Seven out of ten Americans consider foreign trade an economic opportunity, according to Gallup. You wouldn’t expect this given the protectionist rhetoric about “unfair” trade practices and “bad” trade deficits in the news regarding the North American Free Trade Agreement (NAFTA) and tariffs.
To avoid impoverishing Americans, trade uncertainty should quickly end by reducing trade barriers in NAFTA to maintain its net benefits and end tariffs to reap the benefits of the Trump tax cuts.
Let’s be clear: NAFTA isn’t a perfect agreement and other countries have poor trade practices.
For example, NAFTA would ideally be one sentence: “No trade barriers between the U.S., Mexico, and Canada.” Instead it’s more than 1,700 pages of exceptions and regulations that subjectively determine winners and losers. So, a renegotiated deal towards fewer trade barriers would help people benefit from trade.
Also, intellectual property rights and currency manipulation issues in other countries, particularly China, could be problems needing attention. However, tariffs are unlikely to solve those problems, especially when private U.S. firms do business in China knowing they’ll be forced to fork over ideas but do it anyway because of the profitability available from very affordable labor. Instead, the Trump administration should rejoin the Trans-Pacific Partnership talks that include many of China’s trading partners and use its negotiation prowess to benefits Americans.
Ultimately, these trade uncertainties plaguing entrepreneurs’ decisions defy the positive view that most Americans have of foreign trade and reduce many Americans opportunity to prosper.
What’s often lost in this discussion is that countries don’t trade with each other, people do when they mutually benefit. It’s a reason that considering trade deficits a bad deal is nonsense. What’s true is that raising trade barriers will hurt people mutually benefiting along with many others from higher prices and fewer job opportunities.
For instance, Texas has much to gain or lose from NAFTA renegotiations because of about $230 billion in imports and exports with its closest foreign neighbors and largest trade partners. NAFTA has helped Texas lead the nation in exports for 16 straight years and supported at least 300,000 jobs over five years. Not only would Texans suffer from a poor deal with our North American neighbors, but Americans would also hurt as Texas has created 24 percent of all civilian jobs added nationwide since the Great Recession.
While it’s easier to blame others instead of flawed domestic policies, past mercantilist attempts to dictate foreign trade have failed. Understanding that people, not countries, trade to satisfy their desires is why trade balances don’t matter much. Really, the cumulative value of imports and exports tells how much people benefit from trade across borders.
For instance, Americans import $2.9 trillion in goods and export $2.4 trillion for a trade deficit of about $500 billion in 2017. However, the real value of total trade is the cumulative $5.3 trillion because individuals across borders wouldn’t have traded had they not benefited. An estimate of this economic activity shows that NAFTA supports 14 million American jobs.
Passage of the Trump tax cuts last year helped to foster a more competitive domestic policy environment so individuals and businesses can flourish. Specifically, Americans have been winning within months after passage of the $1.5 trillion tax cut over a decade using a static analysis. But, given that the tax relief was, on average, $150 billion per year, the Trump tariffs could make a major cut into that relief.
The figure below notes that current tariffs are a small part of overall U.S. imports, however, if tariffs on autos and auto parts take effect then almost 20 percent of imports would be taxed.
With around a 10 percent tax on current imported goods, the $8.5 billion cost to Americans isn’t much. But add in the potential for a 25 percent tax on $360 billion in imported autos and auto parts, and the tax increase balloons to almost $100 billion per year. That could shave two-thirds annually from the Trump tax cuts thereby substantially reducing its expected benefits.
When you consider the costs of trade uncertainty from the lack of a NAFTA deal and the expectation of more tariffs to come, just think how much faster economic growth and job creation could be. Time is of the essence for more freedom by assuring NAFTA negotiations are towards freer trade and tariffs will soon end so people prosper.
In this episode, I explain why we need educational freedom to let people prosper. It's unfortunate that so many students are stuck at a particular school based on a zip code. Here is a list of the 1,343 failing schools across Texas.
Sure, some people already have school choice, but some is not enough. It should be everyone. Sure, the government should probably not be involved in education, but because it is we should demand that every taxpayer dollar be spent as families see fit instead of the government.
We should let each student learn in their unique way through student-centered funding achieved with education savings accounts (ESAs). These accounts allow families to use the dollars for a number of educational services, which can include tuition, tutors, books, etc.
