop a growing economy, then greater employment will bring better education and reform.

With basic commercial trade, power is shifted slightly toward the economy and away from the state.

Is Global Free Trade Always Good?

As long as trade is at will by both parties, it is good, right?

Not necessarily.

Innovation has led to great developments in goods and services, and led to amazing increases in productivity and capacity utilization. International trade is distributing value more efficiently than ever.

Peter Weiss raises an important counterpoint:

“[clip] The dislocation is often painful and some people cannot make the transition for any number of reasons – I don’t minimize or ignore their pain, or loss. As people living in a community, however we define it, we should consider how we respond to them [clip]”

Throughout history, the waves of displaced workers have ranged from negligible to crisis levels. Displaced workers are typically older workers who are highly skilled in a shrinking industry, or people of all ages who do not have economically rewarding skills. The first set of people is generally easier to define because they had and lost their jobs, while the second set may be far more difficult to quantify.

In the transition to the industrial age, displaced farmers, craftsmen, and tradespeople went through fairly desperate poverty, but there was a large industrial complex forming, ready to hire people with a wide range of skills. In the information age, and with a far larger and more anonymous society, we are dealing with new dynamics. Automation is increasingly replacing labor in production, putting a greater emphasis on capital. The economically rewarding skill set is becoming more cognitive, scalable, and competitive. The highly scaled production of the globally efficient producers displaces less efficient producers throughout the rest of the world.

Why would this be a problem? Clearly, we already acknowledge that some trade should be illegal: monopolistic mergers are restricted by the Federal Trade Commission. Even overly concentrated industries may have restrictions on further consolidation. With information services and assets, marginal costs fall to about zero, and this economy of scale is a strong force for monopolies within each product or service class. Innovation can be stifled if monopolists prevail. However, this dynamic cannot be controlled globally by the US Federal Trade Commission.

But it goes further than that: whenever productivity rises faster than production, fewer workers are required in aggregate. Production may still be growing, but the non-working population and increasing concentration of wealth means that the median utility may shrink. Recent drops in interest rates has promoted refinancing and debt, enabling continuation of consumer spending, but factoring out this externality implies a scary economic reality.

I’m afraid I can’t offer a comprehensive solution, but as policy makers (or simple commentators), the goal should be maximizing the growth rate of the median utility, right? The Fed and international trade policy are currently influenced by an optimization problem that maximizes total GDP growth. Changing the nature of the optimization has the potential to imply that free trade might not always be good. Similar to the measures put in place to avoid the downsides of monopolistic trade in the US, legal and financial policy reform may be due in the next decades to enforce rules as a Global Trade Commission, and also to target disadvantages from productivity growth overwhelming production growth.

Renminbi Valuation

The renminbi is pegged to the US Dollar, and has been for a long time, so what would a revaluation of the Chinese currency mean? Without an exchange rate determined by the marketplace, how can we anticipate the magnitude of the difference between the pegged rate and the appropriate market rate?

It is clear that the yuan is cheap relative to the dollar, but by how much? Our economies are different, and these differences lead to different relative pricing, but looking at a variety of prices can give us some sense of purchasing price parity.

Unskilled Labor:

Textile workers in China are paid about 1/30 of the amount paid for equivalent work in the United States. If this ratio were to equalize through currency revaluation, the yuan would increase by 3000%. However this is almost certainly too high, as China has an oversupply of unskilled labor. This number provides the high-end boundary on the scope of the question.

Gold:

Gold can be purchased in yuan At the time of this writing, $442 worth of gold costs 3670 yuan, implying an exchange rate of about 8.303 Yuan/$. If this ratio were reflected in the currency echange rate, the yuan would increase a negligible amount (Because the exchange rate peg is currently 8.27 Yuan/$). However this is almost certainly too low, as it is illegal for chinese citizens to invest in Gold. This number provides an low-end boundary on the scope of the question.

