In this Let People Prosper episode 64, let's discuss the Texas Public Policy Foundation's Policy Orientation, which was a sold out event that helps define the narrative for the 86th Texas Legislature, and highlight the recent spending limit set by the Legislative Budget Board.
The following are the panels that I moderated or participated in some capacity and my key takeaways with resources:
The other big news on Friday was that the Legislative Budget Board (LBB) set the state's spending limit for the upcoming 2020-21 budget. This spending limit is on only general revenue not dedicated by the constitution which is less than half of the total budget. While statutorily the spending limit should be based on growth in personal income, last session the LBB chose the rate based on population growth and inflation. This time the spending limit is 9.89% for the 2020-21 budget, which is based on an increase of 8.39% in population growth and inflation and 1.5% for Harvey.
This is another good sign that the LBB continues to use a measure for the limit that better matches the average taxpayer's ability to pay than the inappropriate growth rate of personal income. This spending limit is in-line with the recent BRE increase of 8.1% in general revenue-related funds and provides funds available to cover needed expenses along with property tax relief. Specifically, the Legislature could use half of the funds of about $4.4 billion for spending and 90% of the rest of the funds of about $4.1 billion to buydown the school maintenance and operations property tax.
There's been much discussion about international trade, particularly NAFTA with trade between the U.S. and Mexico, in the news and social media after President Trump's recent tweet-storm against the "bad deal."
But let's cut to the chase: people prosper from trade.
Sure, President Trump is correct that the U.S. is running a trade deficit with Mexico, whereby imports exceed exports, this year that looks to surpass the deficit of $71 billion last year (see charts below); but this net trade balance is useless.
True prosperity should be measured by the trade value of voluntary exchange of people importing and exporting products. This trade value between Americans and Mexicans was $557.6 billion in 2017 and is already $512.3 billion through just October 2018, meaning this year is likely to be even higher.
For another example, Texas has a trade surplus with Mexico, meaning Mexicans purchase more from Texans than Texans do from Mexicans (see figures below). Consider that in 2017 Texas exports to Mexico of $97.7 billion were greater than its exports to the next 10 countries combined. And Texas imports from Mexico of $89.8 B were greater than its exports to the next 5 countries combined. But again, Texas' net trade balance with Mexico of an almost $9 B surplus is useless.
True prosperity is the trade value of exports plus imports of $187.5 billion between Texans and Mexicans that year. In other words, through voluntary exchange people satisfy their desires or they wouldn't trade, providing a win-win situation, not a zero-sum game.
Comparative advantage discussed by economist David Ricardo in the early 19th Century explained that an individual (or country) will produce whatever she is relatively more productive compared with someone else (another country) and thing. This is similar to competitive advantage whereby an individual is not only more productive but can produce at a lower cost, which may not always be the case with comparative advantage. I explain this and more the Let People Prosper episode 46 above.
These concepts work in the real world to provide abundant human flourishing. Those people and countries that practice protectionist measures to limit trade have been poor or made poorer over time--even contributing to the failure of their nation such as in Rome or Germany.
What's important here is to be as competitive as possible so that one can continue to benefit from trade by increasing productivity and finding other ways to lower production costs. This can be done through policy such as reducing excessive government spending to lower taxes and cut onerous regulations--both tax and regulatory relief have been successes of the Trump administration. However, tariffs and other trade barriers and excessive government spending by the Trump administration and Congress continue to raise the cost of production and ultimately hurt all Americans as these policy actions reduce their purchasing power.
For example, the Tax Foundation notes that the Trump administration’s imposed tariffs have cost Americans $42 billion in higher taxes levied on thousands of products and threatened tariffs could cost them another $129 billion. This could total $171 billion in higher taxes which would be more than the average per year cut in taxes of $150 billion by the 2017 Trump tax cuts.
Adam Smith also taught us in the late 18th Century that the extent of the market determines the division of labor and specialization. So, expanding the extent of the market through trade with people in other countries improves both of these measure of worker productivity while holding down the cost of production and therefore prices so that the least among us and everyone else prosper over time.
Sure, some sectors, and the workers in them, that don't change course to compete in the expanded markets will be hurt, but people are still better off given more opportunities to work in other sectors and the advantages of an increased standard of living with more quality, affordable products and services.