Human capital is one of the main drivers of economic prosperity, let's not fail our students any longer by a public school monopoly (read this) and let's not fail our quality teachers with low pay any longer by a public school monopsony (read this).
Watch the episode to learn more.
“One of the great mistakes is to judge policies and programs by their intentions rather than their results,” said Milton Friedman. This is certainly true when considering government-mandated paid sick leave.
Connecticut learned that unintended consequences matter after it passed a mandatory paid sick leave law in 2011. And now Austin, which passed its own such ordinance in February, will learn the same thing. Adding to people’s hurt are efforts in Dallas and San Antonio, which are both considering replicating Austin, but the effort in Dallas was stopped in its tracks from too few verifiable signatures.
The lesson here is that mandatory paid sick leave lowers standards of living. This results from raising the cost of doing business, and that higher cost leads to fewer jobs and fewer raises, along with higher prices for consumers.
Here in Texas, Austin’s paid sick leave ordinance, and any others that follow, likely violates state law as outlined in the Texas Minimum Wage Act and it infringes upon the rights of businesses in Texas.
In order to assure this doesn’t happen, the Texas Public Policy Foundation represents the Texas Association of Business, the National Federation of Independent Business, and the American Staffing Association in filing a lawsuit against the city in April to stop this ordinance.
The ordinance would require businesses with more than 15 employees to offer 64 hours of paid sick leave per year or employers with 15 or fewer employees to offer 42 hours of it per year.
While there’s nothing inherently wrong with paid sick leave, there’s something wrong with the government intervening in the relationship between an employee and employer—and potentially violating state law in doing so.
What’s more, research in this area shows that mandatory paid sick leave ordinances don’t help employers or employees.
Take that Connecticut law. It applies to employers with more than 50 employees, excluding manufacturing firms and nationally chartered nonprofit organizations, which nearly 90 percent of employers already offered paid sick leave—before it was mandatory. While this reduced the negative effects of the Connecticut law, a survey of employers less than two years after the law went into effect found that, as expected, employers had already reduced worker wages or hours and raised consumer prices.
The Austin ordinance, which applies to all businesses, is far more draconian, meaning the effects would likely be much more costly. Government-mandated paid sick leave is bad, but Austin’s ordinance is far worse. The cities of Dallas and San Antonio simply shouldn’t be taking cues from Austin.
The opportunity costs associated with this policy must be taken into account.
If an Austin employer has five workers, would the added cost associated with paid sick leave discourage that employer from hiring an additional worker to increase output? It will certainly be a factor the employer takes into consideration when making decisions.
And because—like a minimum wage hike—paid sick leave is a cost that’s not associated with higher worker productivity or profitability, the employer will have no choice but to find ways to cover those costs. We know that usually ends up being lower wages, fewer jobs available, and higher prices.
And in that way, Austin’s paid sick leave policy will harm the local economy, because it works as an indirect tax on both employers and consumers.
The Bureau of Labor Statistics estimates that employers’ costs of benefits, such as paid leave and health insurance, are 30.5 percent of an employee’s compensation, with paid leave alone being only 7 percent. However, with states like Connecticut and cities like Austin mandating such leave, these costs could skyrocket, leaving even fewer dollars available for raises and jobs.
According to a Freedom Foundation report, more than one-third of businesses surveyed reported having difficulty with mandated paid sick leave. Also, most employers across the country voluntarily offer paid sick leave with the rate ranging from 50 to 89 percent even before a mandatory paid sick leave ordinance.
There’s no justifiable reason for the government to jump in when employers and employees have it worked out. Government mandated paid sick leave hurts economic freedom, and economic freedom is the foundation for greater economic prosperity.
In this episode, I give an overview of today's report by the U.S. Bureau of Economic Analysis that shows the U.S. economy expanded at a 4.1 percent annualized rate in Q2 2018, which is the fastest pace in four years.
Relief of taxes and regulations has been a big part of that, but making those tax cuts permanent, reducing government spending, and relieving trade uncertainty would help sustain faster economic growth.
In this episode (YouTube channel Vance Ginn Economics), I explain how institutions matter from an economic, social, and political perspective. This episode is longer than usual (30 minutes) to go through these institutions and explain how the Texas Model supports prosperity while highlighting how it could be improved by limiting spending and eliminating property taxes--starting with school property taxes.
Given how federal institutions have failed for so long, though they are improving now, there is a need to look at the states.
