Taxing Chinese Goods Due to Currency Manipulation: Wrong Solution, Wrong Problem

China. Tariffs. Trade war. Oh my.

Last week, the Senate passed the Currency Exchange Rate Oversight Reform Act (S.1619) and is on the Presidents desk, waiting for an answer. The act is set to tax exports from any country that undervalues its currency in order to gain an advantage in trade. I think we all know what country was in mind when this was written. China.

China has been undervaluing their currency by more than 20%

No doubt China has been undervaluing their currency. Some say as much as 28% and that’s a hefty percentage. The lower the value of the Yuan, the more Asian-persuasion President Hu Jintao has to keep money flowing into China’s economy. Certainly it’s frustrating to U.S and to our government. But the bill the Senate has passed isn’t the solution to the problem.

The Currency Exchange Rate Oversight Reform Act bill intends taxing Chinese exports to the United States, also known as tariffs. Theoretically, tariffs are designed to tax imports from foreign countries, making foreign goods more expensive to buy. It’s often designed to protect domestic jobs, protect small industries, or shield national defense. If Wal-Mart produces a toy in China because it costs $2 to build rather than $4 in the U.S, then China will be the home of many Wal-Mart factories. But if that same toy that is imported to the United States is taxed $3, bringing it total cost of $5 for that toy, then Wal-Mart and China’s economy will suffer because U.S consumers would rather buy $4 toys made in the U.S. Sounds ideal, but like most government laws, reality is far from D.C hypotheses. In reality, most governments retaliate with tariffs of their own, sparking a trade war between countries. Costs rise as well as unemployment. Nothing good comes from tariffs.  We’ve attempted tariffs before. Countless times. And they’ve failed.

In 1928, Washington D.C proposed enacting the Smoot-Hawley Tariff Act. The law would tax more than 20,000 imports, making it the second largest level of tariffs in U.S history. President Hoover and his staff were warned, just like China is warning us now. 1,000 economists sent a plea letter to the President asking him not to pass the law. There was also pressure coming from traders, threatening retaliation. In 1929, the stock market crashed and President Hoover ignored the pleas and passed the bill in 1930. The Smoot Hawley Tariffs sent the economy into a tailspin. Outside countries retaliated, raising tariffs on U.S exports and U.S unemployment went from 6.3% to 11.6% within six months.

Placing tariffs on China will be no different than the tariffs in the past. Our current administration found that out in 2009, when tariffs were placed on Chinese tires. China retaliated and placed tariffs on American auto parts. Were jobs gained? No. Did prices on consumer goods rise? You betcha.

There’s no doubt that China’s economy is growing. The U.S-China trade deficit increased 7.4% for the month of August, setting it at a new high of $29 billion for the month. That’s no good, considering we already have a staggering $189 billion trade deficit this year. At this rate, the U.S-China deficit of 2011 is set to surpass last year’s deficit of $273 billion by almost $20 billion. That’s scary. What’s even scarier is that the IMF has predicted that China’s economy will overtake the U.S economy by 2016. 

Let’s take a step back though and assess the situation. Let’s say we do place tariffs on China’s exports and a trade war starts. What happens to the Chinese based companies that are selling their items for dirt-cheap? Do the jobs come back to the U.S? I wish, but no – they won’t. They’ll go on to the next cheapest country where the cost is just as cheap as China. In 2005, America placed a tariff on Chinese furniture. Instead of moving jobs to the U.S as our government wanted, the companies moved their operations to bordering countries like Vietnam. The cost of making furniture in other countries was still cheaper than U.S costs. So China’s currency isn’t the real problem is it?

As long as costs are cheaper in other countries, the United States will continually fail to bring jobs back home. The real problem is not China; it’s the cost of doing business in the states. 81,000 pages of regulations. Class warfare. A government overhaul on healthcare. Restricting businesses from building factories in certain locations, because the state is not a union state. Pick your poison. These aren’t conservative talking points; they’re facts. And unless Washington gets serious about the facts, we will continue to be in a huge trade deficit with China and other foreign countries.

Currency manipulation isn’t the real problem. Government economic policies are.

Is Obama’s Jobs Act Backfiring?

