Not surprisingly, American billionaires have dismissed recent wealth-tax proposals as an affront to the entrepreneurial spirit to which they attribute their massive wealth. But the ultra-rich never would have their great wealth without legal subsidies from the state and reliable enforcement by the courts.
Some Things Are True Even if Trump Believes Them
One of the hardest things to accept for all of us who want Donald Trump to be a one-term president is the fact that some things are true even if Donald Trump believes them! And one of those things is that we have a real trade problem with China. Imports of Chinese goods alone equal two-thirds of the global U.S. trade deficit today.
.. he’s so weirdly obsessed with protecting “manly” industries like coal, steel and aluminum that affect our allies more than China — and he’s built such a chaotic policymaking process and unilaterally surrendered so much leverage to Beijing — that he can’t be relied upon to navigate the China trade issue in our national interest.
.. David Autor, the M.I.T. economist who’s done some of the most compelling research on the impacts of China trade
.. the “shock” that China delivered to U.S. lower-tech manufacturers in the years right after Beijing joined the World Trade Organization in 2001
.. roughly 40 percent of the decline in U.S. manufacturing between 2000 and 2007 was due to a surge in imports from China primarily after it joined the W.T.O.
.. it led to the sudden loss of about one million factory jobs in Ohio, Michigan, Wisconsin and Pennsylvania. Trump won all of those states.
.. This “China shock,” said Autor, led not only to mass unemployment but also to social disintegration, less marriage, more opioid abuse and more people dropping out of the labor market and requiring government aid.
.. “International trade creates diffuse benefits and concentrated costs,”
.. has created identifiable losers in trade-impacted industries
.. We assumed that China would “reform and open” after it joined the W.T.O.,
.. Instead, China “reformed and closed.” So China kept a 25 percent tariff on new cars imported from the U.S. (our tariff is 2.5 percent)
.. China grew its companies behind a wall of protection, fed them with state funds and, when they were competitive enough, unleashed them on the world
.. “Chinese and foreign makers are about to start sending huge numbers of fully built cars to the U.S. We are about to see a big increase in the U.S. trade deficit in automotive in the next several years.”
.. U.S. tech firms, like Apple, that want to offer cloud services to Chinese citizens have to store the data in China on servers operated by a Chinese partner. The U.S. has no such regulation.
.. “if they don’t accept demands to partner with Chinese companies and store data in China, then they risk losing access to the lucrative Chinese market, despite fears about trade secret theft and the rights of Chinese customers.”
.. “no US auto company is allowed to own even 50% of their own factory in China, but there are five 100% China-owned EV auto companies in the US.”
.. American electric vehicle (E.V.) companies operating in China are forced to have a Chinese partner and transfer technology to them.
.. they are also playing by a set of rules that others would be naïve to ignore.
.. So what would a smart American president do? First, he’d sign the Trans-Pacific Partnership trade accord. TPP eliminated as many as 18,000 tariffs on U.S. exports
.. focused on protecting what we do best — high-value-added manufacturing and intellectual property.
.. China was not in TPP. It was a coalition built, in part, to pressure Beijing into fairer market access, by our rules. Trump just gave it up for free.
.. “Since you like your trade rules so much, we’re going to copy them for your companies operating in America: 25 percent tariffs on your cars, and your tech companies that open here have to joint venture and share intellectual property with a U.S. partner — and store all their data on U.S. servers.”
.. Having a really tough trade negotiation with China on manufacturing and high technology, but doing it in secret, makes sense to me.
Starting a public trade war with our allies over aluminum and steel that raises the costs for our manufacturers, that doesn’t protect our growth industries and that loses allies that we need to deal with China makes absolutely no sense.
.. We needed to be, and still need to be, much more serious, and generous, about creating “wage insurance” and community reinvestment policies for people and places whose employers are suddenly wiped out by a trade shock.
.. tax incentives, Pell grants, community colleges — to create the conditions for every American to be constantly upgrading skills
.. Too much of the economic discussion of late “has been focused on the 1 percent versus the 99 percent,” observed Autor. “It’s become a kind of ‘inequality porn’
.. You lose sight of the fact that there is a dramatic rise in the economic return to tangibly acquiring skills — skills that are available and should be within everyone’s reach.”
.. The lack of real meritocracy in our country today, he added, “is not about the returns to realized skills. It is about the inequality in the ability to acquire those skills.
.. If you get educated in America today, and have a good work ethic, you are going to be rewarded.’
.. What does education do? It gives you a skill set and enables you to adapt to change better.
