How the Market Access Charge (MAC) Would Help Restore American Manufacturing

How the Market Access Charge (MAC) Would Help Restore American Manufacturing

John R. Hansen

America’s growing trade deficits, especially in manufactured goods, indicate that our nation’s international competitiveness – the ability of Americans to earn as much producing exports as they spend on imports – has fallen dramatically. Since the mid-1970s, rising trade deficits have killed millions of American jobs and have forced tens of thousands of American factories to downsize or close their U.S.-based production lines. 

This note describes how a Market Access Charge (MAC) could put these U.S. workers and factories back on the job.

Many factors have contributed to America’s declining international competitiveness, but most important has been misaligned exchange rates that are inconsistent with balanced trade. Other contributing problems such as inadequate investment in plant, equipment, R&D, and staff training are very real and serious, but these can be solved only when American companies are once again confident that such investments will be profitable. And in most cases, profitability can be assured only if exchange rates between the dollar and other trading partner currencies are, on average, consistent with balanced trade.

Why America Needs a New Trade Policy for the 21st Century

Today’s trade policies clearly do not defend America’s right to a level playing field for international trade – a fundamental requirement if America’s labor and capital resources are to be employed with maximum efficiency, and if America’s future generations are not to be burdened by foreign debts caused by today’s trade deficits.

America’s international trade policies served it well for much of the 20th century. Today, however, the policies are badly out of date because, starting in the 1970s, the market forces that determine exchange rates began to change dramatically.

Historically, the demand and supply of real imports and exports determined exchange rates, much as in the days of Adam Smith and David Ricardo. But starting about 40 years ago, world commerce has become increasingly dominated by financial trade in capital and foreign exchange. As a result, exchange rates set in today’s financial markets are rarely consistent with the rates needed to balance imports and exports. This problem is particularly severe for the United States because it consistently attracts excessive inflows of foreign capital that drive the value of foreign currencies down against the dollar, thereby making American goods more expensive for foreigners and foreign goods cheaper for Americans -- a process that inevitably causes US trade deficits. Inflows of foreign-source money are driven by the following factors:

1. The U.S. dollar, which is the world’s premier reserve currency, is more widely used than any other currency for the invoicing of international transactions, for their settlement, and for storing wealth.
2. The U.S. financial markets are the largest, deepest and most liquid in the world, and they are regarded as a global safe haven in the time of financial problems – even if the problems started in the U.S. markets as happened with the Crash of 2008.
3. As the largest market in the world for consumer and industrial goods and services, America has for years been the target of currency manipulators. Countries like Germany, Japan, and China have bought billions of dollars of U.S. currency and other dollar-denominated assets with their own local currencies to drive the value of their currencies down against the dollar. This makes it very difficult for American producers to compete either at home against imported products or abroad with exports.

If America’s need for foreign capital and its supply of dollar-denominated assets had no limit, the foreign demand for these assets would not cause dollar’s value to rise. But this is clearly not the case. Excess demand for the dollar and dollar-based assets drives the dollar’s exchange rate against foreign currencies to levels that are totally inconsistent with rates needed to balance U.S. imports and exports.

If America is to have an exchange rate consistent with balanced trade, it must implement policies that keep the foreign demand for dollars and dollar-based assets consistent with America’s need for imported capital. 

In the short term, specific measures such as countervailing currency intervention are needed to fight currency manipulation and other unfair trade practices. [1]  For the longer term, America must restore the now-broken link between the dollar’s exchange rate and balanced U.S. trade. This can only be done by moderating net capital inflows to levels consistent with a competitive, trade-balancing exchange rate for the dollar.

The best possible way to achieve this would be a Market Access Charge (MAC). A MAC is simply a “peak load pricing” mechanism, very similar to those used around the world by both the private and public sectors to balance demand and supply for services such as airline flights, rental cars, hotel rooms, electricity use, and vehicular access to the central business districts of cities like London during rush hours. America needs a similar demand-moderating mechanism when its financial services markets are clogged with excess foreign capital.

