Arnold Kling  

Buffet's Trade Proposal

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A reader forwarded a proposal made by Warren Buffet in Fortune.


We would achieve this balance by issuing what I will call Import Certificates (ICs) to all U.S. exporters in an amount equal to the dollar value of their exports. Each exporter would, in turn, sell the ICs to parties--either exporters abroad or importers here--wanting to get goods into the U.S. To import $1 million of goods, for example, an importer would need ICs that were the byproduct of $1 million of exports. The inevitable result: trade balance.

Of course, we already have Import Certificates. They are green, with the names of Presidents on them. What Buffet is proposing is really a form of import tariff plus export subsidy.

Buffet and I both are mystified by the fact that the dollar does not adjust downward to reflect our trade deficit. I agree that long-term speculation against the dollar seems appropriate.

I also agree that the U.S. ought to be a creditor nation, not a debtor nation.
However, I think that the solution is to increase national saving. That might mean relatively higher taxes on consumption and relatively lower taxes on saving.

For Discussion. Buffet famously opposes repealing the estate tax. Would repealing the estate tax tend to increase or decrease national saving?


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CATEGORIES: International Trade



COMMENTS (20 to date)
Don Lloyd writes:

Arnold,

"...Buffet and I both are mystified by the fact that the dollar does not adjust downward to reflect our trade deficit...."

Trade Deficit = Dollars out, Goods In

Less dollars, more goods = Lower dollar prices of goods

Regards, Don

fishrush writes:

Because the article required a subscription, it was unreadable to some of us, but raises some simple economics (math?) questions (at least in this economics dummy’s mind). How would the Import Certificates impact ‘Law of One Price’, ‘Purchasing Power Parity’ and currency exchange rates? What happens to exchange rates and trade between two countries during periods of 1980-1990s Brazilian-style hyperinflation? Do these “Certificates” become tradable instruments like, say, forex markets, commodities and/or futures markets? If 2 countries create similarly defined ICs denominated in their respective currencies, what happens if one currency moves against the other? Does Warren show any numbers in his Fortune interview?

David Thomson writes:

We can take it for granted that most people inheriting a large sum of money will be at least half way prudent. Thus, they will invest and save a large percentage of it. Can anyone really argue that this would not increase national savings? Am I oversimplifying anything? This seems like a slam dunk to me. I’m bewildered by Warren Buffet implying that the government generally spends our money better than we do ourselves.

Don Lloyd writes:

Here is an online version of Buffett's article without a subscription requirement --

http://www.siliconinvestor.com/stocktalk/msg.gsp?msgid=19448115

Regards, Don

Steve writes:

That's the advantage you globalization-proof folks have. You get to sit around and be "mystified" by the fact that the dollar hasn't dropped by 75% or more, while us working stiffs have to compete against 75% undervalued foreign labor.

Without the death tax, we'd have robber baron dynasties. Ever more poor/rich gap. A return to the guilded age. Sounds good to those of you who are rich, not good for those of us who want someday to move up and have a chance at getting rich.

Eric Krieg writes:

>>Buffet and I both are mystified by the fact that the dollar does not adjust downward to reflect our trade deficit. I agree that long-term speculation against the dollar seems appropriate.

Arnold, people have been speculating against the dollar since the trade deficit came into existance in 1984.

That was almost 2 decades ago, for the temporally impaired.

With that history, it is foolish to speculate against the dollar solely because of the trade deficits we run. Trade dollar recycling by mercantilist nations like Japan works too well.

Eric Krieg writes:

>>Of course, we already have Import Certificates. They are green, with the names of Presidents on them.

Brilliant! That sounds like something Norm Macdonald would have said on SNL Weekend Update.

David Thomson writes:

“...or more, while us working stiffs have to compete against 75% undervalued foreign labor.”

You are conveniently overlooking the fact that this “undervalued foreign labor” almost certainly stretches your family’s budget. Every job loss results in cheaper prices. This flip side of the coin cannot be ignored.

Steve writes:

"Yeah! I can buy a t-shirt at Wal-Mart for $1, but I can't find a job!"

Way to go globalization! Working just great!

John Thacker writes:

"Without the death tax, we'd have robber baron dynasties. Ever more poor/rich gap. A return to the guilded age. Sounds good to those of you who are rich, not good for those of us who want someday to move up and have a chance at getting rich."

With the death tax, we have the same old robber baron dynasties (Rockefellers, Kennedys, etc.) that formed before we had it. We don't have so many new dynasties, though. The death tax is obviously "not good for those of us who want someday to move up and have a chance at getting rich," at least on the Rockefeller/Kennedy level.

The economic costs of the death tax are also estimated to be very heavy. Like corporate tax, it's particularly distortionary.

Of course repealing the estate tax would increase national saving.

1) It would encourage rich people from other nations to move to the US and save here.
2) By increasing the relative value of saving compared to consumption, it would encourage saving. The death tax obviously taxes long-termed savings and unplanned, especially sudden, death.
3) It would redirect national saving into more economically efficient areas, instead of into mechanisms designed primarily to avoid the tax.

The question of course is the degree to which it would encourage saving.

Boonton writes:

Considering that the estate tax only hits large estates (despite their best efforts, Republicans have been unable to find one 'regular' person hurt by the estate tax), I'm not sure the first cause for increased saving you cite is statistically relevant. Imagine a rich person in Greece with millions in various Euro & US Bonds. He moves to America because the estate tax is eliminated.

Well America's 'savings' might have gone up but it is just an accounting effect. Aside from buying a home in the US, the rich Greek hasn't changed anything. He owns exactly the same saved assets as he did in Greece.

