Buffett's Import Certificates Plan Could Pilot the Economy to a Safe Landing 30 comments
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The American economy has stalled, but we have some of the most competent people in the world working for us. Last week, one of those very competent Americans, pilot Chesley Sullenberger, shown above on the left, glided a US Airways (LCC) jet to a safe landing in the Hudson River. Not a single passenger died.
Warren Buffett, shown above on the right, is the economic equivalent in competence of Sullenberger. He has taken advantage of his extraordinary understanding to help the many investors who have entrusted their savings to him.
In 2003, Buffett proposed an Import Certificates Plan to balance trade in order to avoid the crash that he saw on America's horizon. His brilliant plan would stimulate exports at the same time that it would limit imports.
In October 2008, we pointed out that it is exactly what the United States economy needs right now in order to deal with the recession and keep our economy growing for the long-term.
Buffett was one of Obama's unofficial advisors during the election campaign. Unfortunately, since winning the election, President-elect Obama has turned to incompetent economic advisors, the sort who never saw the current problems coming. They think that they can stimulate the economy without fixing the trade deficit, which is like pumping up a tire without fixing the leak.
Economist and former VP candidate Pat Choate agrees with the Levy Economic Institute of Bard College that Obama's stimulus package won't accomplish much if it doesn't address the trade deficit. He is disappointed with Obama's chief economic advisors. Here is how he assessed them in a January 10 commentary:
Lawrence Summers, the former Treasury Secretary in the Clinton Administration, a key advocate for NAFTA and an architect of U.S. policies for global financial deregulation, will head the Obama National Economic Council....
The Secretary of the Treasury will be Timothy F. Geithner, Summers’ aide in the 1990s and now the head of the New York Federal Reserve Bank – the man who failed to monitor Wall Street during the Bush years....
The Administration’s point person on trade will be Ron Kirk, who is glaringly inexperienced in trade policy. In the late 1990s, Kirk was the Mayor of Dallas, Texas, and in 2002, a candidate for the U.S. Senate seat now held by his GOP opponent. After failing to win that race, Kirk joined the giant Houston law firm of Vinson Elkins, where among other work he lobbied the Texas Legislature for the Wall Street private equity firm Kohlberg Kravis Roberts & Co and TPG, a global investment firm....
America, like Pilot Chesley Sullenberger, does not have much time to solve its problems. During President Obama's "honeymoon," his economic team could easily get Buffett's Import Certificates plan passed. If they don't, we will continue losing our remaining manufacturing industries and will continue to pile on more and more debt. We could be heading toward a dollar crash.
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This article has 30 comments:
If nothing is done by them the economy will fix itself in less time and we won't have to deal with hyper inflation that is sure to follow.
Over a period of time people will have to replace their worn out cars and TV sets and just about everything else they cannot live without.
Savings will be found by limiting spending on things like cell phones, cable tv restaurants etc etc etc. People will pay off debt faster and personal savings will go up markedly.
Bailing out banks and car manufactures and "Hustler Magazine" will delay the economic rebound because the money won't be used the way it is intended.
Finally the solution is what caused the problem in the first place. The solution in their view is to make it easier to borrow money to maintain the life style that many people think they are entitled too.
By the time that the government is done "Fixing" all of us will be receiving some type of entitlement.
One of the smartest moves that they can make is to reduce corporate income tax to a level that is in line with the rest of the world and end the double taxation on dividends. This will encourage private investment in the business world, something that they should have done to end the great depression but did not and the depression lingered for many more years than it should have.
There is a very big difference between Import Certificates and Smoot-Hawley, and there is a very big difference between the 1929 depression and the 2008 recession.
Import Certficates by a trade deficit country don't cause a trade war. They tie imports to exports. Any trade-surplus country that tries to counter the certificates by reducing its own imports of American goods finds that it is thereby reducing its exports.
The 1929 depression was caused by a liquidity crisis; US trade was in surplus. The 2008 recession was caused by a financial crisis that resulted from imbalanced trade, a trade deficit of 5% of GDP. Any reduction in that deficit means that a greater percentage of US demand produces US income.
Howard Richman
You put your finger precisely at the heart of the current problem -- the need for fixed investment. I agree with you that the United States should reduce the corporate income tax to a level that is in line with the rest of the world and end the double taxation on dividends. In our book, "Trading Away Our Future," we go further than that. We recommend eliminating the corporate income tax altogether.
