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“The Accidental Superpower” Redux

“The Accidental Superpower” Redux

| September 04, 2018
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In our profession we are inundated with information from many sources.  It is an ongoing challenge to sort through it all to filter out what is relevant to help us in our effort to help you, our clients, attain and retain financial freedom and security.  One source we like and trust is Brian Wesbury - the chief economist at First Trust.  Last week Mr. Wesbury published a column that was stunning in its readability (for an economist) and its implications.  He titled it - “U.S. Stops Subsidizing Global Growth.”

It brought to mind a book by Peter Zeihan titled, “The Accidental Superpower,” that I have been recommending for a couple of years now in client meetings and through my blog.   At first I thought that Mr. Wesbury’s comments reinforced Mr. Zeihan’s conclusion.  If you read the book, you will recall that Mr. Zeihan uses some economics, but mainly history, geography, and demographics to postulate that, “Simply put the world is indeed going to hell, but the Americans are going to sit this one out.”  

Upon reflection though, maybe something else is going on here.  Mr. Wesbury’s article leads one to speculate a result altogether different from that of Mr. Zeihan.

First, let me summarize Mr. Wesbury.  He begins his column by saying: “For decades the United States has, directly and indirectly, subsidized global growth.  For example, after World War II, the U.S. provided direct economic aid to Western Europe with the Marshall Plan, while also helping to rebuild Japan.  Since then, we have provided never-ending direct aid to foreign countries, which has been a constant political football.

But, in the economic scheme of things, the biggest subsidies of all have been indirect.  For decades the U.S. has held trade tariffs below those of most foreign countries.  And until recently, the U.S. has maintained a corporate tax rate significantly above the world average.  At the same time, the U.S. hindered, through regulation, its production of energy.”

Brian then proceeds to list historical tariff and tax rates to make his case.  For example, according to the World Trade Organization, prior to the current administration, the U.S. had an average tariff of only 3.4%.  Canada’s average was 4.0%, the E.U. was 5.1%, Mexico was 6.9%, and China was 9.8%.  In 1993, the U.S. federal corporate tax rate was 35%.  When combined with state and local corporate taxes, the average was 38.9%.  At that time the average worldwide rate was 33%, but by 2017 the average had fallen to 23% (16 points below the U.S.).

Brian concludes with the comment that, “at the margin, businesses looking to invest globally had an incentive to invest outside of America.  But things have changed - in a huge way.  The geopolitical implications of this are coursing through the world right now.”  The current Administration and higher U.S. oil production are putting, “pressure on other countries to come back to the table and talk about more equal trade. It also forces countries that previously were able to have high income tax rates, huge government budgets, and lots of red tape to rethink their fiscal policies. The global establishment has never been under attack like it is today. The world order is changing for the better.”

According to Mr. Wesbury, the U.S. is engaging with the rest of the developed world (our trading partners), whom we have been subsidizing since World War II, to level the playing field.  If we can get past the turmoil and rhetoric and level the playing field, then what happens?  Will Mr. Zeihan be right that, by abrogating Bretton Woods, the world may indeed be going to hell and the U.S. “sits it out?”  Or, is Mr. Wesbury indeed correct about the changing world order?

I've been thinking about that and wondering - what if the developed world collectively tilts the playing field to subsidize the undeveloped world as the U.S. did to what is now the developed world after World War II?  The undeveloped half of the world suffers from poverty, diseases, hunger, poor or no education, poor sanitation, poor medical care etc.  In this half of the world there is little hope and no future.  Besides the problem of refugees from these regions, these horrible conditions result in many of their inhabitants being susceptible to the allure of piracy and terrorism!

What if we could win the war on terror like we won the Cold War - with economic freedom, property rights, free-trade, etc., and not with guns and bullets?  What if the developed world could lift the undeveloped world at least into the 20th century (figuratively)?  I recently read where half of the world's population has never touched a phone; they have never made or received a phone call!  According to Mr. Wesbury, when the U.S. leads (pushes the world), good things happen.

As was said before, things are changing in a huge way.  Will Peter Zeihan be right in his conclusion?  Will the developed world get their fiscal house in order, stop petty regional squabbles, and pull off a grand strategic gambit like the U.S. did in 1944 with Bretton Woods?   It is well known that the Smoot-Hawley tariffs in the 1930s turned a recession into a worldwide depression.  Tariffs were as high as 70% and worldwide trade ground to a halt.  It was high tariffs after all that led to the American Revolution.  I agree with Mr. Wesbury and virtually all economists that the ideal tariff should be 0%.  The world has been moving in this direction; the current administration did not cause this, but is merely acting as a catalyst to speed it up. 

As has been said many times - “May you live in interesting times.”  These are indeed interesting times - consequential times.  The world order is changing.  Where will we be in 2040?

That is my 20,000 foot view for today.

Until next time, cheers!

Jim

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