A good comparison is the largest four states in terms of economic output and population of California, Texas, New York, and Florida. These states have very different institutions, whereby Texas and Florida have primarily inclusive (liberty-related) institutions and California and New York have primarily extractive (redistributionary) institutions. The economic results from these are clear over the last decade-plus with Texas and Florida leading the way in most economic indicators, even when considering income inequality and poverty.
I highlight how the Texas Model has led the way in terms of prosperity, but there is more that needs to be done, specifically limiting state and local government spending. Specifically, there is no education spending problem in Texas, as noted by data from the Texas Education Agency, and the state share of education spending hasn't declined. So, the state spending more, as education lobbyists request, will not lower property taxes.
I then go through the option of eliminating school maintenance & operations property taxes over 11 years by limiting spending and using state surplus dollars to permanently buy school property taxes down until they are eliminated. As often asked at these events, I also briefly discuss the option of swapping school property taxes with a sales tax that has a broader base so the rate doesn't increase much if at all then cut taxes with surpluses dollars thereafter.
I discuss other ways to improve the Texas Model as well, such as passing a stronger state spending limit and eliminating the business margins tax. These steps will allow Texas to be even more prosperous by getting government out of the way with an institutional framework that support entrepreneurial activity and human flourishing today and far into the future.
Thank you for watching! Please share as you see fit. Have a prosperous day!
In this episode of the Let People Prosper series, I discuss the economic freedom associated with the Texas Model, which is based on relatively less government spending and taxation along with sensible regulations.
I examine data for more than a decade along with the latest state-level jobs report to highlight how the Texas Model has supported abundant prosperity. Of course, Texas has room for improvement, such as limiting government spending and eliminating property taxes, but there's much Texas gets correct.
Please watch and share this episode.
Service industry workers — wait staff, bartenders and the like — are experts in free-market economics. They enjoy immediate and tangible reward for their hard work in the form of tips, and the best servers can make hundreds of dollars per shift through hard work, positivity and attentiveness.
When they aren’t feeling it, the effects are equally tangible — in the form of less pay at the end of a shift. There are other variables, of course, but tipped service workers enjoy something that’s increasingly rare in our salary and set-wage world: They have a real degree of control over how much they earn daily.
So it’s no surprise that many oppose the District’s minimum wage hike for tipped workers. When Initiative 77 was presented to D.C. voters in June, it was sold as a progressive reform for an industry with struggling workers. The measure, approved 55 percent to 45 percent , will raise the minimum wage for tipped staff from the current $3.33 per hour to $4.50 in July and eventually to D.C.’s standard $15 per hour by 2025.
Yet the workers themselves opposed it. They formed “Save Our Tips” groups on social media, and they lobbied hard against it. Why? Because they knew its effect wouldn’t be to set a lower limit on how much they could earn; instead, it would set an upper limit.
It’s simple economics. Restaurant owners will probably compensate for mandated higher server wages by raising food prices. The predictable effect is fewer customers. And the remaining customers will be less inclined to tip. Proponents of Initiative 77 said customers would be free to tip, but the legislation itself makes no mention of that. Tipping culture could die, leaving the ambitious wait staff or bartenders scraping by on what government — not their customers — says they’re worth.
And it’s not just the workers at risk. The bustling D.C. food scene will drastically change.
Food writer Todd Kliman (formerly of the Washingtonian ) knows what will happen if the D.C. Council doesn’t repeal the measure.
“Get ready for it, DC,” he tweeted. “Those cocktails that’re overpriced [right now] at $14? Soon enough they’ll be going for $18. And you’ll be lucky to find apps below $16 at anywhere decent. Entrees? $36-$40, easy. Initiative 77 is gonna make [restaurants] even more a place for those with $$$.”
And the small, family-owned restaurants and neighborhood bars will be hit the hardest. Their margins are typically small, and with rising rents, additional costs will force more of them to close or relocate outside the District.
But really, this is a battle over minimum wages.
Supporters of Initiative 77, “Fight for $15 ” and similar measures call for a “living wage,” but the truth is that despite their good intentions, minimum-wage hikes hurt the very people they’re attempting to help.
There’s a rare near-consensus among economists that price controls lead to poor outcomes in the marketplace. The classic example is the price controls on gasoline the federal government put in place in the 1970s. The outcome: long lines and significant shortages.
This is also true of restaurants. When government demands that employers pay more for labor, then employers can afford less of it.