One of the chief advantages of Import Certificates is that they immediately increase corporate investment because they make American production profitable again.
Howard Richman
tradeandtaxes.blogspot...
We imported too much AFTER we created the pile of housing debt which gave us the false sense of being richer than we were. We could not have imported too much if we did not borrow to do it.
I still do not know about the chicken and the egg.
At least we now know there is someone out there capable of managing a crash.
to summarize Buffet's idea for those that don't have time to read it:
- every exporter would get certificates from the US government for the dollar amount of good that they export
- these certificates would be tradable
- every importer of good to the US would have to have the required number of certificates (for the same dollar amount of imports)
- the market would set the certificate price, but since there is much less imports than there is exports, their price would be definitely positive
The way I see this plan is the following:
- this is a kind of dollar devaluation, but without devaluation. On the one hand this would automatically increase the price of imported goods (making americans poorer, with smaller purchasing power); on the other hand all the foreign holdings of american assets would still be worth the same
- this would introduce a huge distortion into the already distorted international trade
- there is a much easier way for US government to solve the problem - make a real devaluation by printing more dollars. On the one hand this is what Buffet calls "a hidden theft", on the other hand it is easier to do and more generally accepted.
About the economy - Buffet got it right. The most important thing about economy is to see the important dynamics and not get lost in the petty details.
The only way for the US to get out of this mess is to restore it's international competitivness. With 1 bn chinese and another 1 bn indians that came on the labor market in the last 2 decades, the american (and european) worker (even though enahanced by all the education, machinery, etc) became much less competitive. There is and will be a shifting as these differences tend to equalize. As a result americans who live only off their manual labor on average will become poorer. In the same time if the market is allowed to work (which is not the case) this decrease of purchasing power will quckly reverse, while the rest of the world will grow rich and be able to absorb more and more of american exports. If China did not keep it's currency artificially low, chinese exports would become more expensive and american imports to china would become cheaper. The chinese conumer would be richer and would consume more. China would not depend that much on american consumption to fuel its growth and would develop a more varied, more resilent economy. Chinese would not be stuc with billions of US paper assets, that are being stolen from them now by Ben Bernanke printing money. It is simple to say it now ;)
If the above was the only dynamic in international trade, we would see now only continuing improvement. In my opinion the critical point of global labor markets inequalities has been reached. China is becoming more and more consumer oriented economy and soon would drive a large part of its growth (and america's growth) by itself.
The problem is that this change has been mixed with another set of inequalities - the bubbles created specifically by "some of the most competent people in the world" working for the US. To be sure - no country has been blessed by the right leadership. Communist China, fractional India, megalomaniac and divided Europe... but the US leadership in the last 20 years has been just catastrophic... it looked more like a bunch of kids playing with fire, than a leadership of a serious country...
Now the youngest and most inexperienced of these kids is coming to play too... Have fun!
Consider this:
Under the same set of laws, SEC rules, economies etc. Buffet made his share holders billions and Madoff stole all his investors' money. And what this show is how ineffective all these laws are. Buffet was an honest broker and Madoff was not. And that in entirety is the difference in the outcomes as every other piece of the playing field was the same.
More rules and schemes won't do the job. We need an overhaul of the SEC and banking rules to make them much simpler. And then we need to enforce them. Good rules would let a Buffet thrive and stop a Madoff at the $50K mark not the $50B mark.
How is it a person can detail a strategy that sounds promising before entering office? They promise to replace incompetent and crooked individuals with better - individuals that have proven character and integrity! BUT after the transition period - as a result of "behind closed door" meetings etc. That same person does a 180 deg. about face and falls in line with, pursuing the same madness with the same people.
Who "really" is the puppet master and what is the Puppet masters true agenda.
If conspiracy nuts are even remotely correct.... This would be the point in the plane crash where you would be advised to bend over so far that you can kiss your own A**!!
On Jan 18 12:27 PM anarchist wrote:
> I was encouraged during Obama's campaign when he had financial advisers
> the like of Buffett and Volker aboard but where the hell are they
> now? My god, Geithner and Summers going to run Treasury like Paulson
> and with Ben Bernanke still Fed-Head we could be in for a mess so
> bad that it can't even be envisioned now.