Well, here we are. It’s Friday. It’s been a week of ups and downs. Protests going on all over the U.S. Steve Jobs died at the age of 56. The Texas Rangers are playing the Detroit Tigers in the American League Championship Series. 103,000 jobs were added in the month of September. Unemployment is still at 9.1%. The American Jobs Act still hasn’t been voted on.

Let’s be honest. This was all a political move by the President from the beginning. He knows the Republican controlled House will not vote for the bill. It raises the deficit and it taxes the wealthy. He plans on the bill being shot down in the House, to use it as leverage for his 2012 re-election campaign. But his plan is backfiring… in the Senate.

ibtimes.com

It seems there just isn't enough Democrat Senators that are goo-goo ga-ga over this bill. Uh-oh. 


GOP Senators, like the President, asked that the bill be voted on in the Senate. They knew the bill did not have enough votes, regardless that the Democrats have control.


Mitch McConnell demanded a vote on the floor yesterday saying, “I think we ought to accommodate the president of the United States on a matter that he has been speaking about frequently over the last few weeks and give him his vote.”

McConnell knew it wouldn’t pass. There weren’t enough Democrat supporters let alone Republicans. Smart move McConnell, smart move.

To save the president from embarrassment, Harry Reid yanked the plan off the floor yesterday. To gain more votes from Democrats, Harry Reid revised the date of millionaire tax surcharge from 2013, to December.

“I’m fine with the approach they’re taking,’’ the President said.

So much for his past statements on raising taxes on the wealthy. I guess we can cross off what he’s said before:

“Nobody’s looking to raise taxes right now. We’re talking about potentially 2013 and the out years”

We’ll see what happens next week when they have a vote. I’m sure Dick Durbin will be spend this weekend rounding up as many votes as he can. My guess is they won’t vote for the bill until they have a guaranteed 60 votes of yes to break the filibuster. That includes trying to round up votes from Joe Manchin (D-W.Va.), Ben Nelson (D-Neb.), Joe Liebermann (I.-Conn.) and Claire McCaskill (D-Mo.).

I find it amusing that we are still in this debacle, four weeks after this bill was introduced. Obviously if it has taken this long to gain votes, something is wrong with the plan. This bill is a mini stimulus package, filled with the same Keynesian economic policies that the Recovery Act contained. The Stimulus Package of 2009 simply didn’t work. When Obama took office in January 2009, the unemployment rate was 7.7% and rising. Today, it has stalled at 9.1% for the third straight month. There are no “shovel ready jobs” to show from the previous stimulus. 

Times are tough. Unemployment is high. The debt is nearly uncontainable. And Democrats are careful on what they are voting for, especially with their upcoming elections. Obama is keen on passing this bill. Except this time, he doesn’t have the votes he needs in the House.

And maybe even in the Senate.

Debit Card Fees in 2012. Who's to Blame?

My Dad and I were talking this past Friday and he brought up the recent proposals by banks to impose fees on debit cards for consumers. So while it's still fresh in my mind and fresh on the media's minds, I thought i'd throw in my two cents. 


If you haven't heard already, banks are going to be charging their customers fees in the upcoming years for their services. Most major banks have announced that they will be charging customers fees through their debit cards. Bank of America announced that in 2012, they're going to be charging a $5 monthly fee to use their debit cards and Wells Fargo is considering charging $3 for theirs. Some banks have boasted that they won't be charging for their debit cards. However, they will attach fees on through other means or let you keep it free, but with some strings attached. 

Bank Institution	Proposed Fee’s or Charges
Bank of America	$5.00 monthly debit card charge
Wells Fargo	$3.00 monthly debit card charge
J.P Morgan Chase	$3.00 monthly debit card charge
HSBC	$2.50 ATM fees for customers using competitor ATM fees plus 35 cent debit transaction fees (first eight are free).
TDBank	$2.00 ATM fees for customers using competitor ATM fees.
Citibank	Will not charge debit fees. However, it is extremely difficult to get a free checking account.

Many politicians, especially the one's on the left including President Obama are criticizing the banks. In an interview with ABC yesterday, Obama called out the banks:

"You can stop it because if you say to the banks, 'You don't have some inherent right just to, you know, get a certain amount of profit if your customers are being mistreated. That you have to treat them fairly and transparently,'"

That's the message that is sent across by politicians and the protestors out on Wall Street. But who's to blame? Is it the banks or is it the people who called foul on the banks: the politicians?

