Our Current Account Deficit Is Killing Our Competitiveness

[wesdavidson]

Protectionism? no perhaps not, but maybe a real bias toward home production, and ownership.

There was time I could sit on a horse in '79 out on the range near Kemmerer Wyoming and see 30-40 working oil drilling rigs. Today you can go out there and the roads, pads, everything are gone, reclaimed. Just rusting casings sticking up here and there. Today there is a major gas play taking place in the Red Desert of Wyoming. We have the oil and gas. But do we really want to use it up before we use up theirs?

Three top reasons for the lack of oil production in the overthrust belt (despite more proven reserves than in Saudi Arabia) were: (1) It is deep oil. wells were drilled past 25,000 feet. The mideast oil is at 2,500 feet. (2) Taxes; if a well was stopped just before the oil was reached, but after it had good indications, and could be added to proved reserves, then the well could be called a "duster" and the cost taken off the balance sheet, and taxes, immediately. If it came in, then it was a "producer" and the cost had to be amortized over the life of the well. When oil is cheap, you can go broke hitting oil. (3) Environmental regs. Despite oil being a naturally occurring mineral, -there used to be oil seeps all over Wyoming, there are still natural gas vents along the bear river fault. The EPA regulates everything that comes out of a well, or has anything to do with the industry as a pollutant. It adds a lot of money to production costs. Not to mention the uproar over a drill rig or a pipeline. (We won't consider how the thriving freedom loving democratic republics in the OPEC world treat environmental suits.)

Now extend those ideas to the rest of the manufacturing economy.

Yes we have higher wages. We need to. It helps people live better and buy things.

We need a tax structure that rewards making things here. Equipment tax credits, keyed to imported vs domestic sourced equipment. Reasonable health care, environmental and workers comp laws. SBA loans with interest keyed to import content. Corporate tax rates keyed to import content. Corporate tax rates keyed to domestic vs overseas ownership. We need a tax structure that also promotes long term profit, not the quarter to quarter stuff that kills long term innovation.

The days of flaming rivers are over. The days of random pillage and rape of resources is over. We need a sensible EPA revision.

If you are worried about polluting rivers in the great divide basin, well, like much of the west, there are no rivers in the great divide basin. To you folks in the semi tropical and humidity soaked east, this is different country.

Meanwhile, the attitude that we can't store, control and use the vast water resources of the east - we just have to put up with massive flooding every other year - is mind boggling.

So protectionism , well, maybe a little. But real reversal of existing bias.

[Rog]

Good points Wes,

Dare I say it but should it not be the function of government to manage the strategic raw material reserves of its nation?

I know that many readers here will be angered by that thought because it's more government involvment in business.

I would hope that many also recognize that it is responsible business in partnership with responsible government that needs to prevail to build a sustainable future.

Rog

[wesdavidson]

Rog,
The current discussion began about the balance of payments. Sometimes I purposely allow my writing to be less precise to convey a particular message, other times I am in a hurry to get an idea across. This time I will try to be quite precise. The reason for this is that there is a problem that could get dangerous quickly, however, at this time it can still be reversed.

In the old days before Nixon, the balance of payments was expressible in the net number of tons of gold or silver flowing in or out of the county in exchange for other goods.

Since '64 with silver, and '74 with gold we have attempted an experiment, where we have secured our money not with metal, but with the full faith and credit of our nation. In effect, a general obligation bond, with all we have as security.

Now, what we measure with the balance of payments is how much of our nation, and all that makes it up, is mortgaged to other nations in return for cheap goods.

The problem now is that it has become more profitable for some individuals, persons, and corporations, to purchase goods abroad and sell them here, than to produce them here.

There has never been an argument in the US about the need to be careful about the use of natural resources. The arguments have always settled around who regulates and who benefits, and what constitutes a beneficial use for the nation as a whole. If ownership shifts into the hands of other countries we may lose our ability to fight it out here. A solution could be imposed from without. This would not be good.

The key going forward is to increase the profitability of selling goods manufactured in this country, while reducing the profitability of marketing and selling imported goods from abroad.

