Feb. 1st, 2017

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"The big changes were political, as a widespread anti-globalization movement signaled a breakdown in a consensus among most political leaders that had held since the end of the World War II. It used to be generally accepted that reducing trade barriers increases prosperity and promotes peace, benefiting investing and recipient countries and promoting international cooperation in solving problems around the world. Almost all of this was called into question in 2016."

"This renaissance of nationalism and resistance to globalization appears to be universal, and not the exclusive preserve of either the left or right. It seems to stem from a profound sense on the part of many groups that their lives are buffeted by forces beyond their control."

"...statistics indicate that the United States and Europe are just one recessionary shock away from being caught in a deflationary trap. Japan has been stuck in one for more than a decade."

"We need to redirect the global economic dialogue to the promotion of “responsible nationalism” rather than on international integration for its own sake. <...> To enable the international community to engage in this dialogue, global cooperation is key, with the focus of economic diplomacy on measures that increase the range of policies that governments can pursue to support middle-class workers domestically."

"Given figures on the hundreds of billions of dollars lost annually because of tax sheltering, the gains from a global effort to prevent capital income from escaping taxation are at least comparable to those from highly controversial trade agreements. And such measures would make possible more support for the middle class."

"In recent years we have also commenced a race to the bottom in areas like labor standards, environmental protections and capital requirements for banks. Businesses evade stiffer rules by moving elsewhere, hindering national aspirations to improve in these areas. The remedy is international dialogue directed at establishing global minimum standards, harmonizing approaches."

* * *

"The late MIT economist Rudiger Dornbusch made an extensive study of the results of populist economic programs around the world, finding that while they sometimes had immediate positive results, over the medium- and long-term they were catastrophic for the working class in whose name they were launched. This could be the fate of the Trump program given its design errors, implausible assumptions and reckless disregard for global economics."

"I have long been a strong advocate of debt-financed public investment in the context of low interest rates and a decaying US infrastructure, so I was glad to see Mr Trump emphasize it. Unfortunately, the plan presented by his advisers, Peter Navarro and Wilbur Ross, suggests an approach based on tax credits for equity investment and total private sector participation that will not cover the most important projects, not reach many of the most important investors, and involve substantial mis-targeting of public resources."

"Many of the highest return infrastructure investments — such as improving roads, repairing 60,000 structurally deficient bridges, upgrading schools or modernizing the air traffic control system — do not generate a commercial return and so are excluded from his plan. Nor can the non-taxable pension funds, endowments and sovereign wealth funds that are the most promising sources of capital for infrastructure take advantage of the program."

* * *

"While drastic changes in the proposed domestic program are necessary for it to work, the general direction of increasing public investment, reforming taxes and adjusting regulation is appropriate. The same cannot be said of Mr Trump’s global plan, which rests on a misunderstanding of how the world economy operates."

"Consider the immediate effects of Mr Trump’s victory. The Mexican peso has depreciated about 10 per cent relative to the dollar over fears of new protectionist policies, and many other emerging market currencies have also fallen sharply. The impact of this change is to raise the cost of anything the US exports to Mexico and to lower the cost of anything Mexico exports to the US."

"It will also make Mexico and other emerging markets much cheaper relative to the US for global companies. So US workers, particularly in manufacturing, will see increased pressure."

"The consequence of the weak Mexican peso that has been a consequence of his rhetoric is more Mexican immigration to the United States and more businesses choosing Mexico over Ohio as a location for production."

* * *

"The repeal of estate and gift taxes is especially problematic because it would provide a window for the very rich to use gift and trust structures to ensure that their wealth passes without tax not just to their children but to their grandchildren and great grandchildren, regardless of subsequent legislation."

"Adult population growth has slowed by nearly a percentage point, the gains generated by more women entering the workforce have been exhausted, and it is far from clear why tax reform will hugely spur productivity growth."

* * *

"The tax change will harm the global economy in ways that reverberate back to America. It will be seen by other countries and the World Trade Organization as a protectionist act that violates US treaty obligations. Proponents may argue that it should be legal because it is like a value added tax, but the WTO is very clear that income taxes cannot discriminate to favor exports. While the WTO process would grind on, protectionist acts by other nations would be licensed immediately."

"Proponents of the plan anticipate a rise in the dollar by an amount equal to the 15 to 20 per cent tax rate. This would do huge damage to dollar debtors all over the world and provoke financial crises in some emerging markets. Since US foreign assets are mostly held in foreign currencies, whereas debts are largely in dollars, American losses with even a partial appreciation would be in the trillions. Ironically, China, with its huge reserve hoard, would be a winner."

"Fourth, the combination of a sharply lower rate, new opportunities for tax arbitrage and the fact that any revenue gains from bringing overseas cash home are one-shot means the Federal revenue base would erode. The result would be cuts in entitlement payments to consumers who spend heavily, tax hikes on individuals and reductions in government spending. Over time, this will slow growth and burden the middle class."



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August 2017



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