In 2010, Congress and the President passed the Dodd-Frank Wall Street Reform and Consumer Protection Act as a way to protect consumers from the banks that were "too big to fail". Attached to it was the Durbin Amendment. The Durbin Amendment gives the Federal Reserve the power to regulate debit card interchange fees. According to the New York Times, banks charged merchants an average of 44 cents every time you made a transaction on your debit card. The Federal Reserve mandated that by October 1st, three days ago, banks could charge merchants only a maximum of 24 cents per transaction; nearly half the cost. That's called price control.

Theoretically, price controls are designed to protect consumers from high prices (or sometimes low prices) from businesses, such as banks. The government controls the price businesses can charge for services or goods in order to allow consumers to enjoy low costs. Somehow, the government thinks that business' primary goal is to be buddy-buddy with their customers. Wrong. Businesses primary goals are to make profits and they're not gonna take a loss; they're going to find a way to make it somewhere else. And that's where fees and charges come into the picture.

According to Javelin Strategy and Research, the new law would cost the banks around $6.6 billion a year - starting in 2012. If Bank of America and other major banks are going to be restricted on how much they're going to charge merchants, they're going to make the consumer pay the cost. That's how it is. The banks aren't here to make friends. They're here to make money and they're not gonna pay a dime. 


Thought i'd make a visual to help understand how this will work, showing how the system was before the Durbin Amendment and comparing it to what is going to result from the Durbin Amendment. 

In the illustration above, the only party that is paying for the interchange fees is the merchant. The consumers pay nothing. However, in the illustration below, the government is enforcing the Durbin Amendment, allowing the Federal Reserve to set the maximum charge of 24 cents, rather than 44 cents per transactions. That's a loss of 20 cents for the banks. The banks need to make up for lost revenue, so they are proposing to charge the consumers to make up for what they can't charge the merchant. 

Price controls can ruin any economic system. It's been done since the beginning of time and it's always turned out bad, whether it's been price floors (setting a minimum price) or in this case setting a price ceiling (setting a maximum price). Either way, it can be bad for the financial system. It's just another way the government can ruin the economy. Unfortunately, politicians won't admit when they're wrong. They'll continue to blame the banks and the people will love them for it. Sad face :(

Here's an article from USA Today showing how to avoid debit card fees.

"Investing" in Infrastructure

President Obama has been making a hard push for the American Jobs Act, a package designed to rebuild the economy with tax cuts and investments. Make no mistake - "investments" means spending and we've been spending for the last two years with nothing to show for it. Infrastructure is one of the many investments included in the Jobs Act . 

According to the White House's website, the American Jobs Act

"includes $50 billion in immediate investments for highways, transit, rail and aviation, helping to modernize an infrastructure that now receives a grade of “D” from the American Society of Civil Engineers and putting hundreds of thousands of construction workers back on the job."

Hasn't this administration spent billions of dollars on infrastructure before? Why yes, they have. According to recovery.gov, Obama's 2009 stimulus package has already spent a combined $53.1 billion on transportation and infrastructure. Does anyone today see "hundreds of thousands of construction workers" employed from the Recovery Act? Not this guy.

It certainly doesn't help that President Obama stood in front of the Brent Spence Bridge last month, a bridge in great shape, to use as an example of infrastructure repairs that needs to be undertaken. According to sources, the Brent Spence Bridge isn't in need of repairs for decades. In fact, the federal funds aren't going to be used to repair the bridge, but build a new one next to it that won't take place for another four years. Anyone want to wait till 2015 to get this economy started? 

Spending on infrastructure has been tried by presidents before President Obama to stimulate the economy. After the stock market crash in 1929, President Hoover and Franklin D. Roosevelt spent massive amounts of money on infrastructure to give the economy a boost. Franklin D. Roosevelt spent $3.3 billion on infrastructure through the Public Works Administration. It created only temporary jobs. In the end, unemployment was still in double digits at 17% and the U.S debt had increased. 

Arguments could be made that if highways and roads were repaired, that would bring businesses in. Could be a valid argument, except that i've never heard of damaged infrastructure as the primary reason why businesses are leaving the U.S or why they aren't hiring any more workers. What the White House fails to recognize (or maybe they do) is that the proposed construction projects create jobs through tax payer dollars. Tax payers paying for jobs doesn't stimulate the economy, it only cripples it. Then, when the infrastructure projects are completed, the construction workers are out of work. They are again unemployed and the U.S is back to square one. 