For more on the economics of trade and the benefits of NAFTA and trade in general, please read my paper "People Prosper from Trade: NAFTA and Texas."
I also recommend reading papers presented at the Dallas Fed's recent conference on 20 years after NAFTA. The book "Economics In One Lesson" has great stuff on the economics of trade. Another good book that I read recently on trade was "Specialization and Trade" by Arnold Kling--I have a short review of it and other books at my Goodreads page.
In general, we need freer trade to let people prosper. Thanks for reading and sharing with others!
In this Let People Prosper episode 61, let's discuss the U.S. Senate's passage (and soon will be in the House) of a landmark criminal justice reform bill called the First Step Act, the unanimous vote by the Texas Commission on Public School Finance of recommended changes to the system, and the ninth increase by the Federal Reserve of the federal funds rate target to a range of 2.25-2.5%.
These are all key issues. But I'm particularly proud of the work that TPPF's Right on Crime team did to make criminal justice reform a priority for years and ultimately by the Trump administration. The First Step Act "provides reentry programming to help reduce recidivism, includes modest sentencing reforms, increases public safety, and gives those incarcerated a second chance once they have paid their debt to society." This is truly a step in the right direction as far too many are locked up for far too long and then return to a life of crime after because of the lack of a job and social normalcy.
The Texas Commission on Public School Finance provided a number of recommendations on how to improve student outcomes, how to increase teacher pay, how to more efficiently spend taxpayer money, and ultimately how to provide tax reform. Fortunately, the final version included language similar to TPPF's property tax plan that could provide lower property tax payments for Texans across the state. This is what Texans need and deserve to assure that they have every chance possible without unnecessary government barriers keeping them from reaching their hopes and dreams.
Finally, the Federal Reserve raised their overnight lending rate between banks, known as the federal funds rate, to 2.25-2.5%. This is the 9th increase since December 2015 after the Fed had left this rate in a range of 0-0.25% for seven years. The new rate remains near historic lows, as noted in the chart below.
While the stock market tanked after this report, the fundamentals of the economy remain relatively strong. One reason for the decline in the stock market today was because the price of credit increased today. This raise reduces the net present value of longer term capital investments and profitability along with the expectation of at least two more raises next year.
My take is that the Fed left rates too low for too long when you compare it with an indicator of a more market-driven, "neutral" rate derived by the Taylor rule. As you'll notice in the figure below, the Taylor rule suggests a neutral rate above 4%, which is almost twice as high as the federal funds rate. By the Fed's distortion of the markets with imposing an ultra-low interest rate policy and multiple rounds of quantitative easing, there are many assets that are bound to be highly inflated and we should expect corrections in these markets as the rate is raised to a more normal level. This isn't necessarily a bad thing as letting the air out of these inflated markets will help steady the markets and ultimately the economy for a firmer foundation for the long run. Interestingly, stocks remain much higher than they were when President Trump took office, which are positive signs of a growing economy as the economic institutions were strengthened from regulatory and tax relief even as burdens were imposed by excessive government spending and trade protectionism.
More to do to #letpeopleprosper.
In this Let People Prosper episode, let's discuss the large selloff in the stock market as international trade issues along with some signs of slower economic growth and higher interest rates give traders anxiety while incorporating how these influence lower gasoline prices. If you want to learn more, you don't want to miss this full episode. Thanks for watching and sharing with your friends and family! I'm truly blessed to have such amazing support.
While there have been some potential good signs on the trade front with a possible agreement between President Trump and President Xi, there continues to be much uncertainty about the actual agreement and the fact that it is only good for 90 days and does little to reduce higher imposed cost of trade between the two countries. In general, this needless trade dispute is far from resolved and has contributed to a steep drop in the stock market today, but there are some promising aspects of the agreement.
“Just because the U.S. and China have agreed to call a truce in their trade war doesn’t mean that it’s over: This was a classic exercise in can-kicking,” economist Tyler Cowen explains in Bloomberg Opinion. “Nonetheless, most cans have quite a few kicks in them, and overall this is good news for the global economy. Instead of sweeping everything under the rug, as was the case before Donald Trump took office, America and China have found a new way of addressing conflict by talking openly.”
