Saturday, February 25, 2017

Why Fear a Trade Deficit?

Column 2017-6  (2/27/17)
 With foreign trade now a front burner political issue we are
likely to hear more about that thing called a trade deficit.  Many people
claim a trade deficit is a bad thing.  How could anything named
"deficit" be good?

     Shakespeare asked, What's in a name?  Let's consider, What is
in the name "trade deficit?"  If a nation imports more than it exports it
is said to have a trade deficit  If your bank account imports more
money than it exports, Would you call the results a deficit?

     Things we import are useful to us.  Things we make and export
are a waste.  Someone else gets to use them.  If we could import all the
stuff we now make we could live the same way we do now.  If we
could get the imports without making anything to export, we would gain
a whole bunch of leisure time.

     If we imported nothing and exported everything we made,
everyone would soon starve.  It seems foolish to brand imports as bad
while praising exports.  It is like calling work good and the things work
produces bad.  Exports can have value to us only in one way.  We can
use the exports to pay others for stuff they make for us.  Without
payment the making is likely to stop.

     How can we import more than we export?  Does it mean we
aren't paying for all of our imports?  One economist pointed out that we
don't have a trade deficit, instead we have a transportation deficit.  A
simple example will explain why.

     Imagine Toyota shipping $100 million worth of vehicles to the
US and selling them.   Then Toyota buys $100 million worth of
assembly line equipment in the US.   Now consider two options.

     In the first option Toyota ships the equipment to Japan and
builds an assembly plant.  When the purchase is transported across the
magic line it cancels the $100 million trade deficit.  Without the
transportation the trade deficit would live on.

     In option two Toyota builds the assembly plant in the US.  As a
result the US increases its trade deficit by $100 million.  Which benefits
the US more, an assembly plant in the US or one in Japan?

     Such foreign investments in the US are the main cause of the US
trade deficit.  Foreign investors create the trade deficit because they find
the US a better place to invest than their own, or any other, country.

     Some Canadians seem proud that Canada usually has a trade
surplus with the US.  Why are they proud that their fellow Canadians
find investing in Canada inferior to investing in the US?

     The saving and investment rate for people in the US is very low. 
Without investment prosperity is impossible.  The US economy would
be in far worse shape than it is if foreigners hadn't made the
investments that created the US trade deficit.  We should say thank you
rather than complain about the trade deficit.

     There is another small contributor to the trade deficit.  Some
money we spend on imports never comes back to buy anything in the
US.  The local currency in some countries is so bad that people prefer
to use US dollars.

     We shouldn't feel badly about the loss of that money.  Taking
money out of circulation in the US increases the value of the money we
still have.  Without having to increase our spending, we get to buy the
things those foreigners didn't buy.  Again, we should just say thank you.

     The trade deficit isn't a debt.  It never has to be paid off.  If
foreign investors want to take their investments home, they are free to
do it.  No one has any obligation to pay them for their investments.

     President Trump wants increased foreign investment in the US. 
He also wants to reduce the trade deficit.  The one thing certain is he
has to fail to achieve one of those goals.
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Copyright 2017
Albert D. McCallum

Sunday, February 19, 2017

To Trade or Not to Trade

Column 2017-5 (2/20/17)                                   

     Since long before my time a battle has raged over whether to
trade or not to trade with people who live in other nations.  A quarter
century ago Ross Perot proclaimed that the sucking sound was our jobs
going to Mexico.  Others were of the mind that the sucking sound was
Ross Perot sucking all of the intelligence out of the room.

     Donald Trump now waves the banner passed down by Perot. 
Now the main villain is China.  Mexico still has a supporting role. 
What is the truth about foreign trade?  Does anyone care?

     Trade is a two-way street.  That is what "trade" means.  Each
party gets something from the other.  When the wealth moves only in
one direction it isn't trade.  It is either a gift, robbery or extortion.   
Believe it or not the Chinese and Mexicans are so selfish neither will
send us an endless stream of gifts.  Even if they would, Why should we

     We aren't losing jobs to China or Mexico.  When we trade
goods we also trade jobs.  When shirt makers lose their jobs because we
import shirts from China, other jobs are created in the US making
something to pay the Chinese for the shirts.  Those new jobs usually
aren't as obvious as the ones lost.  Sometimes those new jobs do show
up on our radar.  Boeing recently announced that a sale of airplanes to
China would create 50,000 jobs in the US.