On a not-unrelated note, the first hamburger-making robot has gone online in a San Francisco restaurant. Such technology shows that when government steps in and forces up wages, employers have ways to work around them.
To put it simply, no matter what the minimum wage is in law, the actual minimum wage is always zero. An unemployed person who lost his job or can’t find one because of high labor costs earns nothing.
Servers and tipped staff understand this simple economic concept, and that’s why they’re so vehemently against Initiative 77. The D.C. Council has already taken steps to repeal the measure, and Congress is stepping in.
That’s good — it’s good for the economy, it’s good for the industry, and it’s good for the workers who will again have control over their own prosperity.
In today’s episode, I discuss the financial markets and the big news about the release of the state-level jobs report, which Texas continues to be America’s jobs creation engine. I’ll have more on the jobs report soon with graphs but I wanted to give you a quick overview.
Here’s my statement in a TPPF press release: https://mailchi.mp/texaspolicy/texas-....
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In today's episode, I discuss the benefits of trade, both domestically and abroad. In particular, I note that trade with the Chinese, though imperfect, benefits Americans. Instead of resorting to tariffs, which are taxes on imports, we should seek to renegotiate the Trans-Pacific Partnership to deal with potential issues such as intellectual property and other concerns. The tit-for-tat tariffs in the fast brewing trade war with the U.S. and China is unlikely to lead to many policy changes by the Chinese government and will likely help only a few American producers at the expense of many American consumers (and producers).
We should first understand how the balance of trade payments matters. Americans import $505 B from the Chinese. Chinese import $130 B from Americans. This results in a $375 B current account deficit that's matched by a $375 B capital account surplus for America. In other words, we purchase a lot of goods from them relative to how much they purchase from us (current account deficit) but they send that money back to the U.S. in the form of financial investments (capital account surplus). Check out my recent paper on Texas and NAFTA and how people prosper from trade here.
As Americans import $505 B from Chinese, current tariffs (taxes!) on imports of $34 B of goods, soon $16 B, & potential $200 B total $250 B in tariffs, which would be half of all imports from Chinese. At a 10% tax rate, that would mean a tax hike of $25 billion on Americans, limiting the average annual $150 billion tax cut passed last year. This would slow growth compared to what it otherwise could be, meaning fewer jobs for those potentially hurt by trade with China and counter to the tariff game.
Here's how tariffs/taxes on imports from Chinese could influence Americans. Rather than hurt Americans, Trump administration should re-enter Trans-Pacific Partnership discussions to pressure Chinese on intellectual property rights and reduce trade barriers.
In this episode, I discuss the need to eliminate property taxes starting with limiting government spending so state dollars can permanently buy down school maintenance & operations (M&O) property taxes until they are eliminated. I also discuss how the state spending more on education by itself won’t lower property taxes because that’s not how the funding system works.
Here is the paper on eliminating school property taxes (half of property tax burden). Here is a paper on education funding in Texas.
In today's episode, I take the normal look at the financial markets, with stock falling primarily from brewing trade war with China.
But the big news today was the Texas Comptroller Glenn Hegar revising the Certification Revenue Estimate substantially up for the current 2018-19 budget period, such that instead of a $94 million surplus at the end of FY 2019 there is now an expected $2.67 billion surplus. This is one of the many benefits of the Texas Legislature passing conservative budgets to keep taxes lower than otherwise during the last 2 sessions resulting in faster economic growth and even more tax revenue. While many people will want to spend this additional taxpayer money, and there will likely be a need for a supplemental bill to fund expenditures above appropriations from last session for the $1.8 billion delayed funding to the State Highway Fund and some amount for Medicaid, the focus should be on sustaining a conservative budget and prioritizing extra dollars for tax relief. Options could be to buy down the school M&O property tax over time until it is eliminated or even cutting the business margins tax until elimination.
More money in the hands of Texans in the productive private sector is how people become more prosperous while government simply functions to preserve liberty.
The Military Order of the World Wars approached the Texas Public Policy Foundation in 2014 about having someone present on the benefits of a free enterprise system at their Southwest Youth Leadership Conference aboard the U.S.S. Lexington in Corpus Christi. I have presented to many top-notch, high school students from across Texas each summer since then to discuss the importance of the free enterprise system, especially how it relates to the labor market with the use of a minimum wage game (spreadsheet for the game here).
Watch the video above of the presentation in 2016, which provides further explanation of the game and shows the wage negotiations between students.