According to the Wall Street Journal, "at the meeting in Argentina, Mr. Trump and his negotiators agreed to suspend a planned Jan. 1 increase in tariffs on $200 billion in Chinese goods to 25%, from 10%, as the two sides negotiate over Chinese economic policies."
Overall, tariffs are a destructive and counterproductive trade policy, and both the U.S. and China should work toward reducing them to zero. There’s a lot of work left to do on this deal to ensure that Americans can trade with the Chinese without taxes and uncertainty that will only drive up prices and decrease prosperity.
This action in the international trade arena has had costs not only of higher prices for Americans because of raising taxes through tariffs but also in raising the value of the dollar. Of course, the dollar market has many factors, which also include the Federal Reserve's potential actions of continuing to raise their overnight lending rate target. As U.S. interest rates go up compared with other countries, which essentially all developed countries have historically low interest rates, and people want to park their currency in dollars to reduce global risk, the value of the dollar appreciates compared with a host of major currencies, particularly the European euro.
When the value of the dollar goes up, the price of oil falls as oil is priced globally in dollars. In other words, a higher valued dollar makes it more expensive for people in other countries to purchase oil so demand falls contributing to a lower price of oil. Also contributing to this is higher inventories of oil from near record levels of production in the U.S. from innovative techniques through fracking.
This has contributed to the lowest level of gasoline prices this year, translating "to savings of about $200 million a day for Americans, said Patrick DeHaan, head of petroleum analysis for GasBuddy. DeHaan predicted that gasoline prices will fall further in coming days, but how long that will last is unclear." Given much of my academic research is in the oil and gas markets, there is much to the story of how the oil market works based on supply, global demand, and precautionary demand primarily driven by geopolitical issues.
Supply is increasing, global demand is waning, and precautionary demand is heightened by the previous two factors outweigh this push upward in price. Considering that gasoline is a byproduct of oil, there is, on average, about a 2% increase in the retail price of gasoline for every 10% increase in the price of oil, and a symmetric response for a decline in the oil price over time.
Ultimately, imposing tariffs on other countries naturally leads them to do the same to us. And families pay the cost. Instead of resorting to flawed mercantilist trade policy, America should lead the way in promoting free trade, which history shows supports freedom and human flourishing. This should also stabilize the stock market from such wild swings driven by policy uncertainty on a the trade and interest rate fronts. Gaining trust in money issues must also come in the form of reining in bloated federal government spending of taxpayer dollars today and in the future from rising debt.
Achieving freer trade, raising interest rates to a more normal level, and reining in government spending would put the U.S. a sounder foundation for economic growth contributing to more job creation and economic opportunity for more people to prosper.
In this Let People Prosper episode, let's discuss my recent trip to Washington D.C., where I spoke at the American Legislative Exchange Council's meetings about the importance of institutions and did an interview with Freedomworks, and then discussed the federal budget with Russ Vought, who is the Deputy Director of the White House's Office of Management and Budget.
Let's also discuss the latest economic reports about the continued strength of the U.S. economy in terms of GDP growth and personal income, and examine trade issues being discussed at the G-20 Summit.
Below are a few pictures from my recent trip to D.C.
In this Let People Prosper episode, I take a little more time than usual (hope you'll watch the entire episode) to share what economists like Adam Smith, David Ricardo, Daniel Hamermesh, Paul Krugman, and Milton Friedman said about international trade.
In summary, people prosper from trade (see my paper here) and I'm cautiously optimistic about the revised version of NAFTA which is now being called the US-Mexico-Canada Agreement (USMCA), especially with the reduction of some foreign trade uncertainty, but have many reservations of the toll the increased trade barriers put on the auto sector will have on Americans.
The legislatures of each of these countries will not have 60 days to review and vote. Let us not forget the benefits of free trade and find ways to reduce trade barriers instead of erecting more.
VIDEO of event "#NAFTA and #FreeTrade: Gain or Loss to Texans?" hosted by @TPPF & @Heritage here: https://t.co/U5cwxTjrXV. Panelists include @Glenn_Hegar, @dwkreutzer, and me, with @DrewWhiteTX moderating. I hope you'll watch and share it with others.
