Dude, Where s My Tax Cut?

Transcription

1 Dude, Where s My Tax Cut? DR. RAJEEV DHAWAN DIRECTOR Presented at the Global Interdependence Center s Central Banking Series meeting at Fundación Rafael del Pino in Madrid, Spain March 27, 2017

2 Trump s Bull Run A balanced budget is fine. But sometimes you have to fuel the well in order to really get the economy going. Donald Trump 45 th President Index Moves Since Trump Victory 19.8% Chg. From Jan 20th +3.75% 12.5% 12.0% 9.6% 7.4% 6.2% +3.22% +4.03% 3.08% 1.02% 8.87% 0.49% 1.9% Gold S&P 500 Dow Jones Dow Transports Russell 2000 Crude Oil KBW US Banks Gold S&P 500 Dow Jones Dow Transports Russell 2000 Crude Oil KBW US Banks Source: The New York Times, February 17, 2017 Source: Yahoo Finance; Investing.com

3 Wealth Effect Revs Up Luxury Cars U.S. Sales of Most Expensive Vehicles Brands are surging since Election (%) Chg. Jan. Oct 2016 Nov Jan 2017 Maserati 0.9 Maserati 48.0 Rolls Royce Rolls Royce Ferrari 3.1Ferrari 28.0 Porsche 3.2 Porsche 11.0 Bentley 6.8 Bentley 11.0 Lamborghini 0.0 Lamborghini 8.6 Industry 0.2 Industry Source: The Wall Street Journal, March 1, 2017

4 Post-Recession Consumer Spending Divergence Terry Lundgren CEO, Macy s (SAAR, mil.) And I think some of those big-ticket items are eating up not only their ability to spend, but their time. At some point in time you ve got to believe that everybody s going to have a brand-new car. There s dollars that are going to be freed up for other categories of spending. (% Change Year Ago) Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q National Vehicle Sales (left) National Retail Sales (right) Source: The Wall Street Journal, February 22, 2017

5 Forecast in 140 Characters or Less!

6 Currency Manipulation and Trade Deficits They (Japan and China) play the money market, they play the devaluation market, while we sit here like a bunch of dummies. Donald Trump 45 th President United States of America Countries Trade Exports Trade Imports Trade Deficit % of U.S. Trade Deficit % of Total Trade China % 15.90% Mexico % 14.40% Japan % 5.40% Germany % 4.50% Canada % 15.00% A big obstacle to viewing TTIP as a bilateral deal is Germany, which continues to exploit other countries in the EU as well as the US with an implicit Deutsche Mark that is grossly undervalued. Source: Financial Times, January 31, 2017 Peter Navarro National Trade Council Adviser

7 Reality of Global Competition Workers in South Carolina are not competing with Mexican labor, Mexican capital and Mexican technology as they did in the 1970s. They are competing with a nearly unbeatable combination of US know-how and Mexican wages. Richard Baldwin President Center for Economic Policy Research Production & Jobs in Manufacturing Sector Index, Jan 1979 = 100 NAFTA begins 1994 China joined WTO Manufacturing Employment Manufacturing Production Source: Financial Times, November 23, 2016

8 Making of a Modern Automobile (1993) Source: Principles of Macroeconomics by Joseph E. Stiglitz, 2 nd Edition

9 Making of an Automatic Seat-Control Unit Canada U.S. Asia 1 Capacitors; Resistors etc. Centennial, Colo. Mississauga, Ont. (Final Use) Arlington, Texas (Final Use) 5 5 U.S. Mexico 2 Ciudad Juárez Into circuit board El Paso (Warehoused to avoid VAT in Mexico) 3 Source: Businessweek, January 2017 Assembly 4 Matamoros (Norwegian owned)

10 Are Trump and Congress in Sync? Any time I hear border adjustment, I don t love it. too complicated (don t) like the term. Donald Trump 45 th President United States of America Trump calls for a Big border tax that narrowly targets companies that outsource production for goods sold in the U.S. The only power that we have with China is massive trade. I would tax China on products coming in. I would do a tariff, yes let me tell you what the tax should be the tax should be 45 percent. Source: The Wall Street Journal, February 8, 2017

11 Tariff History in Modern Times aka 1970 Onwards 1971 Richard Nixon On 15 August 1971, President Richard Nixon closed the gold window (ending the ability of foreign central banks to convert their dollar holdings into gold) and imposed a 10% surcharge on all dutiable imports in an effort to force other countries to revalue their currencies against the dollar. These policies were designed to prevent a run on US gold reserves and reverse the deterioration in the US balance of payments by getting other countries to revalue their currencies, as well as head off Trade Act of 1974 says: Whenever fundamental international payments problems require special import measures to protectionist pressures in Congress. restrict imports to: (1) deal with large and serious United States balance of-payments deficits; 1987 (2) prevent Ronald an Reagan imminent and significant depreciation of the dollar in foreign exchange markets; or (3) cooperate with other countries in correcting an international balance-of-payments disequilibrium President Reagan imposed tariffs of 100% on medium-sized Japanese color televisions, powerful lap-top and desk computers the President and certain shall proclaim, hand power for tools, a period to retaliate not for exceeding Japan's failure 150 days: to allow more American products into its markets and (A) a to temporary halt the underpriced import surcharge, "dumping" of not Japanese to exceed semiconductor 15 percent computer ad valorem, chips in in other the form nations. of duties on articles imported into the U.S.; (B) 2002 temporary George W. Bush limitations through the use of quotas on the importation of articles into the U.S.; or (C) both a temporary import surcharge described in subparagraph (A) and temporary limitations described in In subparagraph March 2002, (B). President Bush imposed an average 30% tariff on selected foreign steel entering the United States.' This trade law was ostensibly enacted to temporarily protect the domestic steel industry Barrack Obama The Obama administration set steep import duties of 35% on Chinese passenger and light truck tires, responding to what the U.S. International Trade Commission determined to be a surge of Chinese tire exports that has rocked the domestic U.S. tire industry and displaced thousands of jobs. Source: Wikipedia.com;

12 U.S. Forecast: Dollar, Bond Yield, and GDP (% Ch. Dollar Index) (%) Q Q Q Q Q Q Q Q Dollar Index Growth (Left) 10-Yr. Bond Yield (Right) GDP Growth (Right)

13 Corporate Sector s Cash Position Cash Investment Balances of Selected S&P 500 Companies with balance of Earnings Stashed Abroad Billions Source: USA Today Money, November 25, 2016

14 Fed Moves this June & then Stands Pat Until 2018 Feb 17 Forecast 2017Q2 June 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3 Federal Funds Rate (%) Lower Bound Upper Bound History Forecast Real GDP Monthly Job Additions ( 000s) Consumption Auto Sales (Mil.) Housing Starts (Mil.) Inflation (CPI) Yr. Rate

15 Can t Wait Months for Additional Insights on the Latest Worldwide Trends and Economic Data? Here is the Solution! Like us on Facebook and Twitter and we ll keep you in the loop! Economic Forecasting Center at Georgia State Economic Forecasting Center at GSU

16 Special Thanks to the Center s Executive Sponsors Carl R. Zwerner Chair of Family Owned Businesses Sponsors