The game has been expanded upon over time since first created with Dr. Mark Frank while we both taught at Sam Houston State University. The game is composed of multiple sessions where some of the students are employers and others are workers.
Students learn how a labor market works through negotiations between employers and workers in a free enterprise system and in a system with a government-mandated minimum wage. The game shows that although there’s a higher average wage in a system with a minimum wage, there is also higher unemployment, especially for low-skilled workers that the government is trying to help. Students learn how workers are best able to demand a higher wage with less unemployment by increasing their productivity through education, technical skills, and on-the-job training, which access can be limited when there is a minimum wage.
Ultimately, the game helps students to start thinking like an economist when considering how the free enterprise system works and how government intervention will distort those outcomes. It’s fantastic to see the light bulbs start turning on throughout the game as students realize the costs of a minimum wage.
For the last three years, I've worked with SMU's O’Neil Center for Global Markets and Freedom to present my unit in their series “Teaching Free Enterprise in Texas” that teaches high school teachers in Texas about key economic principles. This series of publications are compliant with Texas' TEKS (state standards) and include the benefits of the free enterprise system with regards to international trade, fiscal policy, and other important areas. My unit on “Labor Market Economics” includes the minimum wage game that I've presented to hundreds of public school teachers statewide.
The best path to prosperity is through free enterprise, individual liberty, and personal responsibility—the pillars of improving everyone’s well-being that we promote at the Texas Public Policy Foundation. Unfortunately, these are concepts that many students never learn. With the Foundation’s outreach to high school students on these important principles, there’s a better chance that many will think like an economist and help provide a brighter future for all.
Good jobs report: Nonfarm payroll employment up 213,000 in June, unemployment rate at 4.0%, jobs created in professional and business services, manufacturing, & health care, while retail trade lost jobs. Average hourly earnings up 2.7% over last year.
Job creation of 213K beat expectations of 195K. Unemployment rate up as 601K joined labor force—normal turnover, better job prospects, or grads from high school/college. Still many on sidelines as 25-54 yr old emp-pop ratio creeps up.
Payrolls for May were revised to 244,000 from 223,000 and April numbers revised to 175,000 from 159,000. That added a net of 37,000 new jobs in the prior two months.
Manufacturing sectot.co/tBi7ehT844r added 36K jobs in June, up from 19K jobs added in sector in May. Most of June's hiring was in the durable goods sector. Over the past year, manufacturing sector has added 285,000 jobs. Production drives growth.
Read blog post with figures here.
Texans pay state and local taxes in one form or another. Given Texans desire prosperity and liberty, an optimal tax system creates the least burden on economic activity while funding limited government spending. While the details of taxation can get complicated quickly, core principles of sound taxation include a tax that’s simple, flat, and broad-based.
Taxes may redirect you from consuming with a sales tax, push you out of your home with a property tax, or incentivize you to purchase less gasoline with an excise tax to fund government spending. Fortunately, Texas is one of only nine states without a costly state or local personal income tax. The table below shows that the 9 states without this tax perform much better economically than those states with the highest personal income tax rates.
State taxes in Texas include the dominant sales and use tax, but there are also the franchise tax, motor fuels tax, and other taxes. The more than 4,100 local taxing jurisdictions statewide collect primarily property taxes, but cities, counties, and special purpose districts can also collect a sales tax.
Achieving an optimal tax system begins with the derivation of taxation. First, politicians determine government provisions from voter demand and rent-seeking activity to win votes. Second, those provisions require government spending. Third, government spending requires some form of funding mechanism, hence taxation.
Therefore, a key to an optimal tax system is to educate voters on the costs and benefits of government provisions while effectively limiting government spending, which can be done by putting laws in place to add budget transparency and reduce rent-seeking behaviors while strengthening limitson government spending.
While the Texas Legislature has appropriately restrained government spending below the key measure of population growth plus inflation in the last two budgets, the state budget is up 7.9 percent above this measure since 2004, meaning taxes are higher and economic growth is lower today than otherwise. So, further spending restraint is necessary to help Texans be more prosperous and Texas more competitive. This could be achieved by limiting state spending to 4 percent and using state surplus dollars to provide tax relief, such as eliminating school M&O property taxes over time, until we can get to an efficient sales tax.