Basket of goods:

Depending on the basket you select, purchasing price parity implies different undervaluation of Yuan. I estimate approximately 40% undervaluation, clearly with different classes of goods and services.

Trading:

Under a fair and open market, I envision a 40% inflation on Cinese imports would greatly imporove the stature of US companies that have been drowning under Chinese import competition. Similarly, Chinese companies that earn their revenues from Chinese will see a US Dollar denominated revenue increase of 40%.

[UPDATE 1/25/2005]

Senator Lindsey Graham, (R) Judiary Committee and

Senator Charles (Chuck) Schumer, (D) Finance Committee

are announcing bill to impose a 27.5% tarif on Chinese imports, implying their view that the Renminbi is near 27.5% discounted against the Dollar.

[END UPDATE]

Let’s speculate that Chinese currency will reflect market forces within 2 years. In this speculative possible environment, investors might benefit from:

underweight Chinese companies with revenues largely based on exports

overweight Chinese companies with revenues largely based in China

underweight US companies who import from China

overweight US companies who compete with Chinese imports

Now let’s speculate that Chinese currency will remain pegged to the US Dollar. In this speculative possible environment, investors might benefit from exactly the opposite positions.

How can the US exploit a currency peg that is clearly an unfair trade practice?

Cut taxes and issue more debt.

This increases the Federal deficit, diminishing the value of the US Dollar, and also increases the after-tax pay rates for US workers.

Solution to Outsourcing

Outsourcing is a problem. There will be an estimated 406,000 US jobs outsourced in 2004.

Let me float a possible solution: Let everyone in, give everyone a tax ID card, and eliminate the minimum wage. Give us your tired, your poor, your huddled masses yearning to breathe free, and let them work and pay taxes like everyone else. They would not be citizens yet, but they could live and work here legally.

These legal aliens would not be citizens, but should be offered some of the minimal public social services and protections, reserving the highest level for citizens. If they are in good standing after some number of years, then they would be eligible to become citizens.

Right now, illegal workers in America are willing to take unfair pay, receive no benefits, and tolerate unsafe conditions because they don’t pay taxes and they are afraid of being deported. Given legitimacy, they would demand reasonable pay, reasonable benefits, and reasonable working conditions, finally putting them on a fair playing field with the rest of us. And there is very likely a huge pent-up demand in this population to join organized labor.

With the increase in newly recognized labor tax revenues would increase substantially. And with this reorganization of immigration and the elimination of the minimum wage, businesses would rapidly grow and hire right here in the United States.

Elimination of the minimum wage would mean that employment would go WAY up. There would no longer be this structural unemployment at the bottom of the economic scale where a person is not yet worth more than a few dollars per hour, and so they can’t get a job and the experience they need to advance.

The standard of living for Americans would increase substantially. The fall in unemployment would reduce homelessness and poverty. Rapid business growth and the rise in domestic consumer spending would continue the cycle of increasing domestic labor force growth. Stocks and bonds would increase in value with the growth in businesses and business credit. Inflation would be pushed up by the increasing growth in businesses, employment, and immigration, but these are good reasons for inflation (easily controlled with the Federal Reserve overnight lending rate).

Taxes and Concentration of Wealth

The concentration of wealth plays a role in economic growth and employment, crime rates, and just about every aspect of American society. The primary tools government uses to manipulate the concentration of wealth are tax and healthcare policies. In this article, we focus on how recent tax policy is reshaping the concentration of wealth.

Policies that distribute wealth and power more broadly are sometimes called “socialist” by those who argue against them. Similarly, policies that concentrate wealth and power too much are sometimes called “oppressive” or “fascist”. Both of these names are misleading. In a capitalist democracy, a wide range of policy decisions can set the stage for incentives and fair business; we’re still working to find the best balance.