A Market Access Charge would reduce the demand by foreigners for access to our markets under such conditions by reducing net yields by just enough to make such investments less attractive to foreign traders, speculators, and manipulators. As a result, the demand by foreigners for dollars and dollar-based assets would be moderated by just enough to reduce upward pressures on the dollar – the primary cause over time of the overvalued dollar, U.S. trade deficits, lost jobs, and failing factories.

How would the MAC Operate?

The Market Access Charge (MAC) would operate as follows:

Trigger 

•       A non-zero U.S. trade deficit over the past 6-12 months (the review period) would trigger a non-zero MAC rate. [2] [3]  

Rate

•      An initial MAC rate equal to half of the current spread between average foreign and US interest rates would be charged on the value of the incoming foreign-source money once the deficit trigger point was reached. (Note: the cross-border interest rate spread is the main factor driving cross-border flows of foreign-source money. Setting the initial MAC rate at half this level would allow introducing the MAC without shocking international currency markets.) [5] 

•       At the end of each review period (say every six to twelve months), data on the trade deficit as a percentage of GDP would be reviewed to see if the MAC charge should be increased or reduced.

•       The rate would rise or fall in line with changes in the trade deficit according to an elasticity factor. For example, if the elasticity factor were set at one (1.0), an increase in the trade deficit equal to one percent of GDP over the review period would increase the MAC charge by one percentage point (100 basis points) for the following 12 months. Once the trade deficit began to fall relative to GDP, the MAC rate would decline in the same way, returning to zero once the trade deficit dropped to zero for the previous twelve months.[4]

Base

•       All inflows of foreign-source money would be subject to the same MAC rate. Applying the same rate to all inflows avoids the problems of evasion, corruption, favoritism, and economic distortions that other countries like Brazil encountered with capital inflow charges when they tried to discriminate between “good” and “bad” capital inflows.

•       Because the MAC is charged every time foreign-source money enters the United States, a common rate for all inflows automatically discourages short-term speculative in-and-out flows. Conversely, a common rate imposes a minuscule effective burden on the life-time yields of foreign direct investments because such investments come in only once, stay for a long time, and almost always have a much higher expected rate of return per dollar invested than speculative investments do.

Administration

•       The MAC would be collected automatically and electronically on all inflows of foreign-source money by the computer systems already present in the handful of U.S. banks that handle most of America’s cross-border financial transactions. Under traditional correspondent banking arrangements, these gateway banks would also service incoming cross-border transactions for other banks.

•      Foreign speculators seeking access to US financial markets would pay the Market Access Charge. The MAC is not a tax on Americans.

•       The MAC charges collected by the gateway correspondent banks would immediately be transferred electronically to the General Fund of the U.S. Treasury. 

•       Funds delivered to the US Treasury could be used at the discretion of the Treasury in line with authorizations by Congress and orders of the Administration. Where feasible, special preference would be given to programs designed to improve the global competitiveness of American enterprises and workers. Such programs could include, for example, the National Network for Manufacturing Innovation (NNMI), other types of support for R&D, worker training and trade adjustment assistance programs, infrastructure development, a bank for American International Competitiveness to help finance productivity-enhancing private sector investments in plant and equipment, more efficient border protection operations including antidumping and countervailing duty programs, the liquidation of foreign-held U.S. government debt, and a special fund to help offset any increased costs of borrowing to finance government operations linked to MAC charges on the purchase of government debt obligations.

In sum, a Market Access Charge (MAC) offers the best hope of providing the basis for restoring America’s international competitiveness by fixing the undervaluation of foreign currencies against the dollar.  And to address U.S. trade problems and job losses associated with trade cheating by other countries, the MAC should be supported by parallel legislation that would increase the effectiveness of our traditional measures against trade cheating.

These policies, coupled with supporting efforts to simplify the overly complex tax code, to bring effective tax rates more into line with international standards, to introduce a VAT-like refund for foreign source money used to purchase exported US goods or to build and complete physical assets such as factories in the US.  The MAC-generated funds could also be used to bring health care costs for US workers down, making them closer to those paid by manufacturers in other countries.

