TRADE EQUILIBRIUM, A BETTER FISCAL MODEL THAN THE SIMPSON-BOWLES’ PLAN

OBJECTIVES & OVERLAPS

                         The principal purpose of this article is to propose that the United States enact the concept of Trade Equilibrium (a) to maintain its sovereignty and (b) to create jobs, to reduce poverty, to increase stockholders’ wealth, to increase governmental tax revenues, and to trim tax rates in America.

                        Toward that end, this article also argues that the theory of Trade Equilibrium, as I am proposing it, presents a much better approach to America’s fiscal health than that is possible using the Simpson Bowles plan.

                        Let me note that certain contents of this article are similar to some of my previous writings. Conversely, some of the other topics discussed in here are different from my earlier efforts in terms of contents, reasoning, and structure. (Sources of data used: Bureau of Labor Statistics, Wikipedia—and by implication the sources it itself used! And others as noted! Analysis and calculations based on these data, if any, are by me.)

 UNDERSTANDING AMERICAN NATIONAL DEBT

                        The total American national debt has two parts: (a) the public debt (it consists of government securities held by the public) and (b) the foreign or intra-governmental debt (it consists of the American governmental securities held by the foreigners). As of February 2011, the U.S. debt held by the public was $9.6 trillion and the intra-governmental (foreign) debt was $4.6 trillion, for a total of $14.2 trillion.

                        Technically speaking, the public debt is the amount that the federal government owes to the American public. Since the federal government has taxing power, the public debt represents the amount that the American people owe to each other. From a socio-economic point of view, however, it may suggest existence of unemployment, poverty, and gulf between the haves and the have-nots.

                        Often, the foreign debt represents an excess of American imports over American exports. However, it may also include items such as follows: (a) the funds the Americans send overseas to their families and others, (b) the amount the Americans spend when travelling abroad, and (c) the amount the America spends on fighting terrorism and wars overseas. An increasing foreign trade debt is a primary reason of increasing American unemployment.

 UNDERSTANDING AMERICAN BUDGET DEFICIT

                        The American budget deficit/surplus represents the difference between the revenues and expenses of the American government during a fiscal year (October 1 to September 30). The budget deficits are often financed by taking loans from the public. Budget surpluses, if any, are carried forward and/or used to pay off the existing debt.

 TRADE EQUILIBRIUM WOULD ELIMINATE FOREIGN DEBT

                        Let us assume that American lawmakers pass the law of Trade Equilibrium making it effective January 1, 2013. This act would then have the following consequences (data related to interest and compounding have been ignored).

  1.  America, which currently averages an annual trade deficit of $649 billion a year, no longer face this problem!
  2. No additional export of 1.95 million U.S. jobs a year—a result of the average annual trade deficit cited above!
  3. No additional tax expenditures on the jobs lost!
  4. Net new purchases of $460 billion (10% of $4.6 trillion) worth of American goods and services by foreigners a year for ten years! Or investment in America!
  5. Elimination of American foreign debt in ten years (2022)!
  6. Creation of U.S. trade surplus beginning 2023!

 TRADE EQUILIBRIUM WOULD REDUCE/ELIMINATE PUBLIC DEBT

                        Using Isabelle Cohen, Thomas Freiling, and Eric Robinson’s (2012) research findings as a “broad” guideline, the $4.6 trillion dollars coming back home (new investment) would generate new tax revenues as follows.

  1. About $2.875 trillion in new federal tax revenues over a ten year period, or about $287.5 billion a year!
  2. About $1.794 trillion in new state and local tax revenues over a ten year period, or about $179.4 billion a year!
  3. About a total of $4.669 trillion in new total tax revenues over a ten year period, or about $466.9 billion a year!

                        These tax revenues would take place without making any changes in the current tax code.

                         Under the Trade Equilibrium Act, it would be the responsibility of the foreign countries to decide how to spend these $460 billion dollars in America.. Subject to the American laws, they can buy whatever American goods and services they want to.

 SIMPSON-BOWLES COMMISSION

                        The National Commission on Fiscal Responsibility and Reform (NCFRR), popularly known as Bowles-Simpson or Simpson-Bowles Commission, was established in 2010 by President Barack Obama to identify “…policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run.” Its December 1, 2010 report failed to receive Congressional approval for a variety of reasons. However, it continues to get wide attention. Its authors, Erskine Bowles and Alan Simpson, continue to promote their report to prestigious American audiences.