For decades we have been imposing multiple taxes and costs on manufacturers within our nation, on many levels, for many purposes, and from many levels of government. We have imposed very few costs, or expectations, on imported goods.

It is natural for a sales organization, when faced with a choice between a more costly item from a domestic source, with higher potential costs of liability, or a cheaper imported item, with a very small potential cost of liability, to overlook all costs except the cash cost of purchasing the item, and buy the import. This is especially true when the profits from either transaction are taxed equally.

Of course, the true cost of an import is seldom reflected on the invoice. The true cost of middle east oil must include the cost of armed conflict, and the funding of our enemies in that region. The true cost of cheap Mexican labor is reflected in the influx of immigrants across our border. The true cost of Chinese production must include the pollution load imposed by dirty processes on the ocean water and air currents that subsequently impinge on our coasts. And our dependence on foreign credit, and resources impinges on our diplomatic efforts to improve human rights. The invoice seldom includes any provision for consumer redress in cases of faulty materials, design, or workmanship.

I believe, to state it again, the key is to make it more profitable for sales organizations to sell items made here, than to sell items made elsewhere.

We can do this any of 3 ways;
(a) Remove all regulations from US manufacturers, and hope that costs fall. This would also remove all of the safeties we have built into the system to protect the workers, consumers, and general welfare of the nation. I do not believe we would want our nation and people to be reduced to 3rd world status.

(b) Impose high tariffs on imports, angering trade partners, inviting retaliatory tariffs, and hitting all users of each item with a tariff, while letting non-tariffed goods in "free". This has seldom worked.

or (c) Taxing the profits derived from selling imported goods at a higher level than the profits derived from selling domestic goods. Decisions to import, to outsource, or relocate manufacturing off shore are made at the highest levels of a company. Profits, and taxes are also handled at the highest levels of a company. This puts the carrot and stick at the same level. It would also impact every company the same. Honda would have the same incentive to manufacture here as would GM.

This would also make each seller or marketer a decision maker as to where they wish to source products. If a retail dealer has a choice between 15% tax on that proportion of his profits from selling domestic product or 85% tax on profits from selling imports, (admittedly an exagerated spread) I think they would sell domestic where possible. This decision would be made by every level of supplier, from oil to resin, to steel, to rubber, to tires, to OEM, to local dealer. Of course taxes on profits made on sales of goods exported from the country would be at the lower rate.

This proposal would leave intact all of our trade agreements, allow freedom of companies to make choices based on their needs, and still put a small amount of bias toward local production back into the equation.

The choice is ours, will be be reduced to the status of an nation of poor producers of a few raw materials in trade for manufactured goods? Or will we take steps to maintain independence and self sufficiency.

[Be Ware]

Originally Posted by wesdavidson

Rog,
We can do this any of 3 ways;
(a) Remove all regulations from US manufacturers, and hope that costs fall. This would also remove all of the safeties we have built into the system to protect the workers, consumers, and general welfare of the nation. I do not believe we would want our nation and people to be reduced to 3rd world status.

(b) Impose high tariffs on imports, angering trade partners, inviting retaliatory tariffs, and hitting all users of each item with a tariff, while letting non-tariffed goods in "free". This has seldom worked.

or (c) Taxing the profits derived from selling imported goods at a higher level than the profits derived from selling domestic goods. Decisions to import, to outsource, or relocate manufacturing off shore are made at the highest levels of a company. Profits, and taxes are also handled at the highest levels of a company. This puts the carrot and stick at the same level. It would also impact every company the same. Honda would have the same incentive to manufacture here as would GM.

This would also make each seller or marketer a decision maker as to where they wish to source products. If a retail dealer has a choice between 15% tax on that proportion of his profits from selling domestic product or 85% tax on profits from selling imports, (admittedly an exagerated spread) I think they would sell domestic where possible. This decision would be made by every level of supplier, from oil to resin, to steel, to rubber, to tires, to OEM, to local dealer. Of course taxes on profits made sales of goods exported from the country would be at the lower rate.