In short, introducing the MAC could generate millions of well-paying middle-class jobs, save thousands of factories from closure, and leave future generations free of excessive debt caused by America’s living beyond its means today, spending more on imports than it earns producing exports.

________________________________________

Notes:

[1]  See for example the work of Bergsten and Gagnon at the Peterson Institute for International Economics here and here where they propose countervailing currency intervention as a way to fight currency manipulation by countries like China.

[2]  The U.S. trade deficit is suggested as the key parameter triggering the MAC because it is a well-established and officially available number that directly reflects the misalignment of the dollar. Its relevance and objectivity make it far superior, for example, to debatable, subjective criteria such as the difference between the market exchange rate and the “fundamental equilibrium exchange rate,” an indicator that has been suggested as a test for currency manipulation.

[3]  The MAC charge rates on incoming foreign-source money, the trade deficit trigger point level, the adjustment factor, and the review period used here to explain the MAC’s operation are all reasonable estimates of appropriate values. The actual values for these four parameters would be discussed during the legislative review process with members of the Advisory Committee on International Exchange Rate Policy mandated by Sec. 702 of the Trade Facilitation and Trade Enforcement Act of 2015  (H.R.644), experts from organizations involved in trade policy such as the Coalition for a Prosperous America (CPA), the Peterson Institute for International Economics (PIIE), the Economic Policy Institute (EPI), and others as appropriate. Once consensus was reached, these four parameters would be set into law to provide clear guidance for the Government officials responsible for implementing the MAC. The basic logic of the values suggested here is as follows:

A basic MAC charge of 50 basis points may seem too low to affect foreign capital inflows. However, this rate was chosen for several reasons: 

• First, capital inflows, especially those from the private rather than the public sector, are highly sensitive to opportunities for profit and thus to relatively small changes in perspective net yields. For example, the “taper tantrum,” which was driven by the hint that the Fed might begin to raise rates by tapering off the quantitative easing program, triggered massive flows of capital from emerging market countries into the U.S. 

• Second, we know from Federal Reserve experience that changes as small as 25 basis points in the policy rate can have a significant impact on capital markets. 

• Third, an excessively high MAC rate could cause damaging disruptions rather than gradual adjustments in international capital markets.

The trade deficit trigger point for a non-zero MAC charge is set at zero because there is no reason that the United States should have to suffer trade deficits and the consequent loss of well-paying jobs, productive capacity that is often critical to national security, international technological leadership, and debt that future generations will have to repay in one way or another.

The adjustment factor – the elasticity or ratio of percentage point changes in the trade deficit to percentage changes in the MAC rate – is set at unity for two reasons. First, this would assure a more rapid response to rising exchange rate values and trade deficits than would a value of less than one. Second, in line with the philosophy that trade changes generated by the MAC should be constructively gradual rather than damagingly fast, a factor of unity avoids the risks associated with a higher adjustment factor such as two, which would, for example, increase the MAC charge by two percent for every one percentage point of increase in the trade deficit as a percent of GDP.

A review period of twelve months is suggested for two reasons. First, because the MAC affects the dollar’s exchange rate indirectly by moderating capital flows into U.S. financial markets rather than changing exchange rates directly by fiat or by direct government currency market intervention, a few months may be required before the dollar’s exchange rate moves by enough to even begin affecting U.S. trade balances. 

Second, once the MAC begins to change the dollar’s exchange rate, two or more years may pass before trade patterns change significantly. This time is required because changing trading patterns requires buyers to complete existing contracts, find new suppliers, negotiate new contracts, and accept delivery of goods. This is true even if, as can be expected, the new suppliers are located within the United States rather than abroad.

The MAC would create a “signaling mechanism” that could change market sentiment and yield results more quickly. However, realizing the full impact of a MAC on structural trade deficits will almost certainly take three years or so. 

Consequently, it would be a mistake to keep reviewing the past six months’ experience and raising the MAC charge if the desired results were not seen. Also, making adjustments in the MAC rate too frequently would increase administrative burdens, generate confusing market price signals, and risk overshooting the zero-deficit target. On the other hand, it would be a mistake to put the process on auto-pilot and wait for two or three years before reviewing the situation. Too much could go wrong in the meantime. An annual review therefore seems reasonable.