Here are other publications of mine on NAFTA and international trade:
1) Texans Support, Prosper from Free Trade
2) Renegotiating NAFTA Without Favoritism Supports Prosperity
3) NAFTA Contributes to Texas Model's Success (Overview of my academic research)
4) Trade Deficits Can Be a Good Sign
5) Fast Track to Free Trade Prosperity
In this Let People Prosper episode, I'm interviewed by Josiah Neeley of R Street Institute and Doug McCullough of Lone Star Policy Institute on the Urbane Cowboys podcast about trade, NAFTA, Texas Model, and much more ("Ginn as in Gig").
You can listen to the podcast on Apple iTunes or wherever you get your podcasts.
In this #LetPeopleProsper episode, I discuss my last two very busy days.
With the proposed U.S.-Mexico trade deal yesterday, I was on multiple radio stations today across the nation talking about the costs and benefits of the deal and the implications for Americans. I'm still waiting to see all of the details and am lukewarm about it at this point because of the trade barriers imposed on the auto sector that will lead to higher auto prices for consumers and higher transportation prices for many businesses. However, I'm optimistic that much of NAFTA remained intact, e-commerce provisions were included to modernize the agreement, and the contract is for 16 years instead of the 5 years the Trump administration suggested. Here's my recent commentary at The Hill on this issue.
I testified today before the Texas Senate Business & Commerce on deregulating occupational licensing, which is the most onerous form of labor market regulation (here's my testimony). I discussed the high costs of these and made recommendations on taking a broad look at eliminating many of them or reducing their requirements along with moving towards having employers complete a registration or certification with the state government or a private association to signal that they are able to do the job, which signaling is about all many of these licenses are good for. I'll have a paper published on this soon with Dr. Ed Timmons of St. Francis University.
I also testified today before the Texas Senate Administration on the benefits of program-based budgeting and the need for zero-based budgeting. I explain this in detail in the episode, but basically our state budget today is organized by strategy that lacks transparency and makes it difficult to find granular data in the budget, especially to weed out unnecessary programs. By moving to a program-based budget that's been used in Texas before, this granular data would be available to add transparency for taxpayers and legislators while making it easier to start each program at zero and make decisions whether it should be included--otherwise known as zero-based budgeting.
Please watch the video for more. Don't forget to subscribe to my YouTube channel at "Vance Ginn Economics" and continue to share this with your friends and family. Thank you!
In this episode, I am interviewed by Liz Wheeler of One America News Network on the costs and benefits of the proposed trade deal between the U.S. and Mexico. While consumers will likely pay higher prices for autos, there are benefits of the deal as well. It's important that NAFTA continue as it supports abundant prosperity, especially in Texas.
Here's my press release today and recent research on how people prosper from trade, including NAFTA. A big part of the benefit of today's proposed bilateral trade deal is that it reduces the foreign trade uncertainty holding back economic activity. While tariffs may have contributed to a faster agreement, tariffs are nothing more than a tax and shouldn't be used in such a manner unless willing to increase taxes and raise more revenue to expand government, which isn't something I'm willing to do nor should Americans as it makes people poor.
Hopefully there will be lower trade barriers overall when the agreement is finalized between the U.S., Mexico, and Canada. If not, Texans and all Americans will lose in the process.
In this Let People Prosper episode, I discuss today's enactment by the Trump administration of $16 billion more in tariffs on Chinese products by the Trump administration along with my recent presentation before the U.S.-Mexico Chamber of Commerce in Houston on the importance of institutions along with the benefits of international trade.
While there are certainly acute costs for specific people in trade activity with people in other countries, the benefits are widely dispersed. This is why it's easy for politicians to point to trade as being the problem, such as auto manufacturing or steel, when the primary problem is poor domestic policies. The facts show that trade, whether by individuals domestically or abroad, are overwhelmingly positive. Alternatively, higher taxes from trade leads to increased uncertainty for entrepreneurs that contributes to less economic activity and job creation.
For example, in my recent paper I note that the North American Free Trade Agreement between the U.S., Canada, and Mexico, which got rid of tariffs among these countries, supports at least 14 million jobs in the U.S., with many of them in Texas. We should not look at trade deficits but rather trade flows.
Watch the YouTube video above and view the presentation below to learn more.
