The Economy & Foreign Competition

The economy will fluctuate regardless of substantially all governmental actions, and, absent a depression or a significant recession, the only significant tool that should be used to impact the economy is the adjustable interest rate system of the Federal Reserve Bank. I think that the Federal Reserve Bank overdid the interest rate cuts in the 2002-2005 time frame. A real estate glut is now developing (and an economic slow down) as a result thereof.

We introduced capitalism to countries with much lower cost structures than the U.S. The result has been cheaper goods and loss of jobs. While it is great to have cheaper goods, the cost of lost jobs is significant.

In the future, significantly greater competition will exist for any job that can be out-sourced. Given that it will be very difficult to find replacement jobs, we need to find better ways of keeping jobs in the U.S. Otherwise, aside from the people who actually lose their jobs, we will all soon feel the “trickle up” of lost jobs, including reduced retail sales, reduced stock market returns and an increase in crime. Unlike the U.S., many countries have no minimum wage laws, no child labor laws, no overtime laws, weak or no environmental laws and no work safety laws. Thus, U.S. companies and citizens are at a competitive disadvantage. Some things need to be done to level the playing field. Tariffs could lead to a trade war, which would have pros and cons. Tariffs could be imposed on Chinese goods to cause the prices of Chinese goods to be what they would have been but for attachment.  However, the WTO agreement likely prohibits such an act. “. . . China needs to allow its currency to move upwards, not just to help the rest of the world, but also to rebalance its own overheating economy.” (Source: The Economist, February 7th – 13th, 2004, “Let the Dollar Drop”). Also, via a treaty, all industrialized nations should be held to a common set of environmental rules with respect to air quality.

A refundable 10% credit on U.S.–manufactured machinery and equipment utilized in manufacturing and/or distribution in the U.S. and for U.S.–manufactured software that is consumed in the U.S., with a 7-year 200% recapture tax (with the recapture tax applying if the item purchased is disposed of or moved overseas), for goods purchased or ordered for short-term delivery during a 6-month window of opportunity, would very likely get the economy going when it is down. Once the economy gets going, most of it should continue going after the 6-month period expires.

Foreign wages (and similar payments for foreign services in the nature of compensation) should be nondeductible to the extent that the ratio of foreign labor costs to total labor costs exceeds the ratio of foreign revenue to total revenue. For example, a business that used half foreign labor and sold one-quarter of its goods overseas (and sold three-quarters in the U.S.) could deduct only half of its foreign labor costs on its U.S. income tax return. (The maximum income tax rate on corporations is 35%. Assuming a net state income tax rate of 4%, such a change would make [nondeductible] foreign labor 64% more expensive for profitable companies in the highest bracket, thus helping to narrow the cost gap. Note that the technical means of accomplishing this change of tax law could vary based on company structure.)

Automation is reducing manufacturing jobs worldwide. The U.S. needs to get as many of the new era manufacturing plants as possible. The less the amount of labor involved, and the greater the wealth in the U.S., the greater the likelihood that a substantial number of those plants will be located in the U.S.

The federal infrastructure (roads and bridges, etc.) needs work.  I believe that restoring it is a function of the federal government.  I believe the fix should take place over a number of years, and the funding source should be roads taxes and the General Fund.

Growth of the money supply should be limited to reasonable objective standards that coincide with real economic output growth, so that the Federal Reserve Bank and/or federal government does not penalize savers by creating inflation. Also, for the reason provided above, some limits should exist with respect to the interest rate powers of the Federal Reserve Bank.