“The Case for Christ”
This was a surprisingly good movie. I thought it might be a documentary, but it’s a “real movie.” It’s about journalist Lee Strobel and his mission to disprove the Resurrection.
The Recipe for Economic Growth
Abir Doumit relays some of the facts on how countries grow rich. In the beginning it’s standard stuff for most of you, but they get into some things that are not as commonplace. (I think Dan Mitchell of Cato was the lead writer.)
The Specific Inefficiency Emanating From the Export-Import Bank
In response to one of his critics–who said Don was being naive for ignoring the reality of the “trade war” the US has with China–Don Boudreaux wrote the following:
With respect, what you (and many others) call a trade war is quite the opposite of war. It’s peaceful trade. And through such trade we Americans are made better off the less we export in exchange for what we import. So to the extent that the Ex-Im Bank succeeds in its mission to artificially increase American exports, it makes us worse off by arranging for us to sacrifice for the imports we receive an unnecessarily larger amount of exports. Put differently, the Ex-Im Bank obliges us to work harder to maintain and improve our standard of living. How are we enriched by such an outcome? In what universe is such an outcome a victory rather than a defeat? [Emphasis in original.]
Now folks, as always with my blogs about Don and his Sisyphean struggles against protectionists, I am just quibbling here to make sure we all understand the case for free trade better. I totally agree that the Ex-Im Bank is inefficient and makes Americans poorer, but Don’s statement above might mislead people as to exactly how it makes us poorer.
I am not even saying Don himself necessarily was trying to convey this, but I think the casual reader of his remarks above might think something along the following lines: “In a free market, the US would export (say) $1 trillion worth of American-made goods, and we import (say) $1.5 trillion worth of foreign-made goods. Trump and Wilbur Ross would be horrified at that ‘trade deficit’ of $500 billion, but it actually reflects our economic strength. Now comes along the Ex-Im Bank which subsidizes exports, so that in the new equilibrium the US is exporting $1.1 trillion worth of goods, in order to obtain the $1.5 trillion worth of imports. So the trade deficit now falls to $400 billion, but how does this help Americans? We are getting the same amount of Chinese TVs and French wine as before, but now we have to ship foreigners more units of aircraft engines and software. We’re poorer, not richer.”
So my point in the present blog post, is to argue that the above (hypothetical) viewpoint is incorrect. To the extent that the Ex-Im Bank provides taxpayer subsidies to exporters, and hence expands exports, it simultaneously expands imports. So at a first pass, I don’t think even “successful” Ex-Im Bank actions would reduce the trade deficit; it might arguably even increase it.
To see where I’m coming from, suppose that the Ex-Im Bank works in the following way. (This isn’t accurate, but it helps to see what I’m saying.) Suppose the Ex-Im Bank makes it known to foreign companies, “For every $1,000,000 you buy of American exports, we, the Ex-Im Bank, will send you a check from the U.S. Treasury for $50,000.”
Now what would happen in this scenario? Compared to the original equilibrium, foreign companies would increase their demand for US exports (from the perspective of US exporters). With reasonable parameters, I think there would be an increased demand for US dollars in the forex markets. (Measured in US dollars, US exporters would see higher revenues.) This would make the US dollar strengthen against foreign currencies. That in turn would make foreign goods appear cheaper to US importers, and so Americans would import more goods, relative to the original equilibrium.
Thus, the Ex-Im Bank’s subsidy to exports would simultaneously function as a subsidy to imports. If that sounds weird to you, review the Lerner Symmetry theorem.
In light of this discussion, I don’t think it’s precise to say, “The Ex-Im Bank makes Americans poorer by making us send more exports to get a given amount of imports.” (Again, Don might not have been saying this exactly, but his commentary is consistent with it.)
Rather, I think it’s more accurate to say, “The Ex-Im Bank artificially expands the trade sector and (through taxes) artificially shrinks the domestic manufacturing sector. Americans end up getting goods from foreign producers–which they pay for with exported goods–even though Americans would prefer to consume fewer of those foreign-produced goods, and instead consume more US-made goods (which would be feasible to produce, if we weren’t having to produce so many exports).”
AN ANALOGY: In case you’re not seeing the distinction, consider an analogy with a subsidy given to a domestic good. Suppose the government says to all Americans, “For every movie you watch in a US theater, we will send you $1 taken out of tax revenue.” This subsidy would increase the demand and hence quantity produced of movies. This is inefficient, though.