[4] Under this system, the MAC charge rate can be calculated as follows: MAC = (Deficit – Trigger) * Factor, where Deficit and Trigger are percentages of GDP and Factor is the “elasticity” of the MAC charge with respect the excess of the deficit over the trigger. Thus, when the trade deficit reached 3 percent of GDP, the MAC charge would be equal to (3%-1%) * 1.0 or 2%. An elasticity factor of 1.0 appears to represent a reasonable compromise between getting rapid results and excessively shocking the international trade system, but this is subject to further analysis and discussion.

[5] The relatively slow introduction of the MAC is designed to give the international monetary and trade system time to adjust to a new system. This gradual approach would moderate the initial impact on the countries and companies that have become addicted to America serving as the borrower and buyer of last resort in a world where supply often exceeds effective demand. The MAC’s purpose is sustainable balance through moderation, not revolutionary upheaval. While perhaps more exciting than gradual change, the latter could be a recipe for disaster in our highly integrated modern world.

Why America Urgently Needs the Market Access Charge

Implementing the Market Access Charge (MAC) has become urgent. No other policy tool is capable of solving or significantly reducing critical problems facing America today: trade deficits, budget deficits, job losses, income inequality, socio-political polarization, boom-bust financial sector cycles, and the twin risks of inflation and recession.

 
What is the MAC?

It would be a small charge of probably 1-3% that would be collected on all foreign-source money entering America. This fee, which would be less than half of the recent Fed Funds Rate increase and a tiny fraction of tariffs on China, would reduce or eliminate the profits of the “carry traders” who borrow money at low interest rates abroad and invest it at higher rates here.

How would the MAC Work?

By reducing speculative interest rate and currency appreciation gains, the MAC would sharply reduce the currency speculation that, for the past 50 years, has been making foreign goods artificially cheap and American goods artificially expensive. Although the MAC would obviously not be a “magic bullet” that ends all of our problems forever, it is vitally needed to help assure the success in the following important areas. See my blog for more details (address below).

Reduce Trade Deficits: The MAC would gradually move foreign currency values per dollar to trade-balancing levels in a non-disruptive manner. This would eliminate America’s serious trade deficits and reduce our net debt to foreigners – which are arguably the worst in the world.

 
Increase Good Jobs, Income Distribution, and Socio-Political Unity/Tolerance. Trade deficits are not just a number in a table. They reflect the loss over the past 50 years of millions of good jobs, largely in manufacturing, of family incomes and security, of communities, and of entire “rustbelt” regions of America. 

These losses contribute directly to the income inequality and socio-political polarization that are tearing apart our country today. By eliminating US trade deficits, the MAC would help eliminate all of these problems as well.

 
Eliminate Budget Deficits. Another symptom of America’s severe polarization is the inability of Congress to pass the legislation needed to keep the government open, pay our bills, and to put our country back on the path to the American dream of putting America back on the path to the American Dream of sustained economic growth based on rising productivity, not rising debt, with benefits shared widely by all Americans.

 
A key reason for this dangerous situation is that Government revenues are not sufficient to pay for the programs needed to ensure a more equitable society. (America ranks near the top of the developed OECD countries ranked by income inequality). 

Some would argue that Americans are already too heavily taxed to solve our budget deficit and inequality problems by raising taxes, However, if one ranks the 34 relatively developed countries in OECD (including countries like Mexico and Chile) by taxes as a share of GDP, we are only three positions from the bottom.

The MAC offers an excellent solution to this thorny problem: Even at a very low rate of 1.5%, the MAC could generate up to $1.35 trillion of direct revenues per year – all out of the pockets of foreigners. Thanks to increased GDP growth, another $0.15 trillion would come from existing taxes – a total of about $1.5 trillion. As last year’s budget deficit was $1.4 trillion, the MAC might well generate enough revenue to eliminate the deficit and to start reducing the public debt.

