Tax Cuts and the Cost of Tea in China

Reading the Economist today, which I am known to do, I came across an article about protectionism in the EU.  Scintillating reading, as I am sure you would agree.  They mused about how governments (including the US) are trying to make sure their stimulus packages get spent domestically.  This is why most people want to see infrastructure projects galore in the packages.  “Good idea”, you might say.  After all, if they just give out tax cuts, US stimulus money will end up in China.  Right?

Wrong.  

Well, at least, not all of it.  Think of all the people who take a slice of a plasma TV before it gets sold.  Let’s start at the point of purchase and work backwards.

First, there is the salesman at Best Buy, who gets a commission for making the sale.  That sale in turn contributes towards his salary.  It also keeps Best Buy in business.  That is good because they employ custodians, technicians, salesmen and managers all over the country.  Best Buy also uses that money to service mortgages and leases on its property, pay for utilities and to hire people to maintain the buildings.  

Best Buy acquires the TV from a wholesaler.  The wholesaler runs warehouses, that employ forklift operators, truck drivers and receptionists.  That TV needs to get from Shanghai to the US, which helps to keep our ports hopping, bringing income to plenty of blue collar workers.

Lastly, you have the factory in China.  They get a small piece of the pie, remember, they are made their because the labor is cheap and the costs are kept crazy low.

So, yes, a portion of the money from a basic consumer purchase will trickle out of the country.  But a portion of it stays here too. It makes an impact all the way down the line.  And the people here employed to provide the TV then have money to put into the market, or into a mortgage, or into a Mom and Pop grocery store, or to tipping the waitress at the local diner.

Now this is obviously crazy simplified.  There are thousands of people: bankers, customs agents, cardboard manufactures, print houses, web designers…the list is almost endless, who make their living off of the sale of any consumer good.   It might be one TV, but when you add it all up it is an economic masterpiece.  And this goes on in any industry.  Since we don’t make anything here but coal and Caterpillar tractors, it will be almost impossible to keep the money here, unless we use it to build a bridge.   And while there are infrastructure projects that need to be done, they alone will not pull us out of a recession.  And if you think otherwise, just talk to the Japanese about how it has worked out for them.

I am scared of protectionism in the best of times.  In the worst of times it can be the worst of ideas.  In the 1930’s Smoot and Hawley raised tariffs to keep what little money was left here during the Depression in the country.  Ask anyone now if, in hindsight, that was a good idea.  

If anything, we should be trying to help our trade partners as much as possible.  We made this mess.  We need to help to clean it up.  Let some of the money leave the country.  After all, what helps one of our partner economies helps us as well.  

If that means cutting taxes so that people will go out and buy a TV, then so be it.

And do you know how they are going to pay for this stimulus?  They will issue bonds.  Do you know who this single largest purchaser of US bonds is?  China.

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