However, I think it would be a bit misleading to say, “Consumers are richer if we can produce movies with fewer resources, not more. So by transferring more resources to theater owners, Americans end up paying more for their movies than they need to.” Rather, I think it would be more accurate to say, “The subsidy artificially expands the movie sector, and shrinks the other sectors. For the amount of movies being viewed in the new equilibrium, that’s the amount of resources that are necessary; we moved along the supply curve of movie producers. However, this is inefficient because it induces Americans to spend more of their income on movies than on other goods and services.”
Anyway, maybe I’m being nitpicky, but I think those are slightly different explanations.
Interesting Pairs of Posts
In my efforts to annoy everyone else in the blogosphere, permit me two comments on recent pairs of posts:
==> When the media broke the story of the Syrian gas attack, Scott Adams doubted it was Assad, and went on to predict:
My guess is that President Trump knows this smells fishy, but he has to talk tough anyway. However, keep in mind that he has made a brand out of not discussing military options. He likes to keep people guessing. He reminded us of that again yesterday, in case we forgot.
So how does a Master Persuader respond to a fake war crime?
He does it with a fake response, if he’s smart.
Watch now as the world tries to guess where Trump is moving military assets, and what he might do to respond. The longer he drags things out, the less power the story will have on the public. We’ll be wondering for weeks when those bombs will start hitting Damascus, and Trump will continue to remind us that he doesn’t talk about military options.
Then he waits for something bad to happen to Assad’s family, or his generals, in the normal course of chaos over there. When that happens on its own, the media will wonder if it was Trump sending a strong message to Assad in a measured way. Confirmation bias will do the rest.
Literally the next day, Trump ordered the firing of 59 Tomahawk missiles in retaliation. So Scott Adams presumably could either (a) ignore this entirely or (b) admit he had been totally wrong the day before. But of course what we got was (c) a post in which Adams explained why this was yet another brilliant move by Trump, and linked it to his previous post, without acknowledging that his (Adams’) prediction had been falsified in just about the most undeniable way conceivable.
==> In other news, check out two recent posts by Scott Sumner on EconLog. First skim this, and then this. Scott makes a compelling case that tight monetary policy has promoted free trade and open borders around the world. It’s big of Scott to go wherever the evidence takes him.
Potpourri
==> Larry Reed reviews the (awesome) movie, “Hacksaw Ridge.”
==> Since United is in the news, check out this 1994 piece from Julian Simon explaining the rise of voluntary compensation for bumped passengers. (And note his initial example of how bad it used to be in the 1970s, concerns a practice from United!)
==> George Washington’s Farewell Address is worth (re)reading. Look at this:
Observe good faith and justice towards all nations; cultivate peace and harmony with all. Religion and morality enjoin this conduct; and can it be, that good policy does not equally enjoin it – It will be worthy of a free, enlightened, and at no distant period, a great nation, to give to mankind the magnanimous and too novel example of a people always guided by an exalted justice and benevolence. Who can doubt that, in the course of time and things, the fruits of such a plan would richly repay any temporary advantages which might be lost by a steady adherence to it ? Can it be that Providence has not connected the permanent felicity of a nation with its virtue ? The experiment, at least, is recommended by every sentiment which ennobles human nature. Alas! is it rendered impossible by its vices?
In the execution of such a plan, nothing is more essential than that permanent, inveterate antipathies against particular nations, and passionate attachments for others, should be excluded; and that, in place of them, just and amicable feelings towards all should be cultivated. The nation which indulges towards another a habitual hatred or a habitual fondness is in some degree a slave. It is a slave to its animosity or to its affection, either of which is sufficient to lead it astray from its duty and its interest. Antipathy in one nation against another disposes each more readily to offer insult and injury, to lay hold of slight causes of umbrage, and to be haughty and intractable, when accidental or trifling occasions of dispute occur. Hence, frequent collisions, obstinate, envenomed, and bloody contests. The nation, prompted by ill-will and resentment, sometimes impels to war the government, contrary to the best calculations of policy. The government sometimes participates in the national propensity, and adopts through passion what reason would reject; at other times it makes the animosity of the nation subservient to projects of hostility instigated by pride, ambition, and other sinister and pernicious motives. The peace often, sometimes perhaps the liberty, of nations, has been the victim.