     Trade does mean some workers have to find new jobs.  There is
nothing unusual about that.  In Michigan every year 700,000 or so jobs
are lost and replaced with new jobs.  The only way we can increase our
standard of living is to replace low productivity jobs with more
productive jobs.

     Trump claims he will bring our manufacturing jobs back from
China.  That would be a neat trick considering that those jobs didn't go
to China.  So where did the manufacturing jobs go?  They went the
same place the farm jobs went.

     In colonial times about 90 percent of workers were farming. 
Now only about 1 percent are farmers.  We didn't lose those jobs by
importing our food from China.  Farmers now produce more than ever
before.  Mechanization makes it possible for one farmer to grow as
much as many used to.

     Manufacturing jobs are now going the way of farm jobs.  And,
we will be better off because of it.  Imagine what life would like today
if 90 percent of workers were still farming.  Those displaced farmers
make most of the stuff we have today.

     In colonial times no one could have imagined all the non farm
jobs we have today.  Likewise, no one today can imagine all the non
manufacturing jobs that will fill the future.  As long as people have
unsatisfied wants, there will be work to be done.  All we need to do is
give entrepreneurs the freedom to dream and create.  They will find
ways to employ available labor to produce the goods and services
people want.

     Some may ask, What about the money China lends to the US
government instead of spending?  Be assured, the government spends
that money.  The jobs the spending creates may not be very productive. 
They will be as productive as they would be if government borrowed
the money from people in the US.  And, the borrowing from China
won't drain investment capital from the US economy.  Please don't
interpret this as suggesting government borrowing is a good thing.

     The reason people trade is that they find it easier to make
something to trade for what they want than to make what they want. 
Trade benefits both parties, even when they live on opposite sides of the

     Blocking trade may benefit some politically connected special
interests.   The price we pay is that we all have to work harder for what
we want.  Blocking free trade always increases the price of something
people buy.
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Copyright 2017
Albert D. McCallum

Sunday, February 12, 2017

More About Obamacare?

Column 2017-4 (2/13/17)                              

     In a recent column I considered the nature of insurance
along with what insurance can and cannot do.  Insurance doesn't
reduce losses.  It only provides a means of sharing the losses so
none of the insured individuals have to take a big hit.

     If everyone in the insurance pool doesn't face about the
same risk, those who face greater risks must pay higher
premiums.   Otherwise the low risk individuals will bailout
unless coerced to stay.  It won't work to charge 25 years old
individuals and 85 years old individuals the same premiums for
life insurance.

     Obamacare was designed to defy the basic principles of
insurance.  That is why many people believed Obamacare was
designed to fail.  It was believed to be nothing more than a
stalking horse for the complete government takeover of medical

     The foundation of Obamacare was to force some people
to pay the medical expenses of others.  The prime target was
healthy young people who were to be forced into a herd with
high risk individuals.

     Everyone was to be forced to help pay for preexisting
conditions.  Preexisting conditions can't be covered by real
insurance.  There is no unknown risk to share,  Try buying
tornado insurance after your house is blown away.  See how
many insurers are eager to cover your house's existing condition.

     Preexisting conditions are problems.  Those problems
can't be solved with insurance.  There are only two solutions,
rely on voluntary help or resort to extortion.  Obamacare chose
extortion by requiring everyone to pay or else go without

     Many people seem to be pleased when insurance
companies are forced to provide additional coverage.  Politicians
spin it as something they are doing to the "evil" insurance
companies.  In reality those "evil" insurance companies must
raise premiums to pay the added cost.  Mandated coverage is
extortion as far as those who don't need or want the mandated
coverage are concerned.

     Together the federal and state governments mandate 100
or so coverages, all of which make insurance cost more.   All
mandates of coverage should be abolished.   Let individuals
choose the coverage they pay for.

     Employer paid medical coverage is a substantial cause of
high costs.  One size fits all coverage prevents individuals from
having the coverage that fits them best.  Also, not even seeing
the bill for their coverage encourages waste.  Some go to the
emergency room for hangnails and colds.  Services that seem to
be free encourage unnecessary tests and all sorts of waste.

     Instead of trying to get rid of employer provided
coverage, Obamacare tried to force its expansion.  To get rid of
the wasteful employer provided coverage we must level the
playing field tax wise.