"So what are you saying Jay? Should we just abandon the idea of infrastructure investments altogether?" 

Nothing is wrong with investing in infrastructure as long as it's necessary. But the primary reason why the government is proposing spending on infrastructure is all wrong. This is an American JOBS Act. The White House is using jobs as the primary reason for infrastructure spending, not infrastructure itself. These jobs hold no value to the economy at all, because it uses tax payer dollars and they're short-lived. Take infrastructure out of the jobs act, put it into separate legislation and actually fund infrastructure that needs repairing. After all, shouldn't we be skeptical on what Obama considers defective or inoperable after the stunt he pulled standing in front of the Brent Spence Bridge?

Washington needs to propose real solutions for our economy. Solutions that remove regulations, lower taxes and attacks our debt - solutions that create JOBS. Infrastructure is not a solution.

What Exactly is Fair?

There's been talk going around on if the wealthiest tax payers should pay more in taxes to help the government earn revenue. Many people agree with increase in taxes, calling it a "fair" tax system. They make more, therefore they can afford to give up what they earned. Fair? 

I was going through some articles yesterday and came across an article that was similar to the tax argument. Subject? Football. No, not the NFL. Peewee football. An Arkansas peewee football league reinstated the "Madre Hill Rule", restricting young players from scoring more than three touchdowns a game if they're up by 14 points. This rule was in place to restrict players like Demias Jimerson, an 11 year old running back who just happened to be more skilled than children his age. Demias seemed very well mannered and handled the new rule with maturity. Kudos to the kid and to the parents for raising a child with values. But that doesn't excuse the league for restraining the boy from excelling to new levels as an athlete. 

Last year in Canada, a soccer league containing kids ages four to eighteen, set a similar rule for teams who outmatched their opponents: win the game by more than five points, it's an automatic loss. Bruce Cappon, the father of one of the soccer players expressed his frustration to the media.

"Everyone wants a close game, nobody wants blowouts, but we don't want to go by those farcical rules that they come up with," he said. "Heaven forbid when these kids get into the real world. They won't be prepared to deal with the competition out there."

Couldn't have said it any better.

Since when did our society restrain success instead of encouraging it? It's appalling and absurd. We should direct ourselves towards achievement, instead of bringing others down to what is interpreted as a "fair" level. I'll be damned if I ever allow someone to inform my child to slow down in any area they excel in -  whether it's sports, education or work. The sky is the limit and they should aim high. But that isn't how it is. We're supposed to pity the less fortunate and punish the ones who succeed. Instilling that in everyone's minds only sets them up for failure.

I would say a good percentage of people all share a common goal: make money. And lot's of it. However, not everyone has the same drive and motivation to attain the goals they set for themselves, with only a small percentage able to fulfill their dreams of financial success. But wait... there's a roadblock for that small percentage. It's called taxes. 

Our current and previous White House administration, Congress (remember: it takes two to tango) and the Federal Reserve have borrowed, printed, and spent a massive amount of money, continuing to inflate the dollar and skyrocket the U.S debt. Yet somehow, the same people in Washington deem it necessary that the top earners should pay their "fair" share by paying more in taxes. Through our progressive tax system, the highest tax bracket already pays 35% of their income in income taxes versus the 10% earned by the lowest bracket, but President Obama and many Democrats want to raise the percentage through the "American Job's Act". Is that fair?

Never mind that millionaires only make up .2% of all tax payers (that leaves 99.8% that don't make over $1 million) while also paying 21% of all income tax. Never mind that the top 1% pays more than the bottom 95% combined while only earning 28% of the wealth. Never mind that the bottom 49% of taxpayers pay absolutely nothing in income taxes. Let's talk about "fairness". "Should we punish those who succeed?" 

The answer is no. We are known for our accomplishments and achievements. We're better people when we strive to be our best, while allowing others to succeed as well. Failure will always come and go. It's what's taken from those failures that makes people smarter and able to attain success through hard work and perseverance. Want to make it fair? In the words of hip-hop artist Chamillionaire: "Get on my level". When everyone works for success - THAT is fair.