State of the U.S. Economy Including Strong Growth & Rising Compensation and Costly Tariffs & Budget Deficits: LPP EP 24
In this episode, I discuss the state of the U.S. economy, including the markets, rising compensation for Americans, Federal Reserve leaves target federal funds rate unchanged in the range of 1.75-2%, and costly federal budget deficits of nearly $1 trillion that will be a drag on economic growth unless government spending is reined in along with the cost of tax hikes from tariffs.
There is a clear path to more economic growth, job creation, and resulting prosperity: capitalism without government barriers to opportunity.
In other words, the federal government should uphold contracts through a justice system, provide a national defense, and deal with international commerce, but really not much more than that.
Let people prosper by letting them satisfy their desires within institutions of civil society that are the backbone of America's strength. Unfortunately, too many of those institutions are hindered because of excessive government intervention at every level.
Let's learn more about what we can do together.
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 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.
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.
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.
In each episode, I will discuss how we act to satisfy our desires given scarce resources around us withing a number of institutions. This episode is on how trade between people, whether domestically or abroad, supports prosperity and how barriers to trade, such as tariffs, reduce prosperity.
Review my paper on the topic here.
The North American Free Trade Agreement (NAFTA) has contributed to economic prosperity for Texans and all Americans, which is why any renegotiation should be toward freer trade.
I was quoted in this Houston Chronicle article.
I had the honor of presenting at the @SMUONeilCenter's event: “#Trump & the Texas Economy.” Watch my presentation (first presenter) along with others as we discuss #Texas, taxes, spending, #NAFTA, #tariffs, & #energy.
This originally appeared on the WND website.
President Trump’s embrace of new tariffs on steel and aluminum imports is largely believed to be behind the exit of his top economic adviser, and one free-market advocate is concerned that it could hurt American consumers and stunt the nation’s economic growth spurt.
Last week, during a meeting with executives from America’s leading steel and aluminum manufacturers, President Trump announced his new policy.
“We’ll be imposing tariffs on steel imports and tariffs on aluminum imports. Pretty much all of you will be immediately expanding if we give you that level playing field, if we give you that help,” said Trump in announcing 25 percent tariffs on steel imports and a 10 percent surcharge on foreign aluminum.
The policy comes as little surprise, since Trump routinely condemned what he characterized as terrible trade policies with the likes of China and Japan and vowed to revive American manufacturing by addressing America’s trade posture.
However, Texas Public Policy Foundation senior economist Vance Ginn believes tariffs are the wrong policy for Trump to pursue.
“I think this would be bad for Americans overall and reduce our economic potential over time, which had been boosted by the tax cuts last year and the regulatory reforms that were made,” Ginn told WND and Radio America. “I’d rather see those sorts of things boosted instead of tariffs and trade practices such as this.”
Ginn said the simple fact is that charging more for imports means higher prices for all of us.
“If you raise the cost of doing business, that hurts business. And it hurts American consumers,” he said. “Whenever you look at raising steel prices and aluminum prices, those are in the cars that we drive and the buildings where we work and in many other aspects of capital throughout our economy.”
He also said Americans were reminded just last decade in the George W. Bush administration that steel tariffs don’t necessarily get the intended results.
“Some estimates show that cost us about 200,000 jobs,” Ginn said. “I would hate to see more Americans not have a job when we’ve had an expanding economy.”
Commerce Secretary Wilbur Ross estimates that the steel tariffs would result in a bump of one-half of one percent to three-quarters of one percent, an average of about $700. He said the difference is “trivial.”
Ginn said that approach badly undermines the administration’s defense of the tax cuts.
“If $1,000 is just crumbs, according to Nancy Pelosi, but a big deal according to those in favor of the tax cuts, $700 is also a big deal,” he said. “That takes away a lot of the potential from those bonuses that they had before to [add income].”
But with significant trade deficits and China dumping steel into this country in violation of World Trade Organization protocols, the U.S. stands at a tactical disadvantage.
Ginn said that doesn’t explain why the tariffs apply to everyone.
“The proposal so far would be a global tariff on steel and aluminum,” he said. “It wouldn’t just hit China. So if there are those issues with China, let’s deal with those, not necessarily make it for everyone to pay these higher costs.”