     Employer provided coverage is exempt from income and
Social Security taxes.  Pay the same money to the employees so
they can buy insurance and it is subject to both taxes.  To
correct this problem all medical expenses, including insurance,
should be exempt from both taxes.  What employer wouldn't
gladly give his employees raises equal to the cost for medical
coverage, in exchange for being relieved from providing the

     I haven't come close to even touching everything that
needs to be done to unravel what government has done to make
medical insurance and services far more costly than need be. 
Until we have individuals price shopping for medical services
and insurance, the problems will live on.

     The cost for most medical services have been rising
toward the stratosphere.  Meanwhile, the cost for plastic surgery,
which usually isn't covered by insurance, has been going down. 
With proper incentives all medical costs can be reduced.  More
freedom and choice, not more government intervention, is the
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Copyright 2017
Albert D. McCallum

Sunday, February 5, 2017

What Is Insurance?

2017-3 (2/6/17) 
 With the battle over repeal of Obamacare descending
upon us medical insurance promises to be in the news for what
is likely to seem like forever.  It is a safe bet that the discussion
will generate more heat than light.  A good start would be
having everyone, especially those in Washington, D.C., know
what insurance is.  A bit of knowledge about what insurance can
and can't do would also be good.

     I am reminded of an age old riddle.  If you call a tail a
leg, how many legs does a dog have?  The answer, of course, is
four.  Calling a tail a leg doesn't make it a leg.  Neither does
calling a harebrained scheme insurance make it insurance.

     Insurance isn't magic.  It doesn't mystically prevent
expenses and loses.  Neither does insurance magically create
wealth to reimburse those expenses and loses.  In fact insurance
adds to those expenses and losses.  Someone has to pay the cost
of providing the insurance.

     Insurance is only an arrangement where many individuals
agree to pay small amounts to compensate a few who suffer
large losses.  There are four requirements for an expense or loss
to be insurable.  First, there must a number of people who face
the same risk of expense or loss.  Second, there must be a very
low probability that more than a few of those people will
experience the loss.  Third, the members of the group must have
little ability to avoid or cause the loss.  Fourth, it must be
impossible to know in advance who will experience the losses.

     A simple example will illustrate the basic principles of
insurance.  Assume that 10,000 people own houses.  History
indicates that on average only three houses will be hit by
tornadoes each year.  The loses can be shared through insurance.

     If some of the houses are in Oklahoma and some in
Minnesota, not everyone faces the same risk.  To make insurance
work, at a minimum those in Oklahoma would have to pay
higher premiums.  Otherwise those in Minnesota would reject
the insurance and buy less expensive insurance that only covered
houses in Minnesota.

     A recent poll found that 80 percent of people want
Obamacare repealed.  Apparently its failures haven't gone
unnoticed.  Sadly those failures were obvious from the beginning
to anyone who looked for them and was willing to see them.

     Obamacare combines insurance with extortion.  A minor
but controversial feature of Obamacare illustrates this point.  The
law mandates the coverage of contraceptives.  Contraceptive
insurance is impossible.  It is no more workable than "insurance"
to fill your cars fuel tank when it's empty.

     If contraceptive coverage were offered as an option, only
those who wanted to use contraceptives would buy it.  Almost,
everyone who bought it would use it.  The "insurance" would
cost more than the direct purchase of contraceptives.  No
sensible person would buy the coverage.

     Government "solved" the problem with extortion.  If you
buy medical insurance you are forced to pay for someone else's
contraceptives.  Refuse to pay the extortion and you not allowed
to purchase medical insurance.

     This is only the tip of the extortion iceberg floating in
Obamacare.   There is more than enough left for another column.

     I accidentally discovered a replacement for Obamacare. 
My spell checker wants to replace it with "macabre."  I did not
make that up.

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Copyright 2017
Albert D. McCallum

Saturday, January 28, 2017

What About Jobs?

Column 2017-2 (1/30/17)                                 

     During the 2016 campaign candidates talked much about
jobs.  After a politician speaks the first question to ask is, What
is the truth?  This is at least doubly true when politicians talks
about jobs.  There is something about jobs that causes
politicians, and others, to slip into a fantasy world that defies

     Donald Trump proclaimed that he would be the greatest
jobs president ever.  Was he talking about snow jobs?  The jury
is still out on that.  He didn't set the bar very high.  I don't
recall the last president who was great at creating real jobs. 
Anyone with access to money, his own or someone else's, can
easily and quickly create make work jobs.