This proposal would leave intact all of our trade agreements, allow total freedom of companies to make choices based on their needs, and still put a small amount of bias toward local production back into the equation.

The choice is ours, will be be reduced to the status of an nation of poor producers of a few raw materials in trade for manufactured goods? Or will we take steps to maintain independence and self sufficiency.

Wes, I agree that we need to seriously rethink (and likely change course) on our decision not to produce...profitably...goods at home.

However, please elaborate because I fail to see the real difference between b and c. I understand the change in decision making agent (govt vs. company mgmt). However, isn't one a direct tariff while the other really is an indirect tariff in form of a tax? Wouldn't doing c still end up "angering trade partners, inviting retaliatory" taxes?

Also, other countries aren't blind. Once they know we're doing this I'm not sure you can assert the trade agreement will remain intact.

Otherwise some good analysis.

[Rog]

Wes,

I once again agree. Your proposal would be an excellent start (I'm sure many might disagree). It is ultimately a matter of national security. I have another thread entitled something like "favoring manual labor over automation" but that's not what it is really about. It's about a similar subject to this.

The main problems with looking at profitability as the sole driver for an organization is that it a) the organization only looks at it's own direct costs and b) it drives inevitably to a lowest cost driven economy.

There needs to be a new social reality and economic model that is about 'fair cost' trading rather than lowest cost. What is the long term benefit of lowering the selling price of Milk so far that you put your own farmers out of business? Now I don't want organizations to be wasteful or subsidized, it's part of their social responsibility not to be. They equally should not be so unfairly pressured as to be put out of business when they are able to produce a good product at a 'fair' price. The same holds for any organization non-profit, for-profit and government.

I'm sorry that I cannot be as specific on a necessary measure as you are but I do think there is a good model that's driven by limiting third party ownership in companies. Anyone who benefits from an organization without directly contributing to its daily activities has only one motive, profit. (A philanthropist would not expect any return on capital if anyone's wondering about that). By changing the nature of ownership of organizations we can change their behaviour. This should be a complementary, bottom up approach to your top down approach of appropriate taxation.

Rog

[ez_at_large]

Hmmmmmm,

I read all the posts, consider all the sides and opinions and come up with one question.

Stripping away politics, national policy, race, religion, ethnicity; why do we think we are entitled to a better life than anyone else on the planet?

I know it's a rhetorical question but how about it?

Why is it not fair that other people raise their standard of living?

Even if it is at our expense for a time. Ask anyone in the world if you could live anywhere where would it be? Here probably because we live in the best possible mode at the moment.

We are suffering from our success that's all.

If all your worldly possessions consisted of the clothes on your back and a bowl, would'nt even our temporarily depressed country look like Eden?

I hear the word communism, socialism bandied about with words that hold fear like Ebola and TB.

Look at those words. Communism-with its root in community, common, socialism-social, to be friendly within your community, to be fair and humble with one another, forgetting that it was corrupted from the start by humans.

Are not both of these concepts the basis of all the religions on the planet at the moment?

How do we get out of our present situation, WE LEARN TO SHARE THE PLANET, it does not belong to one nation, ideology, economic theory. it belongs to US, humanity. As I have stated in other posts we should do what we know how to do best, build things, be the example.

If we take the road that we are special, entitled, and greedy then we reap what we have sown, resentment!

Because that is what we see in the faces of those broken by Wall Street, Banks, Healthcare costs. Resentment. "I did my part I worked hard, bought my groceries in the town I live in, my car at the dealer near me, and you come in and fleece me and ask me for more when your greed has no bounds. I resent it!" That is what I see, its not anger as much as resentment. Anger fades, resentment festers. We can not build our nation on a belief we are entitled to it on the backs of the rest of humanity.

If we lead, and supply to the world what it can not supply on its own we will return to prosperity. Otherwise the resentment of the world will gloat over our fall and the hubris that lead to it.

Just my opinion for what it's worth.