Ginn also said the effort to reduce America’s trade deficits starts with a tough look in the mirror.
“Let’s look at what we’re doing here at home that’s also maybe raising the cost of living and raising the cost of doing business such that China and other countries are having a competitive advantage in the global market,” he said.
“Let’s look at the cost of unions and what they’re doing to the cost of labor over time. Let’s look at our minimum wage and what that’s doing over time. Retirement pensions. There are a number of factors that are raising the cost here that are putting us at a disadvantage compared to other countries.”
Ginn believes America’s position on the global trading stage is already on the upswing, thanks to the tax-reform bill.
“That helps to reduce the cost of doing business,” he said. “It allows us to be more competitive on a global playing field. I think we should look at more of those things, along with regulatory reforms.”
According to Ginn, the way to help an economy flourish is not to add more complications but to remove as many as possible. He said it’s led to a booming economy in Texas.
“The ability for us to focus on freedom and free markets has allowed us to be a powerhouse,” Ginn said. “As an independent nation, we would be the 10th largest economy in the world and continue to create a lot of jobs. In fact, over the last decade, we created 26 percent of all new jobs that were added in the United States.”
President Trump’s negotiating tactics often show him throwing out an idea, watching his critics set their hair on fire, and then finding common ground with a less severe approach. Ginn suspects that is Trump’s approach here, as well as an effort to put the heat on officials renegotiating the North American Free Trade Agreement, or NAFTA.
“He’s even talked to the Mexicans and the Canadians and said, ‘Look, if we don’t get something done with NAFTA, then I’m definitely going through with these tariffs.’ That puts pressure on the NAFTA renegotiation process as well,” he said. “I’m hopeful this is not where we’ll be at the end of the day.”
Ginn contends NAFTA could be much better but it’s not as destructive to the U.S. economy as its critics suggest. He says free trade ought to be the ultimate goal.
“What would be a perfect trade agreement?” he asked. “It would be no trade barriers between the countries that are involved. Instead, we have a 1,700-page trade agreement with NAFTA.
“So what does that do? That picks winners and losers throughout the whole economy. There’s a lot of ways to renegotiate to make this more of a free-trade agreement. I’m just a little concerned that’s not where we’re going to go if we start picking out even more winners and losers in the process.”
Just as Americans mutually benefit from voluntary exchange domestically, so can individuals in different countries within the rule of law. A perfect trade agreement would be one sentence that provides no more than a contractual obligation: “There shall be no trade barriers among countries X, Y, and Z.”
The Texas Public Policy Foundation (TPPF) recently held an event co-sponsored with The Heritage Foundation that discussed whether Texans gain or lose from the 1994 North American Free Trade Agreement (NAFTA). Panelists included Texas Comptroller Glenn Hegar, Dr. David Kreutzer of the Heritage Foundation, and Dr. Vance Ginn of TPPF, with moderator Drew White of TPPF.
NAFTA is an agreement among the U.S., Mexico, and Canada designed to reduce costs of exchange among Americans, Mexicans, and Canadians. While it’s far from a perfect agreement, as more than 1,700 pages pick government winners and losers, data indicates it at least benefits Texas and the energy sector.
In 2016, Texas exports totaled $231.1 billion and imports were $229.3 billion, giving a trade surplus of $1.8 billion. Instead of evaluating a trade deficit versus surplus, consider that people agreeing to each transaction benefit from more than $460 billion in foreign trade.
Texas’ trade total with Mexico resulted in a $10.8 billion trade surplus and with Canada a $4.7 billion trade surplus, so NAFTA contributes to a $15.5 billion trade surplus in a $1.4 trillion economy.
Texans prosper from each individual transaction through overall lower prices and a growing economic pie. Research finds that fewer trade impediments among NAFTA countries helped Texas become economically diversified and more resilient to oil price fluctuations over time.
Moreover, a Texas industry that should support NAFTA is the energy sector. In 2016, Texas exported $37.1 billion in petroleum and coal products, the majority of that sum going to Mexico and Canada.
Critics of NAFTA point to trade imbalances as a reason for dissolving the agreement. This reason can be discounted in the context of the energy sector: the U.S. energy sector had a positive trade surplus with Mexico of $11.5 billion.