According to the Tax Foundation and noted in the figure below, Texas has the 10th highest reliance on sales taxes in the nation, but the 5th least burdensome state-local tax burden. While a sales tax should apply to the broadest base possible, Texas has sales tax loopholes of about $45 billion in FY 2018. These loopholes should be reduced or eliminated to follow sound taxation with the broadest base and lowest rate possible.
The Texas Comptroller notes that sales and property taxes in Texas are regressive. A flat tax rate results in higher income people paying a lower share of their income on taxes than lower-income people, but higher income people pay much more in taxes. The costs of property taxes are substantial, with businesses and individuals each paying about half for school M&O property taxes, and they hurt lower-income property owners and even renters as these taxes subjectively skyrocket.
Sales taxes, on the other hand, allow people freedom with their money to spend or save, do not have to tax capital, and are transparent. Individuals pay about 60 percent of sales taxes collected while businesses submit the rest, but businesses don't ultimately pay taxes as they pass costs along to people through higher prices, lower wages, and fewer jobs. An example of this is the recent U.S. Supreme Court ruling that allows Texas to expand the sales tax base to all online transactions, which most are already taxed online at places like Amazon and WalMart, but any additional tax revenue should be used for tax relief because Texas state and local governments already spend too much.
A sales tax is pro-growth because it allows individuals to choose what’s best for themselves. Other forms of taxes that try to socially engineer behavior, such as a gas tax or carbon tax, end up distorting economic activity and hurting lower-income households most.
In conclusion, by effectively limiting government spending that allows a move to an optimal tax system based on a sales tax of final goods and services, Texans will flourish and other states will have an optimal system to follow.
While some say that if we have a trade deficit we win or if we have a trade surplus we lose, that's the wrong way to think about trade when everyone benefits from the exchanges that result in higher productivity and lower prices. Watch to learn more. Read my paper when you have a chance as well.
Occupational licensing is a form of regulation that requires a person to register with the government, achieve training, pay fees, and often complete an exam before being allowed to perform a job or vocation. The intended goal of occupational licensing is to ensure public health and safety by mandating quality in a profession.
However, the reality is that individuals in an industry with a license use licensing requirements to limit and prevent competition so more money is in their pockets at the expense of consumers and potential entrants.
Read this about the cost of occupational licensing, this about harbor pilots monopoly, and this about solutions.
These are tough times for newspapers, particularly local papers that are still an integral part of their communities. They serve many vital functions, because no 24-hour news channel and no national political website will likely keep track of the varsity boys’ basketball scores or the proposed teachers’ raise that the school board is discussing.
What’s more, most local papers continue to shine as beacons of civility and reliability in an increasingly politicized media environment. And that’s why we should wish them well instead of forcing additional costs on them that their budgets can’t bear.
Yet that’s what a new trade dispute at the Canadian border is doing. New tariffs on newsprint — which are typically a newspaper’s second biggest expense, after personnel — have caused the commodity to spike in price by about 30 percent, according to CNN. That has already meant layoffs, and will mean many more.
But isn’t the whole point of tariffs to protect American jobs? Well, yes — but there are always unintended consequences.
The newsprint tariffs were because one small company in the state of Washington — Northern Pacific Paper, or NORPAC — with about 300 workers complained that Canada is dumping “uncoated groundwood paper,” or newsprint, on American markets. The truth is that low demand for newsprint in the age of the internet has resulted in many American manufacturers closing down or changing their operations (demand for cardboard boxes for Amazon and other online retailers is booming, for example).
And local newspapers are caught in the middle.
The Beaumont Enterprise expressed it well in a recent editorial: “There simply aren’t enough mills on this side of the border to meet the demand for newsprint in the U.S., and no company is going to invest tens of millions of dollars for new mills in a shaky market. Even if they did, it would take years for them to ramp up production. ... We’re not asking for a handout or a free ride, just the opportunity to compete as best we can. If these tariffs are removed, we’ll have a better chance.”
Which brings us to the real point here — free trade matters. As the Texas Public Policy Foundation’s new paper explains, people prosper from free trade, and the North American Free Trade Agreement, which is being renegotiated now.
NAFTA has always been controversial, but its positive effects have become evident in the decades since it was passed. The U.S. economy expanded and millions of jobs were created after NAFTA. The U.S. Chamber of Commerce estimates trade among people in the agreement — the U.S., Mexico and Canada — supports 14 million U.S. jobs with 5 million of those jobs related to the boost in trade since NAFTA.
What’s often missing from the discussions about NAFTA is the fact that countries don’t trade, people do. In this case, Americans, Canadians and Mexicans trade with each other.