 THEORY OF TRADE EQUILIBRIUM AND THE SIMPSON BOWLES’ PLAN,

                         The Simpson-Bowles Plan consisted of six major parts projecting a total savings of $4.123 trillion dollars over a nine year period (2012-2020). An itemized comparison of these savings with that of those possible from the Theory of Trade Equilibrium that I am proposing for enactment, is presented in the following exhibit:

 Exhibit

Theory of Trade Equilibrium versus the Simpson Bowles’ Plan 

1. Spending CutsSimpson-Bowles: $1,661 billion of discretionary spending cuts by putting in place discretionary spending caps into law lower than what is projected to be spent

Trade Equilibrium: As defined, spending cuts is not a part of my theory. However, any and all unnecessary expenses should be eliminated. When done, it would only enhance the value of this theory.

2. Additional RevenuesSimpson-Bowles: $995 billion in additional revenue with $785 billion in new revenues from tax reform by lowering income and corporate tax rates and broadening the base by eliminating tax expenditures. An additional $210 billion in revenue is also raised in other revenue by switching to the Chained-CPI and an increase in the federal gasoline tax

Trade Equilibrium: As defined, tax reform is not a part of my theory. However, any and all necessary tax reforms must be pursued. When done, it would only enhance the value of this theory. 

3. Healthcare SavingsSimpson-Bowles: $341 billion in federal health care savings by reforming the Sustainable Growth Rate for Medicare, repeals the CLASS Act (which has already happened), increase Medicare cost sharing, reform health-care tort, change provider payments, increase drug rebates and establishes a long-term budget for total federal health-care spending after 2020 to GDP + 1 percent.

Trade Equilibrium: As defined, healthcare reform is not a part of my theory. However, any and all necessary healthcare reforms must be pursued. When done, it would only enhance the value of this theory. 

4. Other Mandatory SavingsSimpson-Bowles: $215 billion in other mandatory savings by moving to the Chained CPI for all inflation-indexed programs, reform the military and civil service retirement system, reduce farm subsidies, reduce student loans and various other reforms.

Trade Equilibrium: As defined, mandatory savings is not a part of my theory. However, any and all necessary savings must be pursued. When done, it would only enhance the value of this theory. 

5. Social Security SavingsSimpson-Bowles: $238 billion in Social Security reform, to be used to ensure the program is sustainably solvent in the infinite horizon by slowing benefit growth for high and medium-income workers, increase the early and normal retirement age to 68 by 2050 and 69 by 2075 by indexing it to longevity, index cost of living adjustments to the Chained-CPI, include newly hired state and local workers after 2020, increase the payroll tax cap to cover 90 percent of wages by 2050 and creates a new minimum and old-age benefit. 

Trade Equilibrium: As defined, social security savings is not a part of my theory. However, any and all necessary savings must be pursued. When done, it would only enhance the value of this theory. 

6. Budgets Process ReformsSimpson-Bowles: Budget Process Reforms by creating discretionary spending caps and caps total federal revenue at 20 percent of GDP.

An additional $673 billion is saved due to lower projected spending interest payments as a result from lower deficits. 

Trade Equilibrium: As defined, budget process reforms is not a part of my theory. However, any and all necessary savings must be pursued. When done, it would only enhance the value of this theory. 

Trade Equilibrium Effects Over Ten & More YearsSimpson-Bowles: A total of $4.123 trillion in savings is projected in this plan over a nine year period, or $458 billion dollars a year, or $4.581 trillion for 10 years. It projects to eliminate federal deficit by 2035 (about 22-23 years from now). 

Trade Equilibrium Effects Over Ten Years: As defined, and as noted above, my theory would generate tax revenues as follows:

About $2.875 trillion in new federal tax revenues over a ten year period, or about $287.5 billion a year!

  1. About $1.794 trillion in new state and local tax revenues over a ten year period, or about $179.4 billion a year!
  2. About a total of $4.669 trillion in new total tax revenues over a ten year period, or about $466.9 billion a year!

 Suggestions for Additional Research

  1. Effect of an elimination of new U.S. trade deficit of $649 billion a year on the U.S. debt?
  2. Effect of an elimination of additional export of 1.95 million U.S. jobs? Among other variables, it would reduce some tax expenditure (unemployment benefits, etc.).
  3. Distribution of dollars coming back home ($460 billion a year–10% of $4.6 trillion of foreign debt—among various parts of American economy).
  4. Effect of U.S. trade surplus beginning 2023 on its economy!
  5. Effect on the economy of a dollar surplus country as it spends those dollars in buying American goods and services! Effect of using billions of dollars on improving its infrastructure, such as transportation, water, and food!
  6. What is the value of national pride, national security, national economic independence that would arise following the theory of Trade Equilibrium? 
Trade Equilibrium With A Major DistinctionSimpson-Bowles: Its 65 page report does not deal with its effect on American employment in any direct way—probably because it wasn’t its goal. 

Trade Equilibrium: As defined, saving existing jobs and creating net new jobs is a significant outcome of my theory.