And cities and towns anchored by universities tend to reinvent themselves more easily; they’re engines of adaptation.
Après Cohn, le Deluge?
Trump’s top economic adviser departs, and the administration’s grown-ups worry.
Mr. Trump’s washing-machine and solar-panel salvo was to be followed by a focus on China’s unfair trade practices, namely intellectual-property theft. The president would announce narrowly targeted trade actions against that country, while holding aluminum and steel tariffs in reserve. All this would be choreographed around renegotiation of the North American and Korea-U.S. free trade agreements.
.. Mr. Ross took advantage of the situation last week to get the president’s ear, and back we were to the days of Mr. Trump spinning out on the advice of the last person in the room.
.. few know that he spent this past weekend talking the president down from an even more Planet Mars idea from Team Ross —to set tariffs closer to 50%.
.. Mr. Ross (a former steel executive) and the nativist Peter Navarro have driven out their biggest free-market opponent, increasing their ability to wreak harm on the economy.
The voices of those who actually understand economic policy are greatly diminished, as evidenced this week by the administration’s endless loop of fact-free and near fantastical claims about the effects of the tariffs.
His shabby treatment has more than a few of the grown-ups now actively considering their own exit plans. It’s one thing to do battle daily; it’s another to watch months of work get flushed on a whim, and get publicly branded a “globalist” to boot. Mr. Cohn’s top deputy, Jeremy Katz, departed just as soon as the tax deal passed, and watch for other Cohn staffers—many of them important free-market voices—to follow.
.. Imagine a Trump presidency without Mr. Kelly, H.R. McMaster, Jim Mattis, Don McGahn, Mick Mulvaney, Kevin Hassett. Consider, too, that no one as good is likely to replace them—now having seen how the White House works.
And don’t forget congressional Republicans, whom Mr. Trump has potentially set up for a midterm rout.
Many are furious that he has forced them to call him out, splitting the party. But they are also legitimately fearful the tariffs will spark trade war and destroy tens or hundreds of thousands of jobs, neutralizing the benefits of the hard-won tax reform.
The economy is the best thing Republicans have going for them in November, and the Trump-Ross-Navarro trio just embraced the only policy that could kill it.
Just how bad it is will depend hugely on Mr. Cohn’s successor.
.. Besides, who in his right mind would even want the job?
Trump Alienates Allies Needed for a Trade Fight With China
China’s predatory trade behavior is threatening sectors much more vital than steel and aluminum
“Beijing has doubled down on its state capitalist model even as it has gotten richer,” Kurt Campbell and Ely Ratner, who both served in foreign-policy roles under former President Barack Obama, write in the current issue of Foreign Affairs. “Cooperative and voluntary mechanisms to pry open China’s economy have by and large failed.”
.. But Mr. Trump has consistently rejected collective action in favor of going it alone. His officials downgraded multilateral efforts to reduce steel overcapacity. In January 2017, Mr. Obama’s administration launched a case at the WTO against China for subsidizing aluminum, but Mr. Trump has failed to follow up.
.. since 2003 China has four times promised to address overcapacity in steel production, as its actual capacity quadrupled to roughly half the world total.
.. Yet China exports little steel to the U.S. because of existing duties and accounts for just 11% of its aluminum imports, far behind Canada. The Commerce Department argued for a global remedy because Chinese production depresses global prices and drives foreign producers out of third markets, and they then ship to the U.S.
This means the pain of Mr. Trump’s tariffs will fall not on China but on actors that play by the rules, including Canada, Japan and the European Union. When the EU threatened to retaliate, Mr. Trump said he would escalate by raising duties on European cars.
Chinese misbehavior has thus brought the U.S. to the brink of trade war with its own economic and strategic allies, echoing how Russian meddling has served to fuel internal strife in Europe and the U.S.
.. Chinese forced technology transfer, commercial espionage and intellectual-property theft, all aimed at creating Chinese champions in key industries by 2025.
These pose a far greater threat to U.S. technological leadership and the enormous value it adds to U.S. exports than do growing imports of steel and aluminum which, while vital to some communities, are commodities.
.. The U.S. is preparing a sweeping penalty against China, but it would be more effective if done jointly; otherwise, Beijing may simply persuade others to hand over their technology in exchange for Chinese sales or capital.
.. Most of all, though, it requires Mr. Trump to understand where leverage comes from.
“Chinese misbehavior with respect to intellectual property and economic espionage is a real problem that requires a response,” Patrick Toomey, a Republican senator from Pennsylvania, said in an interview. “We are much more likely to get our allies to work with us if we aren’t punishing them for selling us steel that our consumers want to buy.”