     Before continuing we need to consider a simple question,
What is a real job?  Businesses don't hire employees for the
pleasure of writing pay checks.  Hiring is worth while only when
the employee produces more value than what he costs.  That cost
includes taxes, insurance, fringe benefits and all other expenses
resulting from the hiring.

     It is often impossible to determine exactly how much
value each employee contributes to production.  The total value
all employees contribute can be calculated.  For a business to be
profitable and survive total employee cost must be less than the
total value created by the employees.

     If the business pays some employees more than they
produce, it must pay others less.  Employees who are paid
substantially less than what they produce are likely to find
greener pastures elsewhere.  For any business, losing its most
productive employees is a serious problem.  Thus, businesses
have plenty of incentive to pay employees in accordance with
their value to the business.

      When minimum wage laws would force an employer to
pay more than the worker is worth to the business, the business
can't afford to hire the worker.  Thus, the least productive
workers have no jobs and no income.  For them the minimum
and maximum wage is zero.

     An honest calculation of the impact of minimum wage
laws requires including in the calculation those with no wages
because of the laws.  Of course, we can never be certain exactly
how many jobs are lost to minimum wage laws.  This leaves
plenty of room for advocates of minimum wage laws to lie.

     By trampling on freedom in the marketplace businesses
can find other options when the employees don't produce enough
to pay their costs.  Businesses ask government to protect them
from competition.

     The sugar industry is a prime example.  Thanks to
government protection of the sugar industry you pay twice as
much for sugar compared to sugar prices in most other countries. 
Among other things, government protection of the sugar industry
has pushed hard candy makers out of the US.

     If protection isn't enough, businesses plead for outright
subsidies to cover their losses.  Either way the inefficient,
wasteful production goes on.  The taxpayers and customers are
forced to pay for the losses.  Under our crony capitalism,
government interference with competition causes vast amounts of
waste that drag down our standard of living.  Various studies
find that without the government caused waste, our incomes
would be twice or more what they are.

     Should it come as a surprise that the younger generation
considers capitalism to be a dirty word?   Crony capitalism is
the only capitalism they have ever seen.  Free choice in the
marketplace is what matters.  Provide that and willing investors
will provide all the capital we need to have a vigorous,
prosperous economy.

     Presidents don't create productive jobs.  They protect
wasteful inefficient jobs.  The heart of Trump's job plan appears
to be the protection of inefficient jobs.  The most good a
president can do is to get government out of the way.  Then free
people working together will create productive jobs that
efficiently make the things people want to buy.

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Copyright 2017
Albert D. McCallum

Monday, January 23, 2017

What Is Wrong With Businesses?

Column 2017-1

     During the recent election campaign politicians and others
devoted many words to the subjects of businesses and jobs.  If
you found it all confusing, don't feel alone.  It was bad enough
that the speakers disagreed with each other.  Far worse, some of
them couldn't utter two sentences without contradicting

     The primary purpose of work is to produce things people
want to use.  Businesses and jobs aren't ends in themselves. 
Both are only means of producing consumer goods, including
services.  If an enterprise, whether a business or some other
entity, doesn't produce something of value to consumers it has
failed.  This failure wasted resources that could have been better
used to produce value.

     The ultimate mission of a business is to earn profits. 
When we have freedom in the marketplace there is only one way
for any business to earn profits.  The business must create value.

     The business buys resources, including human resources.
The business sells its products.  If the business sells its products
for more than its resources cost, it has created value and earned
a profit.  If the opposite happens the business has destroyed
value and suffers a loss.  In free markets the business must soon
find a way to create value or else end up on the rocks of

     Consumers have the final say on how valuable the
products are.  Businesses must please their customers or perish. 
Businesses may disappoint their customers.  Those disappointed
customers aren't a good source of future sales.  There is a reason
why con artists don't work the same neighborhood twice.

     Consumers acting in free markets weed out wealth
destroying enterprises while rewarding and encouraging
expansion of wealth creating businesses.  This process is far
more efficient and effective than anything politicians and
bureaucrats can devise.