Reduce Financial Sector Instability. Swings in interest rates driven by the need to fight inflation contribute to wide swings in asset prices and to the risk of market crashes that hurt all Americans, directly or indirectly. The MAC would sharply reduce such swings.

Reduce Inflation and Recession Risk. (See blog of 2024.01.22 for more on this point.)
Summary. The MAC is a sensible, flexible, easy way to fix some of our most pressing political, social, and economic problems. We need to act now to help all Americans.

To Fight Inflation, Avoid a Recession, and Stop the Coming Budget Crisis, Implement the MAC - Now

                                                                                                            John R. Hansen

Question: Why has implementing the Market Access Charge (MAC) become so urgent?

Short Answer: The MAC, a small charge that would be collected on all money entering America's financial markets from abroad, was originally designed to reduce the excess currency speculation and manipulation. For decades, this has been reducing the value of foreign currencies against the US dollar, making US goods artificially expensive compared to foreign-made goods. Consequently, Made-in-America goods have found it increasingly hard to compete domestically against imports or as exports.  In fact, currency misalignment since the 1970s has been the major factor causing America’s rising trade deficits and debts to foreigners, lost jobs, slowing growth, increased budget deficits, and socio-economic polarization.

Even at a low introductory rate, the MAC would initially generate $1-2 trillion of additional US Government revenues per year, making a major contribution to balancing the US budget, thus reducing the risk that Congress may fail to reach a budget agreement in time to avoid another disastrous Government shutdown. Furthermore, reducing the inflow of over $90 trillion of foreign-source money into America would also make it far easier for the Fed to kill inflation without killing the economy.

How would the Market Access Charge (MAC) work?

The MAC rate, which would probably start at about 1.5 percent (less than half the Fed Funds Rate at the beginning of 2024), would be collected by US banks receiving foreign money transfer orders via systems such as SWIFT. The fee, which would apply at the same rate to all inflows of foreign-source money, would be adjusted periodically to reduce or eliminate the spread between (a) higher US interest rates and (b) the lower foreign interest rates that attract foreign money. Reducing the interest rate spread would sharply reduce the speculative gains that currently attract tens of trillions of foreign-source money into America each year.*1  With the MAC in place, the Fed could set domestic interest rates high enough to control inflation without causing a recession.*2

America needs the MAC more than ever today because it would:

1. Fight Currency Misalignment: By reducing the incentives for foreign countries like China and Japan to buy US dollars and dollar-based assets, the MAC would control the currency inflows that destroy the competitiveness of Made-in-America goods both here and abroad.

2. Potentially eliminate US budget deficits, thus reducing America’s outstanding national debt, and its interest payments on debt. Today, interest payments alone drain nearly two billion dollars per day out of our national budget. Of these payments, about a third goes to relatively wealthy foreigners; the rest goes to relatively wealthy Americans.

Contrary to popular opinion, America’s public debt is not just money we owe ourselves. Before the Fed began “printing money” by incurring the enormous amounts of domestic debt needed to finance COVID stimulus payments, about forty percent of America’s total public debt was owed to foreigners.  In 2022, the average total federal debt burden per U.S. household was $240,000 compared to a median family income of only about $75,000. *3

3. Support urgently needed programs from the national to the local level -- such as improving our national security, infrastructure, environmental protection, and social programs. The MAC could help support existing programs more adequately and to fund new programs without raising taxes or increasing the public debt.

4. Fight inflation with less risk of causing a recession. When the Fed raises interest rates to fight inflation, the spread between average interest rates here and abroad widens, creating an irresistible incentive for foreign speculators to bring their money into America’s financial markets and purchase dollars and dollar-based assets.

These higher interest rates -- the Fed's most visible tool for decreasing inflation -- trigger inflows of foreign money that increase domestic stocks of credit just when the Fed is trying to tighten credit. Consequently, the Fed is forced to raise interest rates even higher, greatly increasing the risk of even larger inflows -- and a recession. In fact, all of the Fed’s major inflation-fighting episodes during the past sixty years have caused a recession.*4  Implementing the MAC would reduce this risk sharply. *5

5. Increase domestic and foreign demand for Made-in-America goods: A more competitive dollar would create at least 3-5 million well-paying middle-class jobs, not only in manufacturing and associated sectors, but also in sectors producing internationally traded products such as agricultural and other natural resource products, as well as services such as movies and other intellectual property.