So likewise, a passionate attachment of one nation for another produces a variety of evils. Sympathy for the favorite nation, facilitating the illusion of an imaginary common interest in cases where no real common interest exists, and infusing into one the enmities of the other, betrays the former into a participation in the quarrels and wars of the latter without adequate inducement or justification. It leads also to concessions to the favorite nation of privileges denied to others which is apt doubly to injure the nation making the concessions; by unnecessarily parting with what ought to have been retained, and by exciting jealousy, ill-will, and a disposition to retaliate, in the parties from whom equal privileges are withheld. And it gives to ambitious, corrupted, or deluded citizens (who devote themselves to the favorite nation), facility to betray or sacrifice the interests of their own country, without odium, sometimes even with popularity; gilding, with the appearances of a virtuous sense of obligation, a commendable deference for public opinion, or a laudable zeal for public good, the base or foolish compliances of ambition, corruption, or infatuation.
As avenues to foreign influence in innumerable ways, such attachments are particularly alarming to the truly enlightened and independent patriot. How many opportunities do they afford to tamper with domestic factions, to practice the arts of seduction, to mislead public opinion, to influence or awe the public councils. Such an attachment of a small or weak towards a great and powerful nation dooms the former to be the satellite of the latter.
Against the insidious wiles of foreign influence (I conjure you to believe me, fellow-citizens) the jealousy of a free people ought to be constantly awake, since history and experience prove that foreign influence is one of the most baneful foes of republican government. But that jealousy to be useful must be impartial; else it becomes the instrument of the very influence to be avoided, instead of a defense against it. Excessive partiality for one foreign nation and excessive dislike of another cause those whom they actuate to see danger only on one side, and serve to veil and even second the arts of influence on the other. Real patriots who may resist the intrigues of the favorite are liable to become suspected and odious, while its tools and dupes usurp the applause and confidence of the people, to surrender their interests.
The great rule of conduct for us in regard to foreign nations is in extending our commercial relations, to have with them as little political connection as possible. So far as we have already formed engagements, let them be fulfilled with perfect good faith. Here let us stop. Europe has a set of primary interests which to us have none; or a very remote relation. Hence she must be engaged in frequent controversies, the causes of which are essentially foreign to our concerns. Hence, therefore, it must be unwise in us to implicate ourselves by artificial ties in the ordinary vicissitudes of her politics, or the ordinary combinations and collisions of her friendships or enmities.
Our detached and distant situation invites and enables us to pursue a different course. If we remain one people under an efficient government. the period is not far off when we may defy material injury from external annoyance; when we may take such an attitude as will cause the neutrality we may at any time resolve upon to be scrupulously respected; when belligerent nations, under the impossibility of making acquisitions upon us, will not lightly hazard the giving us provocation; when we may choose peace or war, as our interest, guided by justice, shall counsel.
Why forego the advantages of so peculiar a situation? Why quit our own to stand upon foreign ground? Why, by interweaving our destiny with that of any part of Europe, entangle our peace and prosperity in the toils of European ambition, rivalship, interest, humor or caprice?
==> CNN now mocks Sean Spicer for making a Hitler comparison in politics. Naturally, it took me a good 18 seconds to find an example of CNN anchors comparing Trump to Hitler.
Two More Podcasts Up
I have to be brief, but here are the links:
==> In ep. 37 of the Lara-Murphy Show, Carlos and I talk about the perils of “tax reform,” including the real estate crash after the 1986 overhaul.
==> In the latest Contra Krugman, Tom and I talk about China. But the important thing here is the discussion starting at 18:50.
Tom Woods’ Liberty Classroom
Tom Woods is offering a special for the Master level of his Liberty Classroom–$200 off, plus some signed books. But you have to hurry up (for real); the offer expires soon.
My Part I of the History of Economic Thought course is already up there, and by early summer I will have posted all of Part II (which covers 20th century). You don’t want to miss it!
Use this link so I can redistribute some of the profits.
Debt vs. Equity Finance and Interest Deductibility
In reaction to my Congressional testimony–where I said I didn’t think the federal government should tax interest payments, if they are retaining a corporate income tax–Roger Barris objected. He claimed that I was ignoring the lessons of Finance 101, and in particular the famous Modigliani-Miller theorem.
I must confess that his initial stance annoyed me; after all, I stated the “standard” position in my testimony, and then went on to disagree with it. So simply repeating back to me the standard position doesn’t seem to advance the ball much.
However, in email follow-up Barris and I had a nice conversation; apparently Twitter is not the best place to settle disputes.
