Trade Deficits Aren’t as Big a Deal as You Think They Are

Trump keeps bragging about how he’s reducing trade deficits.  He’s been claiming that China eats our lunch. This is evidence that he doesn’t understand how economics work.

Now the budget deficit is a problem.  It means we’re going deeper into debt, drawing ever closer to bankruptcy.  The trade deficit just means we buy more from China than they buy from us. But it doesn’t mean we’re getting screwed.  Strictly speaking, increasing imports makes GDP decline. But depending on what we do with what we buy, the overall effect could cause GDP to grow,

Here’s an example: One thing we buy from China is smartphones.  They’ve been manufacturing them for years. And I’m not talking about Huawei.  I mean iPhones and Androids and so forth. So every time one gets shipped here, the trade deficit grows.  Doesn’t this reduce GDP? Doesn’t this take American jobs? Nope, it does this opposite.

What would happen if they were made here?  They would cost more. And what happens when things cost more?  People buy fewer of them. Some estimates say iPhones would cost over $2,000.  Right now, they’re maybe half of that.  Or less, for some models.

It shouldn’t be a surprise that smartphones have driven eCommerce way up.  And that drives American jobs. Maybe we don’t produce the smart phones, but over 20% of the Android app developers are here.  Those are obviously good paying jobs.  It’s just one example. Proliferation of smartphones has affected almost every industry.  It would be easier to list the industries that haven’t been affected. It would be a very short list.

If people had fewer phones, then this impact would be lessened.  We might have more manufacturing jobs, but fewer coding jobs, fewer eCommerce jobs, even fewer delivery jobs.  Whatever gains we got from more manufacturing jobs would be drowned out by the loss of others. Whatever negative impact those imports had on GDP would be drowned out by by the decline in every industry that is impacted by eCommerce.

So we need to stop acting like trade deficits are a problem.  Buying more from someone than they buy from you doesn’t mean you’re getting screwed.  I buy more from my grocery store than they buy from me. My employer buys my labor from me, but I don’t buy a damn thing from them.  Despite this, we all seem to be doing fine. And as long as buying stuff from China is allowing us to use those goods to make our economy grow faster, the United States isn’t getting screwed either.

Why Taxing Wall Street Speculation is an Incredibly Bad Idea

Bernie Sanders plans to pay for free college with a “tax on Wall Street speculation”.  This line sounds great with lots of working class and middle class people, the same way “tax the rich” sounds good.  It’s even better, since it’s not just “the rich”. It’s “tax the rich guys who tanked the economy a decade or so ago”.

I can understand how something that appears to punish rich hedge fund managers and bank CEOs is cathartic.  Millions of people were laid off, went deep into debt, and struggled during the recession. I was one of them.

And to anyone who doesn’t truly understand the way Wall Street and the financial industry works, these guys can appear scary and suspicious.  The stereotype is a rich kid who graduated Phillips Exeter or Andover, went right into Harvard, Yale, or Princeton, then waltzed straight into a six or seven figure job where they appear to be arcane puppetmasters who pull the strings of the economy in a way that benefits them at the expense of the rest of us.

Stereotypes don’t come out of nowhere.  The stereotype exists because guys like this actually exist.  But they don’t represent the entire industry. They represent the relative few bad actors who dominate the headlines and make the others in their industry look like idiots.  

Now one small problem is that when you tax people for doing something, they do it less.  This isn’t necessarily a bad thing, since there are high frequency traders using technology to game the system in a way that doesn’t really add much value to the market.  But if they stop doing it, the revenue will be much less than anticipated. The revenue depends on maintaining current volume.

But this is a relatively small thing. The real problem with taxing trading is that the Wall Street guys aren’t the ones who will end up paying the tax.  Everyone else will.

We think of stock or bond trading plaything of the rich.  But many working and middle class people are involved, directly and indirectly.  The pensions plans for teachers, police, firemen and others are invested in the stock market, usually through mutual funds.  Private companies and nonprofits fund their employees retirements in 401k and 403b plans, which also invest heavily in mutual funds.  And the tax will hurt the returns these funds make.

Bernie’s tax will be 0.1% on bond trades and 0.5% on stock trades.  Doesn’t seem like much on its face.  But the impact on retirement savings can be significant.  The “expense ratio” in a mutual fund represents the amount that fund spends on administration.  They are usually very small; less than 2%. But because gains compound over the years, even a slight increase in the expenses for a fund can translate into significantly lower returns.  

So what happens if the total retirement savings are reduced?  Pension plans may struggle to fund their retirees retirement. Maybe older people have to go back to work instead of completely retiring, or at least retire with a lower than expected standard of living.

The increase in these fees also impact insurance companies.  Many pension plans are run by insurance companies, not financial institutions.  These are funded by “pooled separate accounts”, which are effectively mutual funds by a different name.  These also invest in stocks and bonds, and would also be affected by the tax.

But even people who own normal insurance policies would be affected.  It has to do with the way the insurance industry works.

If you buy a life insurance policy at 30 for $500,000 and live 50 years, the insurance company would have to charge $10,000 per year just to break even.  But the average policy doesn’t charge anywhere near that much.  So how do insurance companies make up the difference?  They invest. A lot. But if the returns on those investments were to take a hit, they’d need another way to make up the difference.  Like, raising premiums or reducing coverage. Which means ordinary people pay for it. This is true with every type of insurance, not just life insurance.  And virtually every person in the US is covered by some form of insurance. So even a person with no retirement savings, no pension, no investments of any kind would be affected if this tax is charged.

The thing Bernie supporters miss about this tax is the same thing Trump supporters miss about the tariffs.  They think the tax will only affect people they don’t like. But the people who ultimately pay that bill will be ordinary people, through loss in retirement savings and higher insurance premiums.