The agreement is also credited as a driving force in the North American resurgence in energy production.
North American economies produced a total of 22 million barrels of oil a day in 2016, with the majority produced in the U.S. Although the U.S. is the leading producer of petroleum in the world, we demand six million barrels of oil and related products per day more than we produce. Canadian producers who export about three million barrels a day to the U.S. satisfy the bulk of this excess demand.
NAFTA benefits the construction of natural gas pipelines stretching from the U.S. to Mexico. This helps expand the market for excess natural gas production in the U.S. while allowing Mexicans to convert to cleaner-burning energy production.
Members of the energy sector should support the continuation of NAFTA as well as an updating of the section of the agreement dealing with energy production toward freer trade. If U.S. producers could more freely operate in Mexico, the U.S. energy sector, Texans, and Americans, could prosper more.
This commentary originally appeared in The Houston Chronicle on October 15, 2017 and updated on January 18, 2018.
Criticism of the North American Free Trade Agreement is nothing new. In 1992, U.S. presidential candidate Ross Perot notoriously implied that if NAFTA passed there would be a “giant sucking sound” as jobs and wealth left the country. Recently, there’s discussion of adding sunset clauses and other measures that could weaken the agreement because of similar fears.
Examining free trade agreements before and after inception is wise. But, 23 years after inception of NAFTA, critics must consider the vast data noting the benefits to Americans, especially for those in Texas. Instead of trashing the agreement, renegotiation should include encouraging freer trade.
While today some applaud changes to NAFTA, a recent Gallup poll shows that 72 percent of Americans believe foreign trade increases economic opportunity. This support across the political spectrum is on the rise since 2011, with 80 percent of Democrats, 71 percent of independents, and 66 percent of Republicans now favoring foreign trade.
Often headlining the free trade debate is the notion that one country is pitted against another. But Gallup’s data suggest the economic benefits are widely understood wherein individuals voluntarily trading with one another mutually prosper.
In other words, America doesn’t trade with Mexico, Americans trade with Mexicans and both see benefit from it.
As voluntary exchange within a legal framework benefits people in U.S. states, an optimal free foreign trade agreement would allow movement of goods among countries while respecting each countries’ laws. Unfortunately, politics picks winners and losers, evidenced by NAFTA’s 1,700 pages of carve outs for privileged sectors.
Regardless, evidence indicates Americans benefit from NAFTA, particularly in states like Texas.
In 2016, Texas exports totaled $231.1 billion and imports were $229.3 billion, for a foreign trade surplus of $1.8 billion. Instead of thinking about trade deficits as bad and trade surpluses as good, consider that people benefit by a remarkable total of more than $460 billion through trade.
Texas’ trade with Mexico is almost 40 percent of total exports and 35 percent of imports, resulting in a $10.8 billion trade surplus. Exports to Canada are 8.6 percent of total exports and 6.6 percent of imports, for a $4.7 billion trade surplus.
While NAFTA partially contributes to a $15.5 billion trade surplus in a $1.4 trillion economy, Texans prosper from each individual transaction through overall lower prices and a growing economic pie. Research finds that fewer trade impediments among NAFTA countries helped Texas become economically diversified and more resilient to oil price shocks over time.
In the early 1980s, Texas’ mining industry, comprised mostly of oil and natural gas activity, was 21 percent of the state’s private economy. While the oil price collapse in 1986 reshaped Texas’ economy, there was a steady decline in mining’s share after the passage of NAFTA. Mining is now only 8 percent of Texas’ private economy as expansions in sectors like healthcare, technology, and retail outpaced that of oil and gas activity.
Result: More Texans have prospered from trade with Canadians and Mexicans. However, foreign trade alone is not wholly responsible for this growth. Pro-growth policies in Texas have also provided the institutional framework for Texans to thrive.
The Fraser Institute’s measures of economic freedom, which compares entities based on government spending, taxes, and regulation, ranks Texas as the third best nationwide, while the U.S. now ranks a multi-decade low of 16th worldwide.
Policy makers would be wise to consider the evidence of increased economic prosperity from foreign trade agreements despite their imperfections and focus on reducing government’s influence on Americans.