Capital gains income tax:

Under President Bush’s tax cuts, investors are now paying 15% tax on income from capital gains. Meanwhile, income from work is taxed about twice as much, depending on your marginal rate. The tax code is effectively encouraging income from capital gains by giving back half the tax on that type of income. It’s not clear to me that the government should be in the business of encouraging one type of income over another, but if we do then we should be encouraging income from work. Investors may argue that they have already earned this money and paid taxes on it so it should not be taxed again. This is true; remember that you only pay tax on the new income. The original amount you invested is not considered income and is not taxed again.

Estate taxes:

Estate taxes were created along with child labor laws, voting rights for women, and the establishment of an income tax during the Progressive Era (1900-1918). President Bush is eliminating the estate tax, and has proposed to make this tax cut permanent in the coming term. The question of whether we should we maintain estate taxes or eliminate them is a subjective question. Rather than make this point myself, let me defer to the words of President Franklin Roosevelt: “Great accumulations of wealth cannot be justified on the basis of personal and family security. In the last analysis such accumulations amount to the perpetuation of great and undesirable concentration of control in a relatively few individuals over the employment and welfare of many, many others. Such inherited economic power is as inconsistent with the ideals of this generation as inherited political power was inconsistent with the ideals of the generation which established our Government.” President Bush’s agenda for estate taxes is to reduce the estate tax over time to nothing, and in the next 4 years, his agenda is to make this permanent. If this happens, families of vast wealth will effectively be an elite class, removed from the rest of Americans by the virtue of birthright.

Dividend income tax:

Bush’s economic agenda for the next 4 years also includes eliminating the tax on dividend income (http://www.gop.com/GOPAgenda/AgendaPage.aspx?id=2). If this is passed, those who receive dividend payments will not pay any taxes on that income, giving them an after-tax raise of more than 50% (35% tax leaves 65%. Going from 65 to 100 is a 53.8% gain). That personal income will no-longer be contributing to the government revenues, and the shortfall will accumulate against us all in the form of budget deficit. If stopping the double-taxation of dividends is the goal, the correct way to deal with it would be to make dividend payments a deductible expense just like any other cost of doing business.

These recent tax cuts have been very effective in getting money back into the hands of Americans, but have put us into growing debt. The budget deficit is important because the national debt must someday be paid down, with interest. This is one of the most important factors that determines the value of the US dollar and international confidence in American investments. With extensive history and other nations as examples, we clearly see that as the debt gets bigger, we will experience inflation, not be able to buy as many foreign goods, and see less international interest in our stock markets. The U.S. budget deficit in 2004 will hit a record $445 billion, according to the White House. Not only would this be a record deficit, but also an unprecedented fall from record surplus.

Federal Budget Surplus or Deficit

Data source: http://www.cbo.gov/showdoc.cfm?index=1821&sequence=0

Instead, if income from all sources is simply taxed as income, then tax policy will be much more fair and government revenues will be higher. On this point, the Democratic agenda to roll back such specific portions of the recent tax cuts seems right. The timing, however, is sensitive: increasing taxes during economic recession can make problems worse.

In any event, the Federal Reserve (not tax policy) is the primary mechanism for managing economic recession. If the federal government uses changes in the tax code to manipulate the economic cycles, then it is acting as a backseat driver to the Federal Reserve. In addition to the complication this adds for the FED in determining the funds rate, it also makes it much harder for citizens and businesses to plan and prepare taxes.

The concentration of wealth threatens our nation. The poverty rate was 12.5% of all Americans in 2003. The numbers are even worse for children: 17.6% of Americans under the age of 18 are living in poverty (http://www.census.gov/hhes/income/income03/prs04asc.html). I hope you will agree that these numbers are too big. These Americans often disappear in our society and are not very well represented in politics: they may not apply for jobs or vote, they often do not have health insurance, they often do not pay taxes on the money they do earn; they hide from the system because the system demands taxes that they can’t afford to pay. Tax policy is exacerbating this problem and should be made fair in the ways I described above. Once the downward spiral of joblessness and poverty can be broken, the upward spiral of employment and fulfillment can begin. Increasing the workforce and reducing structural poverty is clearly in the interest of America.