Americans trade with the rest of the world for the same reasons that they trade with each other. They trade because it allows them to satisfy their desires while focusing their efforts on what they do best, which in turn raises productivity, incomes, and standards of living.
On the other hand, trade barriers mean higher prices for consumers, fewer jobs for workers, and less prosperity for all.
Opponents of free trade — who often call for subjectively determined “fair trade” — cite trade deficits as a reason to oppose NAFTA. But that’s a misunderstanding of a basic economic principle: comparative advantage.
Take the auto industry. Yes, the U.S. saw economic declines in the auto manufacturing sector (declines that would largely have occurred anyway, due to automation and costly domestic policy), as some production moved to Mexico because of lower costs for capital and labor.
But at the same time, the U.S. energy sector boomed, due to American innovation and expertise. The result is that Mexico sells us car parts and some cars — but we sell Mexico (and the world) gasoline and other petroleum products. That’s comparative advantage — both industries produce more of their respective products that they’re relatively more productive in and make both products more accessible to domestic and international populations, growing the economic pie and creating more net jobs over time.
Newspapers have it tough already. If this trade dispute over newsprint continues, the losers will be the local communities that see their newspapers decline in size and substance, or fold altogether.
We’ll still have our 24-hour cable news channels, but we probably won’t have the box scores from last night’s high school playoff game — or the kind of governmental accountability that only comes from having a reporter at a city council meeting. That would be a real loss.
In the same way, if NAFTA isn’t renegotiated with an eye for fewer — not more — barriers to trade, the losers will be Americans. That, too, would be a real loss.
I recently posted a commentary with economist Bob Murphy on the failures of a carbon tax at TribTalk. Today, TribTalk posted not just one commentary by my good friend Josiah but another commentary on the need for a carbon tax.
While they claim a need for a carbon tax and that it is a free market tool, the need is highly questionable and a tax isn't free market. Fortunately, there's no political will to pass a carbon tax in Texas or in D.C., but the discussion will continue.
Instead of government intrusion and possibly making the situation worse, we should do what's been proven to work is let prices reflect whatever values determined in exchange along with technological innovation that has made us more prosperous in terms of wealth and environmental quality.
Here's my quote in TPPF's The Cannon (read and sign-up for daily newsletter here): "While proponents of a carbon tax continue to push variations of it, there's no hiding how a carbon tax is a tool to control people in their daily lives, especially given U.S. energy-related carbon emissions are already down to 1992 levels."
Finally, check out my recent paper on the flawed assumptions and high costs of a carbon tax.
Texas ports contribute $650 billion in trade and support 1.6 million Texas jobs. But as goods travel through Texas ports, Texans and all Americans are paying a higher price than necessary from an uncompetitive market of harbor pilots.
Ships entering a U.S. port must be guided by a licensed harbor pilot, which is noted as “compulsory pilotage” in Chapter 61 of the Texas Transportation Code. Pilots are tasked with guiding, not helping steer, ship captains with navigating harbor waters and docking safely. They can provide a valuable service not only to the ship and its cargo, but also to the safety of other ships on the open waters and communities near ports.
However, the harbor pilot market is in need of competition from current barriers of a too restrictive state license and the collusive nature of licensed pilots on commission boards deciding who can get a license.
The Texas State Pilots Association grants a monopoly in most ship traffic coming into Texas ports. Rates and pay are regulated by a commission board, usually the same board that oversees the port. Harbor pilots must receive federal and state licenses, with the federal license allowing them to guide ships under the U.S. flag and the state license allowing them to guide ships under the U.S. and foreign flags—in other words, the state license is more valuable than the federal license.
Licensed harbor pilots dominate these commission boards, contributing to a conflict of interest. They can essentially give themselves a raise, decide which fees to charge shippers, and restrict interested people from obtaining a license.
Because a harbor pilot is compulsory for mariners, the state license restricts the number of pilots, and admittance into the association is limited, annual salaries of harbor pilots are driven arbitrarily higher from monopoly power to more than $400,000, or $192.31 per hour. Pilotage-related fees can add up to 10 percent of U.S. shipping costs.
These monopolistic wages reduce investment, decrease job creation, and encourage shippers and other industries to use ports in other areas, or different modes of transportation. The potential net result is lower economic prosperity. In fact, the American Great Lakes Port Association noted that research shows pilotage costs in Great Lakes-Seaway have contributed to less economic growth, employers moving elsewhere, and fewer jobs created in the region.