Rolling back needless regulations, cutting individual income taxes and the developed world’s highest corporate income tax rate, and slashing excessive government spending would support greater economic growth.
Meanwhile, reductions of existing trade barriers and expansion of foreign trade should be a priority.
We must also be honest that free trade doesn’t necessarily create a net number of new jobs and often the economic benefits are diffuse while the tradeoffs can be acute. Ultimately, though, free trade benefits everyone by lowering the general price level, opening up previously inaccessible markets, and creating new industries providing more opportunities for more people to flourish.
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.
A free enterprise system with government institutions preserving liberty best supports individual prosperity, even between countries.
Vance Ginn, Ph.D., is director of the Center for Economic Prosperity and senior economist and Dayal Rajagopalan is a research associate at the Texas Public Policy Foundation, a nonprofit, free-market research institute based in Austin. They may be reached at email@example.com.
This commentary was originally featured in The Hill on September 22, 2017.
Though not perfect, NAFTA has increased prosperity and improved the lives of millions of
Americans through greater competition, affordable products, and wealth and job creation. Potential renegotiations of NAFTA could deter these gains if the deal doesn’t include reducing both trade barriers and government favoritism for certain industries.
Consider that Mexico has long maintained state control of natural resources, including natural gas, coal, and oil, resulting in only one petroleum company — the 75-year-old state-run Pemex. As with most government-created monopolies, Pemex has been plagued by corruption and inefficiency, ultimately forfeiting its incentive to take risk and prospect for sub-surface resources.
These developments led to a surprisingly beneficial move in 2013 by Mexican President Enrique Peña Nieto to gradually privatize the energy sector. While initially unpopular, the constitutional changes were in place a year later, opening the gates for foreign investment in Mexico’s energy sector.
Steve Hanson, the CEO of International Frontier Resources Corp., stated, “In short, it is the largest energy opportunity in the world today — and the door has just been opened.” His optimism is largely due to the unprecedented amounts of Mexico’s untouched natural resources.
Texas energy companies are poised to capitalize on this new open market, especially because Texas is the leader of the North American energy industry. When this industry grows, Texas, and America, prosper. With only nine percent of the U.S. population, Texas created 25 percent of all new American jobs since the last U.S. recession began in December 2007, which is around the time the shale revolution began.
Thanks to NAFTA, proximity and profit motives, Texas refineries are intertwined with Mexico’s energy sector. Increased production of Mexico’s crude oil and natural gas often results in more business for Texas refineries, contributing to greater wealth and job creation here at home.
However, there’s no guarantee these economic benefits will continue.
An outright exit from NAFTA might nullify these opportunities and economic gains. In addition, there are regulatory barriers that bar full realization of energy business with Mexico, the majority of which were erected in the wake of the denationalization process.
An amendment to the energy chapter of NAFTA currently allows for these regulatory barriers by granting Mexico unilateral regulatory power in the energy sector. While this specific concession is not typical for free trade agreements, favoritism far too often plagues international trade and should be eliminated.
The Trump administration’s pressure on NAFTA has recently picked up momentum is in accordance with a wider shift from free trade to so-called fair trade with stated goals of shrinking U.S. trade deficits and preventing job losses.
While these goals sound good in theory, U.S. exports and imports contribute to a growing economic pie and job creation with mixed effects on specific industries.
For example, the U.S. International Trade Administration notes that 11.5 million jobs were supported by U.S. exports in 2015, with 10 percent of those in the Lone Star State. Unfortunately, these data account for only part of the job creation supported by foreign trade.
While imports get a bad rap, individuals voluntarily trading in those exchanges benefit or they wouldn’t agree to the transaction. Imports often result in lower prices, higher productivity, and more business investment such that people have more money in their pocket, higher wages, and more job opportunities.
In short, the focus shouldn’t be on reducing trade deficits and risk increased poverty, but rather how to make the U.S. more economically competitive.
Renegotiating NAFTA could serve as a valuable opportunity to promote prosperity, but only by reducing trade barriers and government privilege so individuals in different countries can mutually benefit. In addition, the U.S. can help keep businesses from fleeing and support more job creation at home by cutting excessive government spending, passing pro-growth tax reform, and rolling back onerous regulations.
This is a proven path to human flourishing.
Vance Ginn, Ph.D.