Some argue that we should not worry about America's manufacturing or agricultural sectors because they are naturally dying sectors -- that we should focus instead on services like hi-tech engineering. However, several real-world realities blow holes in that argument. First, "services" are much harder to ship across oceans than are "goods" and constitute a small share of total global exports. Second, services tend to be highly labor intensive, and developing countries like China and India have a comparative advantage in services because of low wage rates compared to those in America. Third, modern manufacturing, which has been held back in the US by the overvalued dollar's need to compete with undervalued foreign currencies, is actually highly capital intensive and highly productive. Fourth, wealthy developed countries like Germany with a strong current account surplus support their GDP growth and exports with strong manufacturing sectors.   

Creating jobs in manufacturing and other potentially high-tech sectors will become increasingly important as the hundreds of thousands of people who dropped out of the labor force during the pandemic continue looking for jobs again.

6. Trigger real domestic and foreign investments in American manufacturing. Some people wrongly think that imposing the MAC on inflows of foreign-source money would cause a shortage of funds needed to finance critically needed investments in our economy. However, most of the foreign direct investment (FDI) flows into the US last year went into portfolio investments – the purchase of existing financial assets such as stocks, bonds, and derivatives.

Only 3 percent of FDI went into the creation and expansion of real physical capacity that improves America’s productivity, reduces costs and inflation, increases US competitiveness, and triggers more rapid economic growth, higher living standards, increased revenues, and balanced budgets. By restoring the profitability of “Made-in-America” products, the MAC would sharply increase private investments in America, both foreign and domestic. This could even reduce the cost of capital. However, profitability is essential for growth and prosperity, and the MAC is essential for profitability.

7. Far more effective than tariffs in reducing US trade deficits with countries like China. Tariffs can be evaded rather easily with widely known tricks like shipping through third countries, rebranding, and under-invoicing. In contrast, evading an exchange rate is virtually impossible. Furthermore, the MAC would generate about ten times as much Government revenue per year as import duties currently do. In fact, the MAC would generate enough revenue to eliminate budget deficits initially and to begin paying down our national debt with no increase in taxes on Americans.

8. Reduce America’s debt service burden. Implementing the MAC would increase the Government's ability to invest in high priority programs such as skills training, childcare, green energy, and other initiatives that would improve the quality of life for the average American family and increase America's productivity without increasing the public debt.

9. Increase economic growth. The MAC would stimulate domestic production and exports while reducing our excessive dependence on imports. With the MAC in place, America could roughly double its current rate of economic growth.

10. Put America back onto the path to the American Dream – the dream of sustained economic growth based on rising productivity, not rising debt, with benefits shared more equitably by all Americans. The MAC could rebuild a country where people are no longer economically, socially, and politically polarized – a United States of America where Americans are truly united.

The MAC, which is fully legal under US and IMF rules, could be implemented in a matter of weeks by legislative action or by the President under the International Emergency Economic Powers Act (IEEPA). No new administrative structures would be needed. Existing US correspondent banks would simply be directed to (a) collect the MAC as a routine part of processing SWIFT and similar international payment orders and (b) immediately send the proceeds minus a modest processing fee for the bank to the US Treasury. As a single MAC rate would apply to all inflows, no additional time or skill would be required for processing at the border.

The Urgency of the MAC Today

Congress has recently kicked the budget deficit can down the road -- again.  Solving the problem would have been far superior, but delaying government shutdowns is at least better than causing shutdowns and causing the Governments' borrowing costs to rise. 

This delay gives Congress time to approve, implement and begin running a fully functional Market Access Charge. In addition to helping to prevent another recession and to restoring economic growth based not on rising debts but on rising competitiveness with benefits widely shared throughout America, a Market Access Charge would lay the foundations for eliminating the US budget deficit without raising taxes on American residents. This should allow a good compromise to be reached across the aisle in time to avoid a truly destructive crisis.