THEY "COULD DIE" for the wrong solution so they think Survival NOT "BAIL-OUT"
On Jan 18 10:50 AM PrudentMan, CFA wrote:
> Why are pilots good in crisis and bankers and investment bankers
> not? Pilots don't go to Ivy League Schools where they are taught
> they can walk on water so they don't have to do their homework!!!
On Jan 18 11:43 AM John Polomny wrote:
> Sounds like a camoflaged Smoot-Hawley. I will also note that in the
> article Buffett cautions that his macroeconomic record has not been
> very good.
It should be noted that the Macro record of King Alan of Greeenspan was pretty bad. From holding interest rates way too low for way too long to insisting that the Wall Streeters who created the CDS and CMO toxic crap would self regulate themselves just fine since they were well aware of the risks! Thanks Alan!!
Buffet's plan is good because it lets the free market decide what imports are really needed, penalizes imports without tariffs instead of debasing/devaluing the dollar, and provides incentives to production and export of American made goods. The alternative is surely a complete collapse of the dollar, but as always, its a question of when. Without eliminating the trade deficit, I think we will soon find out WHEN.
On Jan 18 01:17 PM Howard Richman wrote:
> John Polomny,
>
> There is a very big difference between Import Certificates and Smoot-Hawley,
> and there is a very big difference between the 1929 depression and
> the 2008 recession.
>
> Import Certficates by a trade deficit country don't cause a trade
> war. They tie imports to exports. Any trade-surplus country that
> tries to counter the certificates by reducing its own imports of
> American goods finds that it is thereby reducing its exports.
>
>
> The 1929 depression was caused by a liquidity crisis; US trade was
> in surplus. The 2008 recession was caused by a financial crisis that
> resulted from imbalanced trade, a trade deficit of 5% of GDP. Any
> reduction in that deficit means that a greater percentage of US demand
> produces US income.
>
> Howard Richman
My guess is the ICs would be a violation of our treaty obligations.
A lower standard of living for the future has already been guaranteed by America's borrowing. The bigger the debt is allowed to become, the worse the fall will eventually be, and the longer the idiocy is allowed to persist, the bigger that debt gets.
Face it folks, we don't "trade" much, we just buy stuff with IOU's to PLUTO and beyond.
A more efficient way to curtail capital flows would be a return to the gold standard.
Excellent article. It is obvious that we are being devastated by our exponentially mounting trade deficit. We need balanced trade immediately, or we will become an economic basket case and possibly under the control of China for generations to come. Anyone who thinks economic nationalism inevitably leads to depression doesn't understand history, which shows that virtually every industrialized nation grew rapidly with protectionist or even mercantilist economic policies, China being the current obvious example. The US grew rapidly with tariffs throughout the 19th century. As you point out, it is a myth that Smoot-Hawley was the primary cause of the Great Depression. While I was already familiar with Choate's excellent fact-filled and ideology-free analysis of the problem from his recent book "Dangerous Business," I had not heard of Buffett's proposal for Import Certificates, which makes complete common sense (no surprise there, coming from him). His usual modest and folksy way of describing the problem is also so clear as to be understandable to any rational person other than a mainstream economist. It should be read by every American voter.
Thanks!
On Jan 18 10:50 AM PrudentMan, CFA wrote:
> Why are pilots good in crisis and bankers and investment bankers
> not? Pilots don't go to Ivy League Schools where they are taught
> they can walk on water so they don't have to do their homework!!!
On Jan 18 10:50 AM PrudentMan, CFA wrote:
> Why are pilots good in crisis and bankers and investment bankers
> not? Pilots don't go to Ivy League Schools where they are taught
> they can walk on water so they don't have to do their homework!!!
You are completely correct that all the countries of the world have had disastrous leadership the last few decades. I personally don't see how the huge trade surpluses are going to benefit the Chinese anymore than the deficits benefit us. As the saying goes, "If you owe the bank $100,000, you have a problem. If you owe the bank $100,000,000, the bank has a problem." We have all these wonderful products and all they have are a bunch of zeroes on their bank accounts which can easily be made worthless by American treasury printing presses.
There's another saying surgeons have-"all bleeding stops." Eventually the trade deficit would correct but not necessarily in a way that either Americans or the Chinese or Indians, etc. would like. Finding the best way to bring about balanced trade would have the advantage of stabilizing our economy and increasing their standard of living.