More to the point, Arnold & others continue to dodge my question on free markets and savings; Why are free markets the preferred answer to every question except savings? Arnold bristles at gov't intervention to force our trade deficit to $0 but is gung ho for a gov't run savings policy. Why not accept that the savings rate of Americans is the rate that Americans have choosen to save when confronted with the current market rewards for savings?

I'm generally more liberal than most in this group, but I generally feel that its ok to say you are going to override the market but you should be required to give a reason why this is a good idea. This means justifying why we should ignore a market solution. For example, you may assert a market solution is immoral or you may say that the market has failed to work properly. What bothers me about the savings debate is that this part of the argument is ignored.

Lawrance George Lux writes:

I once proposed an inheritance tax laid upon the Recepient of gain. It states Everyone could inherit up to $4 million before being taxed at very high rates; a potential 100% past twelve million.

The principle behind Inheritance tax is to allow Parents to pass a standard of living to their children, without passing in total the economic power exercised by the Parent to the Child. Failure to tax Inheritance adequately leads to a Wealth aristocracy. This is not absolutely bad, but it transfers Wealth from trained hands into untrained hands in most cases. This, in the long run, lessens the value of Labor wages.

The effect on Savings of removing the Inheritance tax would be miniscule. People do not surrender profit-making occupations and ventures, because they cannot pass on their wealth in total to Children. It ignores the Prestige factor in Wealth aggregation. lgl

Lawrance George Lux writes:

I have just finished the Buffet article. He ignores the natural process of U.S. asset value becoming less with increased foreign purchase, so foreign suppliers will decrease Trade imports to this Country.

Buffet's concept of ICs has merit, though more for creating a Profit-making market, than for a resolution of the Trade deficit. He suggests Net Exporters would not retaliate in kind, a foolish thought; retaliation by reduction of exports in Production necessities, in favor of finished Consumer products. Foreign nations enjoy their Trade advantage with the U.S., and will not willingly surrender it.

I have previously proposed a Import tax, based across the board, and similar to a Sales tax--around 6-8%. It can be justified by stating it negates the tax cost to domestic producers of domestic production. This tax, applied at the entrance, would magnify transportation, distribution, and Retail costs; so that advantage to domestic production would increase to 18-22%. The universal nature of the tax would limit excess use of foreign raw materials, raise the cost of foreign finished products significantly, and promote capitalization of domestic production. lgl

Bob Dobalina writes:

I'm often guilty of topic-stray, but I can't help myself.

Does it occur to anyone how morally insidious the estate tax is?

When you die, the state can confiscate over half of the fruits of your labor!

Now, taxing estates, as income, to their beneficiaries is slightly less odious, and far less complicated.

Mcwop writes:

"I'm often guilty of topic-stray, but I can't help myself.

Does it occur to anyone how morally insidious the estate tax is?

When you die, the state can confiscate over half of the fruits of your labor!

Now, taxing estates, as income, to their beneficiaries is slightly less odious, and far less complicated.

Posted by Bob Dobalina on November 6, 2003 12:29 PM"

It is kinda morally "icky". Regardless, many rich give away large/complete portions of their fortunes. I believe this would happen estate tax or not.

Boonton writes:

"Does it occur to anyone how morally insidious the estate tax is?"

It has occurred to some, not me & many others though.

"When you die, the state can confiscate over half of the fruits of your labor!"

"Now, taxing estates, as income, to their beneficiaries is slightly less odious, and far less complicated."

In effect this is a distinction with little difference. By definition if you are dead you really don't 'own' anything in any useful sense of the word.

I'm sympathetic to the high rates on the soon to be phased out estate tax but you also have to remember that is a function of the giant exemptions built into it. An estate of $1M could be passed on totally tax exempt. So if the rate of 50% was applied to a $1.5M estate, you are effectivly being taxed at only 16.67% ($250K/$1500K).

So tax wise, even with the estate tax you are much better off making $1.5M by waiting for your rich relative to die than to actually earn it yourself by working.

Boonton writes:

Re Arnold's original question:

The estate tax can only dampen saving to the extent that income is consumed rather than saved to escape the tax. I'm reminded of a movie, maybe it was from the 80's, where the person stood to inherit some large fortune only on the condition that he spent $1M (or some large sum) in one week.

The estate tax already has large exemptions built into it. This means you must have a sizeable estate before you even have to take the estate tax into consideration. In economic terms the marginal utility of additional consumption for most people who qualify would be very low.

Look at it another way, suppose you wanted to increase consumption using tax policy. Would your first instinct be to go fir a higher estate tax?

Steve writes:

Boonton--

Brewster's Millions. Richard Pryor. $30 million over 30 days=$300 million inheritance. It was a great movie...

Boonton writes:

Thanks Steve!

Mark T writes:

Maybe we are looking at the current account "problem" from the wrong angle. If we consider that the US offers the best risk adjusted return on savings available in the G7, then we find that the return on existing capital for the US household (not note the savings ratio which is simply a cash flow item) is almost certainly delivering an expected return on capital equal to required return, i.e the US household IS saving enough. Equally the Japanese, European and Chinese "household" is saving in the US as well - creating a capital account surplus. By the laws of accounting identity this capital account surplus means a current account deficit. Thus instead of the US spending first and relying on the kindness of strangers to fund its spending - perhaps we need to consider things the other way around. Not that expenditure has to be funded but that cash in has to be spent. Until the rest of the world grows sufficinetly to provide decent returns on capital, they will remain dependent on US capital markets for their savings and US consumers for their sales line. China of course will be the method by which this resolves itself.

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