[Rog]

Hi Ez,

I also agree with many of your sentiments. What is 'fair' is a very difficult question. Making profit not your sole motivator does not inhibit progress. In fact I would argue that it enhances it. Making profit your sole motivator does set you on a different path.

I would say that it is unfair to limit someone else from raising their standard of living (which also needs to be defined) but it is equally unfair to excessively raise one's standard of living to the detriment of another, even if that other has yet to be born.

Make no mistake we are not suffering from our success. We are suffering from our excess and inability to face a growing reality. We find ourselves apparently wealthy but racking up a huge debt to give to future generations. One can never be a victim of one's success only of one's inability to plan for the possibility of becoming successful.

There are many emotive words and it seems that any with a potential link to politics or religion carry a great deal of emotion. The word I would use that would drive us to 'share the planet' is compassion. It is the center of all good human activity. To be compassionate is to care fervently about the well being of others. The other phrase I would profer is that the solutions are 'both/and' solutions not 'either/or' solutions. Put away pre-conceived notions of right and wrong and look at the problem.

By the way the main western religions are based on the notion that we are all less than perfect and that perfection and paradise await us in another world. American Indian beliefs are grounded in us currently living in the paradise that must be preserved and honored for those generations to come. I cannot help but think that our belief systems spill over into our political and economic thinking too.

Rog

[wesdavidson]

You guys are all thinking. That is what we need, ideas.

As for mine, well, they are worth what they cost you.

The difference (b) and (c) to other countries, trade agreements etc, is the difference between raising the gas tax, or raising license plate registration fees for, or, banning non commercial pickups... Both increase revenue, both could reduce driving, one leaves most of the decisions up to the individual.

It is a little progressive, by taxing profit, it hits profitable companies like Walmart harder than unprofitable ones like it GM. It kicks companies, importers etc. when they are up, not down. Profitable companies have the most choices. It would also take a lot of the incentive away for ViseGrip etc to have gone overseas. Or dodge trucks going to Saltillo Mexico. It would be about impossible to not make money with visegrip. People pay what they have to to get them. The whole move was predicated on even higher profits and greed. IMHO.

In the end, it doesn't matter what tool is used, but we have to quit digging deeper. We can backfill a trench with a hand shovel. a teaspoon, a dozer, or a backhoe, or bare hands. The direction of the trend is what matters.

The problem right now, is that if you envision the balance of payments and the negative results, like a dike, we have a bunch of rats digging nice comfortable burrows in it. Some are going in for heavy equipment at this point. (picture that, an army of rats with mining gear, what a picture) one day the little burrows get bigger, leaks will get bigger, when the leaks get too big, it will carry the dike away. rats, burrows, and all. And all downstream.

As for our quality of life. Just look at Zimbabwe, they chased away the productive farmers, and buisiness men, scrapped the tractors and combines. Gave the land to the poor folks, and have nearly starved to death. I think that people need to vote, preferably more than once in their life, preferably with more than one name on the ballot, and not get shot for it. ("One man, One vote, One bullet". As it was told to me by a black Rhodesian in Jo'berg a couple decades ago) But the people that won didn't value people.. The key was they lost the productive folks. It would be like asking you to cast up and roll out the steel and iron for car in your back yard starting with a charcoal grill, a claw hammer and a chunk of rail road rail, not much productivity there. (but for the people reading this, a challenge that maybe could be met if the local zoning got out of the way!)

Maybe it would have worked better to scrap the Zim army and build better roads, and schools, employ a few folks, make a market for the food that could be produced.

My grandfather's first house was a 1 room log cabin. Luckily he was able to find credit in January of '41 for a mortgage ($5,000) on a couple hundred acre farm. He built it up then traded to a larger place, my grandmother by his side all the way. . My dad was orphaned at 12, he taught high school for 37 years, and earned 2 masters degrees and a doctorate, he and mom paid off their house and retired, busier now than ever. I don't think that it would be fair to knock them back just because they had more than a poor unfortunate Zimbabwean. I would be more for firing Mugabe, the president of Zimbabwe, and few thousand other rats, and raising them up to meet us. .