Last, but certainly not least, pilot fees paid by shippers are eventually passed on to the consumer. These higher prices reduce consumers’ purchasing power and standard of living.
A step toward breaking up the monopolistic situation in the harbor pilot market would be for commission boards to provide a more competitive, objective environment for those seeking a harbor pilot license. Better yet, the state should issue a license to whomever complies with required criteria instead of a commission board deciding whom can get one.
The American Pilots Association states that pilots would not be able to act independently, in the public interest, or have enough investment if there was competition. However, almost every other industry allows competition, and even those industries with restrictive licensing requirements have specific requirements that help avoid nepotism. In Florida, a study found that opening the harbor pilot system to competition could lower annual port costs by $35 million and create roughly 5,000 jobs in related industries.
As with all occupational licensing, Texas should consider whether licensing harbor pilots protects people from health and safety risks. Specifically, assuming there is a risk and a need for licensing, Texas could simply abide by the federal license or at least reduce the requirements of the state license.
Ultimately, competition in the market of harbor pilots would support improved quality and safety at a lower price as has been the proven result from unhampered markets throughout history. This would not only benefit those who would like to be a harbor pilot but can’t get access to a license but also Texans from a lower cost of living.
Let people prosper by adding competition in the harbor pilots market.
Six months ago the Tax Cuts and Jobs Act was passed by Congress and signed into law by President Trump. Proof that Americans keep winning from pro-growth tax reform is evident with each new economic report.
So far more than 4 million Americans will receive bonuses and millions more are receiving additional benefits from at least “615 examples of pay raises, bonuses, 401(k) match increases, expansions, and utility rate reductions” due to the tax cuts, according to Americans for Tax Reform.
Adding to that stellar list is the latest benefit reported by the U.S. Bureau of Economic Analysis that American companies repatriated $305 billion of foreign earnings to America since the tax cuts. Comparatively, that total in the first quarter of 2018 was 10 times more than the amount repatriated in the first quarter of 2017. Before the tax cuts, companies were estimated to have $2.6 trillion held in foreign accounts, so more repatriated dollars may soon be on the way.
The BEA notes that the “TCJA requires U.S. parent companies to pay a one-time tax on their accumulated earnings held abroad, but generally eliminates taxes on repatriated earnings.” In other words, a primary cause of this extraordinary increase is foreign earnings no longer being taxed when brought back to the United States.
“U.S. firms that used to build their factories overseas in order to avoid U.S. taxes, they stopped in their tracks because of the tax bill, they are bringing all the money home,” said Kevin Hassett, chair of the president's Council of Economic Advisers.
The last time repatriated earnings saw a big boom was 2005 following the American Jobs Creation Act under President Bush. Much of those funds went to stock buy backs, increased dividends, and mergers and acquisitions, which did not necessarily translate immediately into more economic activity.
Economists, including Chairman Hassett, are more hopeful this time around as many have boosted projected annual economic growth rates. According to the Wall Street Journal, "Macroeconomic Advisers raised its second-quarter gross domestic product forecast to a 5.3 percent seasonally adjusted annual growth rate; as of Monday, the firm had been predicting a 4.6% growth rate. If the latest forecast holds up, it would be the strongest quarterly growth reading since the third quarter of 2003, edging the 5.2% growth rate recorded in the third quarter of 2014."
As expected, pro-growth tax reform contributes to more economic activity as production quickly ramps up. One such company increasing investment is Apple, the largest U.S. taxpayer, which recently announced it will invest more than $350 billion over the next five years because of the new tax law.
Congress should make these tax cuts permanent. But Congress must first do something about excess government spending, which is the driver of taxes and deficits. The national debt already exceeds our entire economic output at more than $21 trillion. We can’t afford to continue the downward spiral into more debt from a lack of spending restraint.
By restraining government spending so that taxes can be lower than otherwise, the benefits of the Trump tax cuts will continue and families will prosper.
Vance Ginn, Ph.D.
Free market economist with leanings towards Chicago/Austrian schools of economics. Hard rock drummer. Classical liberal. First generation college graduate at Texas Tech University. Hometown: Houston. Recovering academic. Work at the Texas Public Policy Foundation in Austin to research ways to #LetPeopleProsper. Live the dad life in Round Rock, TX. Views=mine.