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.

aldmccallum@gmail.com
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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
complain?

     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
world.

     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.

aldmccallum@gmail.com
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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
services.

     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
insurance.

     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
coverage?

     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
solution.

aldmccallum@gmail.com
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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