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Trade, Growth & The GOP Tax Bill

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What the Republicans do not get about economic growth, and some reformatory suggestions for both developing and developed countries.

Back when both parties liked trade: President Clinton signing NAFTA documents, as President Ford, Senate Majority Leader Mitchell, President Carter, Senator Dole, President H.W. Bush and Vice President Gore look on (The Atlantic).

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During the World Economic Forum earlier this year, Alibaba CEO Jack Ma stated that globalization and trade cannot be stopped. He challenged the current generation to improve it. President Trump of course has opposed trade and continues to rail against NAFTA. However, countries who have implemented economic reforms that have opened up trade are the ones who have succeeded in creating real economic opportunities. But issues remain, such as improper growth methods and free trade actually not being so free in reality. Thus, it is important to “reform” the reforms.

New markets, international trade, development, investment, and industrialization are all tools for producing economic growth. But the way growth is thought to be achieved, especially among conservatives, is not how the economists envisioned it. Consider the “trickle down” theory of Prime Minister Thatcher and President Reagan, where tax cuts to the wealthy will increase business investment and personal consumption, essentially trickling down money to the lower classes. But growth is not about money changing hands passively, but getting at the poor directly through an active pull-up strategy, where governments would accelerate growth through infrastructure such as roads and bridges and investing money in public education and building new schools as well as social spending such as welfare and healthcare. With better education comes better doctors, hospitals, STEM professionals, and technology, including clean tech.

When Mario Cuomo destroyed trickle-down economics at the Democratic National Convention back in 1984 (NPR). His son Andrew, now Governor of New York himself, is raising taxes and fighting the GOP tax bill.

These ideas are not just for developing countries; they should be tried in the United States. That being said, how do Republicans claim Reaganomics and the new GOP tax bill will create economic growth when it cuts government funds which would pay for initiatives which could boost growth? Not to mention, governments must have resources to attract foreign investors and companies, alongside foreign aid.

The growth rates that Republican members of Congress are expecting are incredibly unlikely. Economic growth is a miracle when it actually happens; the haste of the tax bill, lack of parliamentary debate, or hard numbers reduce the chances of it happening.

Even before tax cuts, government resources and foreign aid often fall short. The private sector must also produce growth, through investment, jobs, trade, innovation, entrepreneurship, strategic marketing, investing in new cities, revitalizing neighborhoods with new businesses, and companies donating to build and establish schools. The private sector (which should be larger than the public), ought to give all kinds of different places a chance, and they are the only ones who can invest and industrialize so efficiently.

Conservatives often tout the “pull yourself up by the bootstraps” theory, but that is about doing it all by yourself and with a “laissez faire” free market. But growth relies on government and industry in tandem, producing help and opportunities in many forms which will pull people out of poverty.

Economic Development in Malaysia (Yahoo News Singapore).

One necessary provision in creating rewarding-yet-toilsome growth is that it must be the first priority before anything else.Some may believe that it is important to redistribute wealth first before having economic growth come in. That does make sense to an extent, with individuals having more cash on hand when growth arrives. But under that plan, how long can redistribution and the money last when there is little growth? Imagine a country deciding instead to have years of foreign and domestic investment, trade, returns on growth, and plans redistribution afterward. Then, the economy has a backbone, and that country can collect higher taxes from wealthy corporations and individuals. Those taxes can go towards welfare, fixed basic income, education, or government services. Because the economy is industrializing and thriving, companies can also pay higher wages to their workers.

Now compare that plan to the effects of the GOP tax bill mentioned earlier. Regardless of where the money is used, it appears that the Federal Government will run out of money soon, due to a $136 billion reduction in tax revenues. Growth’s enablers have been diminished. Also, the tax bill has led to permanent wage increases for only 25% of America’s top 150 companies. Most of the relief money has gone to stock shareholders and company stock buy-backs, not take-home income for working families.Economic growth should be about the latter.

Free trade needs to be freer. Even if new markets are available for exporting, a lot of countries tend to produce one particular product too intensely, leading to more exports and lower prices. For some firms, this can lead to serious losses. Instead, firms should not produce such surplus and instead “free up” their exports by investing in other sectors. Free markets should also replace bureaucracy. This was clear during the collapse of the Soviet Union, where the world saw that socialist and government control of the economy did not lead to more income distribution. Socialists should know that such bureaucracy led to corruption and abuse of power. Socialists should also know that freer markets can lead to egalitarian wealth distribution, as developing nations with free markets have produced triple the rate of economic growth as closed systems, with higher living standards for the common man or woman. Meanwhile, government intervention should still play an important role in the economy. While this may be known to many as capitalism, important governmental and democratic institutions make it more of a “market democracy” or even a “social democracy”.

Trade’s needed reforms are going to roil both the left and right. But the relationship between business and government is clear; the left should stop hating the market system alongside big business and financial investment firms who are not corrupt or immoral and the conservatives should stop despising governments which are not immoral or corrupt. As Goldman Sachs alum and Clinton Treasury Secretary Robert Rubin has said: “the market-based model must be combined with strong and effective government, nationally and transnationally, to deal with critical challenges that markets won’t adequately address.”. Resultantly, globalization will improve.

Special thank you to Laurence Seidman, Chaplin Tyler Professor of Economics, University of Delaware.

Robert Rubin, known as the greatest Treasury Secretary besides Alexander Hamilton and Chairman Emeritus of the Council on Foreign Relations (CNBC).

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