NEW YORK – Economic inequality has moved to the top of the political agenda in many countries, including free-market poster children like the United States and the United Kingdom. The issue is mobilizing the left and causing headaches on the right, where wealth has long been viewed as worthy of celebration, not as demanding justification.
But today’s concentrations of wealth do demand justification. In 2018, Forbes listed three billionaires among its top ten most powerful people in the world. Next to the heads of states of Chinese President Xi Jinping, Russian President Vladimir Putin, US President Donald Trump, and German Chancellor Angela Merkel, one finds not only the Pope, but also Amazon founder Jeff Bezos, Microsoft co-founder Bill Gates, and Google co-founder Larry Page. All three owe their power not to public position or spiritual influence but to private wealth.
As contenders in the Democratic primary for the 2020 US presidential election, Senator Bernie Sanders of Vermont and Senator Elizabeth Warren of Massachusetts have promised to impose new taxes on the super-wealthy. Warren’s wealth-tax proposal – a levy of 2% on every dollar of net worth above $50 million, rising to 6% for fortunes greater than $1 billion – has ruffled billionaires’ feathers. According to Gates, he has paid more in taxes than almost anybody – some $10 billion. And while he would consider it “fine” if that figure had been doubled to $20 billion, he believes a much higher tax would threaten the incentive system that led him (and others) to invest in the first place.
For his part, Michael Bloomberg, the founder of the Bloomberg news empire, a former mayor of New York City, and now a Democratic presidential contender himself, argues that a wealth tax might be unconstitutional, and that it would turn the US into the likes of Venezuela. And not to be outdone, Facebook founder and CEO Mark Zuckerberg has suggested that taxing billionaires’ wealth would lead to worse outcomes than leaving it where it is, implying that the ultra-wealthy know better than the peoples’ elected representatives how tax revenues should be spent.
Note the sense of entitlement underlying each of these reactions. Each man’s billions, we are told, belong to him; he earned the money and should therefore get to decide how to spend it, be it on philanthropic projects, taxes, or neither. The billionaires tell us that they are willing to pay a fair share of taxes, but that there is some undefined threshold where the incentives to innovate and invest will be thrown into reverse. At that point, apparently, the ultra-wealthy will go on strike, leaving the rest of us worse off.
But this perspective ignores the fact that accumulated wealth is largely a product of law, and by implication of the state and the people who constitute it. As economist Thomas Piketty demonstrates in his 2014 book, Capital in the Twenty-First Century, the rich today hold most of their wealth in financial assets, which are simply legally protected promises to receive future cash flows. Take away legal enforceability, and all that remains is hope, not a secure asset.
Moreover, the private empires over which today’s billionaires preside are organized as legally chartered corporations, which makes them creatures of the law, not of nature. The corporate form shields the personal wealth of the founders and other shareholders from the corporation’s creditors. It also facilitates the diversification of risk within a company, by allowing discrete pools of assets to be created, each with its own set of creditors who are barred from making claims on another asset pool, even though the parent company’s management controls all of them.
Further, the company’s own shares can be used as currency when acquiring other companies. When Facebook bought WhatsApp, it covered $12 billion of the $16 billion purchase price with its own shares, paying only $4 billion in cash. And, as with Facebook, corporate law can be used to cement control by founders and their affiliates through dual-class share structures that grant them more votes than everyone else. As such, they need not fear elections or takeovers of any kind.
Finally, companies whose assets take the form of intellectual property (IP) and other intangibles tend to rely even more on the helping hand of the law. As of 2018, 84% of the market capitalization of the S&P 500 was held in such intangible assets. It takes a legal intervention to turn ideas, skills, and knowhow – which are free to be shared by anybody – into exclusive property rights that are enforced by the full power of the state. And in recent years, Microsoft and other US tech companies have boosted their earning power significantly by promoting US-style IP rules around the world through the World Trade Organization’s body for Trade-Related Aspects of Intellectual Property Rights (TRIPS).
To be sure, there are good reasons for states to adopt laws that empower private agents to reap the rewards of organizing businesses and developing new products and services. But let’s call a spade a spade and a (legal) subsidy a subsidy. While Bezos, Bloomberg, Gates, and Zuckerberg may well be savvy entrepreneurs, they also have benefited on a massive scale from the helping hand of legislatures and courts around the world. This hand is more contingent than the invisible one immortalized by Adam Smith, because its vitality depends on a widely shared belief in the rule of law. The erosion of that belief, not a tax, poses the greatest threat to billionaires’ wealth.