Anyway, this may be a series of posts, but check out the following to see where I’m coming from. Because not just Barris, but some other people I respect have also told me that people distinguish operating costs from financing costs, I am open to the possibility that I am missing something here. However, as of right now, I still think I’m right, and that I’m adequately incorporating the perspective of the people who are arguing with me.
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Scenario A
Joe puts in $100,000 of his own money. He sells half of the company to Sally for her $100,000.
The company spends $100,000 on materials and $100,000 hiring a worker. At the end of the year they sell the resulting product for $220,000. The materials and wages are deductible expenses. The company has net income of $20,000.
Without taxes, that would be a return of 10%. However there is a corporate income tax of 35%. So the corporation pays $7,000 in tax. Joe and Sally each get $6,500 in dividend payments, which are taxed as personal dividend income.
The $200,000 is available to repeat next year.
Scenario B
Joe puts in $100,000 of his own money. He issues $100,000 worth of (perpetual) bonds to Sally, yielding 6.5%.
The company spends $100,000 on materials and $100,000 hiring a worker. At the end of the year they sell the resulting product for $220,000. Out of this they pay $6,500 to Sally as interest on her bonds. The materials, wages, and interest are deductible expenses. The company has net income of $13,500.
Without taxes, that would be a return of 13.5% to Joe. However there is a corporate income tax of 35%. So the corporation pays $4,725 in tax. Sally earns $6,500 in interest payment, which is taxed at personal interest income rate. (She has the same rate of return as in Scenario A, but is happier now because she gets that same expected rate of return but with lower risk.)
However, now Joe earns $8,775 in dividend income, compared to the $6,500 he earned in Scenario A. The extra $2,275 is the amount of tax the company avoided in Scenario B relative to Scenario A. (The company paid $7,000 in corporate income tax in Scenario A but only $4,725 in B.) Joe is earning a higher rate of return in this scenario, but his risk is higher. Depending on his preferences, he might not wanted to have taken on debt-to-equity of 100%, in which case he could’ve borrowed a smaller amount from Sally and let her buy in with equity for the rest.
The $200,000 is available to repeat next year.
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OK let’s stop to catch our breath. In light of the above two scenarios, it is standard for people to argue, “See? There are two ways for a company to obtain financing: it can pay dividends or interest. To put equity financing on an even footing with debt financing, the government should not allow corporations to write off interest payments on bonds.”
Now let’s consider two more scenarios:
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Scenario C
Joe puts in $1,000,000 of his own money. He tells Sally that if she is willing to work full-time running the business, he will make her 40% owner.
The company spends $1,000,000 on materials. Over the course of the year it earns $1,100,000 in gross revenues. Without taxes, Joe would get $60,000 in dividends and Sally would get $40,000.
However, what they report to the government is net corporate income of $100,000. So they pay $35,000 in tax, and of the remaining $65,000, Joe gets $39,000 while Sally gets $26,000, and each then pays personal income tax at the dividend rate on this. (But this is 0% for Sally, since her total income is so low.)
Scenario D
Joe puts in $1,000,000 of his own money. He hires Sally to work full-time at the business, for a salary of $30,000, but she will only be paid it at the end of the year.
The company spends $1,000,000 on materials. Over the course of the year it earns $1,100,000 in gross revenues. The company pays Sally $30,000 in salary. Sally pays 15 percent income tax on this labor income, which would leave her with $25,500 after-tax, but actually when you figure in the standard deduction etc. she ends up with more after-tax income than the $26,000 she pocketed in Scenario C. Thus Sally prefers this scenario, especially since her payment is contractually locked in, rather than being the residual of the company’s profits.
Because Sally’s wage payment is a deductible business expense, the company’s pre-tax net income is $70,000, so it pays the IRS $24,500. Thus the company saves ($35,000 – $24,500) = $10,500 on corporate income tax by going this route with Sally’s compensation. Joe is the sole owner and pays himself a dividend of $45,500. That’s $6,500 more than he earned in Scenario C. Now, it’s riskier, so maybe Joe wouldn’t want to fully exclude Sally’s equity. But it shows the possibilities.
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Now notice we can make an analogous analysis for Scenarios C and D, as we did for A and B. To wit: “There are two ways a company can obtain labor services: it can pay dividends or wages. To put equity labor on an even footing with wage labor, the government should not allow corporations to write off wage payments on labor contracts.”
Does that sound right? Or would that screw everything up even more?
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