Friday, August 12, 2011

Protectionism, Soaking the Rich

An Idea That WON'T Save American Jobs
As I’ve mentioned in prior postings, the Unrepentant Capitalist likes to surf the business section of various news web sites.  I also enjoy perusing the reader comment sections at the end of articles to see what people are thinking about the news of the day.  I've noted a disturbingly high number of people posting comments about ‘saving’ American jobs by enacting various laws to manage our international trade.  Some even come out and use the word ‘tariff’ to describe how they would solve our problems if they were in charge.
Thankfully, most folks inside the Beltway remember enough economic history to realize the disastrous economic effects that we visited upon ourselves during the 30’s by enacting the Smoot-Hawley tariff act.  During the early days of the Depression, there was much hue and cry over international trade and the jobs the US was losing due to imports.  Lawmakers came to the rescue by passing the Smoot-Hawley legislation.  Most of our trading partners quickly enacted reciprocal tariffs of their own resulting in a drastic decline in international trade.  
Worldwide trade dropped 66% between 1929 and 1934.  U.S. exports dropped from $5.4 billion in 1929 to $2.1 billion in 1933 (figures measured in 1930's dollars.)  That was a loss $3.3B of business that a weak U.S. economy could ill afford.  Few people blame Smoot-Hawley for starting the Great Depression, but most economists agree the tariffs contributed to turning a 2 year downturn into the worst depression in US history. 

I’m sure my readers get this, but to understand the full magnitude of how much economic activity we would jeopardize through tariffs, realize that U.S. companies have international sales totaling trillions of dollars each year.  According to an S&P report (S&P 500: 2010 GLOBAL SALES - July 19, 2011) S&P 500 companies sold $2.3 trillion in goods and services outside the U.S in 2010.  This number actually understates the true international sales figure as only 255 out of the 500 companies report their international sales.  For these 255 companies, almost half of their sales come from outside the U.S.   
I’m not even counting those smaller US companies not represented in the S&P 500 who sell goods and services to foreign buyers.  $2.3 trillion is a lot of business and a lot of jobs for companies like Caterpillar, Boeing, 3M, GE, Ford, and Johnson & Johnson.  If you consider that S&P 500 companies average $360,000 of revenue per employee, $2.3 trillion of revenue works out to 6.4 million jobs.  Granted, not all of the 6.4 million jobs are in the U.S, but many in this group are American workers.
China sells us toy airplanes, and we sell them Boeing 777's.  We've got a good thing going here, let's not shoot ourselves in the foot. 

 Let's Raise Taxes on those Nasty Rich People

“The rich need to pay their fair share of taxes!” 

As the debate rages around fixing the U.S. budget problems, I’m hearing that one a lot.  

Now for a couple of facts.

According to the IRS, the top 10% of income earners in the U.S. make 44% of the income and pay 67% of the income taxes.  

Small businesses (generally defined as companies with 500 employees or less) are a crucial segment of our economy.  The US Small Business Administration (SBA) says small businesses account for 50% of private sector employment and have generated 64% of new jobs over the past 15 years.  So who owns small businesses?   According to, the average small business owner has an annual salary of $233,600. 

So for those who want to raise taxes on the rich, a couple of questions—1. Is 2/3rds of the tab not enough?  2. What do you think happens to small business creation if you raise taxes on those people responsible for creating many of these businesses?

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