     For so long as consumers are free to choose in the
marketplace, businesses can't make a career of ripping off
consumers.  Only when consumers lose the freedom to choose
can businesses endlessly rip off those customers.

     Only "do it my way or I will hurt you" government can
empower businesses to exploit customers.  Many businesses
today are ripping customers off.  The ripoffs are possible only
because licensing laws and a swamp full of regulations protect
politically connected businesses from real competition.

      The "occupy Wall Street" crowd made a valid point
when they claimed many big businesses were thriving on ill
gotten gain from exploitation.  They went completely off the
track with their proposed solution.  More laws, regulations and
bigger government weren't the answer to a problem caused by
too many laws and too much government.

     The only reason businesses grow "too big to fail" is that
government protects them from competition and bails them out
when they grow too big to succeed on their own.  The real
problem is crony capitalism where government and big
businesses conspire to take care of each other at the expense of
everyone else.

     Inefficiency, waste and exploitation are always on
defense and fighting losing battles when businesses are free to
produce as they see fit and fully depend on satisfied customers
free to reject any and all products.  The same formula works
equally well with non business enterprises.  Yes, government
schools, I'm looking at you.
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Copyright 2017
Albert D. McCallum

Wednesday, August 12, 2015

What Is Wrong with Social Security?

Column for week of June 15, 2015

     Most people seem to have at least an inkling that all is
not well with Social Security.  Many if not most believe that
we should do something to fix Social Security.  A tweak here,
a tuck there, a bit more tax, a slight increase in the retirement
age, and all will be well.

     It won't be that simple.  The Social Security system is
so flawed that it is unfixable.  The US economy is in a death
spiral.  The one single event that started the plunge and put the
USA on the downward course was the creation of Social
Security.  How does it work?

     Our great productivity is built on investment.  Instead of
putting all of our efforts into making things for immediate
consumption, we put part of our efforts into research,
development, factories, office buildings, mines, etc. that will
produce consumer goods in the future.

     Our investment in these production facilities increases
the productivity of workers.  This investment doesn't merely
defer consumption.  It increases total production allowing us to
consume more in the future.  This is how we raise our standard
of living.

     Thus, people who save and invest for retirement
increase our productivity.  This makes it easier for those still
working to produce for the retired.  The retired sell off their
investments and buy what they consume.

     The retired aren't a burden on the producing generation. 
The producing generation saving for its retirement buys up the
investment.  They may add to that investment providing for a
better retirement and further increasing productivity.

     When the  producing generation buys the investment of
the retired, the producers are merely repaying the retired for the
aid the retired gave the producers by investing and increasing
the workers' ability to produce.  Everyone benefits.

     With Social Security there are no savings and no
investments.  All Social Security taxes are spent immediately
by the government, either to pay benefits, or for general fund
spending.  The so-called Social Security Trust Fund is a myth. 
It is merely a collection of government IOUs for consumed
wealth.  The only way to pay those IOUs is to take wealth
from someone.

     Social Security doesn't provide one dime of investment
or even one widget of increased productivity.  It also
discourages workers from saving for retirement and investing
the savings.

     All Social Security payments are taken from the
producing generation and transferred to the retired generation. 
This is totally a burden born by the producers.  The producers
have less to spend on food, clothing, education, medical care,
and everything else in order to provide more for the retired.

     As the ratio of retirees to workers increases the burden
on the producers grows.  In the beginning many workers
supported one retiree on Social Security.  We are fast
approaching the point where there will be one retiree for each
worker.  Each worker will be supporting one retired person.

     The effect of Medicare is the same as that of Social
Security.  Presently Social Security and Medicare payments per
retiree are more than $25,000 per year.  Even with no increase
in payments, each worker will have to pay at least $25,000 per
year to support a retiree.  How are these burdened workers
going to save anything to invest in increasing, or even
sustaining, productivity?

     We have two choices.  We can get rid of Social
Security and Medicare replacing them with savings based
retirement.  The alternative is to continue riding the dying
Social Security horse until it collapses.  Either way Social
Security and Medicare will end sooner or later.

     If we stay on the present course our economy will die
with those worn out horses.  We can act now to keep the
Social Security bus from running off the cliff.  Or, we can
relax and enjoy the ride.  Those of us who see what is coming
are not likely to greatly enjoy the ride.  Perhaps ignorance is
bliss, for a while.
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Copyright 2015
Albert D. McCallum