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!
Vance Ginn, Ph.D.