The time to act is NOW.

John R. Hansen, PhD
Founding Editor, Make America Competitive Again
January 22, 2024 

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Notes:

1. To simplify administration, to maintain a level playing field, and to help prevent tax evasion, a single MAC rate would apply to all inflows at any point in time regardless of the source, origin, destination, purpose, or of the currency involved.

However, the MAC tax would be refunded upon proof that the incoming funds had directly and traceably been used to pay for US exports or to complete construction of productive physical investment projects in the United States – much as VAT countries refund VAT paid on exported goods, for example.

2.  By making it possible to maintain a domestic monetary policy including the Fed policy rate, the MAC would make it possible to break what has for been known for decades as the “impossible trilemma.” The MAC would make it possible for America to maintain an independent monetary policy, balanced trade, and free cross-border foreign currency flows unfettered by quantitative restrictions.

 3.  At the margin, the US Government was covering up to 100 percent of its net annual borrowing needs from foreign rather than domestic sources.

 4.  It is worth noting that, on average since the late 1960s, recessions have started about five months after the Fed starts reducing interest rates and on average have then run for 11 months with the shortest lasting 2 months and the longest three lasting 16-18 months.

5.  Note that only two or three percent of foreign-source money coming into America today is used for investments that create new productive assets. The remainder is used for various forms of financial speculation. The concern expressed by some that the MAC would reduce the money available to finance new productive investments in America is nothing but a myth.

In fact, if made-in-America products once again became internationally competitive thanks to the MAC’s establishment of a current account balancing exchange rates for the dollar, much of the foreign-source money now entering America’s financial markets would be used for real capital investments rather than for speculative casino capitalism. This would probably lower the cost of capital for real investments in America. By extension, the growth that the MAC would stimulate would generate more tax revenues with no increase in tax rates on American residents.

America Needs a Competitive Dollar - Now!

Fight Inflation and Recession More Effectively with the MAC and Balance the Budget

Why is it so hard for the Fed to kill inflation without killing the economy? Could the Fed improve the efficiency of its inflation fighting and avoid causing recessions? Could it do so in a way that balances the budget, helping us avoid a major default? Yes. This may sound like Mission Impossible, but with a small policy tweak, the Fed could do all of this plus fulfill its mandate of economic growth with stable prices more successfully, and brighten the future for all Americans.

Each of America’s ten recessions since the late 1950s has been preceded by inflation and significant increases in the Fed Funds Rate (FFR). The obvious cause of the recessions is that higher interest rates and tighter credit increase costs and thus reduce demand for Made-in-America goods. This reduces output from US producers and thus growth. By increasing the cost of doing business, higher interest rates force businesses to reduce output and fire workers, leading to recessions.

True, but recent research indicates that these explanations ignore some key challenges facing the Fed in today’s highly financialized world. In particular, when the Fed raises the Fed Funds Rate, this increases the spread between American interest rates and those abroad, triggering massive flows of foreign-source money into America via speculative carry-trade.

Some $90 trillion worth of foreign-source money came into America’s capital markets last year – about four times GDP! Most of this money was used to buy dollars and existing dollar-based financial assets -- not to finance new real investments in productive projects that will increase our nation’s well-being. Furthermore, increased spreads make inflation and recession risks worse for the following reasons.

 
Inflation: By increasing the stock of capital in the United States, inflows of foreign-source money dilute the Fed’s efforts to reduce the availability and increase the cost of capital. This makes it harder for the Fed to control inflation. Also, excessive stocks of domestic credit tend to reduce the Fed’s ability to get banks to raise their on-lending rates by normal margins.

Recession: Excess capital inflows increase the risk of recessions. Because these inflows undermine the Fed’s policies, the Fed must raise interest rates repeatedly to kill inflation. As noted above, however, higher rates reduce the demand for Made-in-America goods and increase production costs. As demand shrinks, productivity drops, and recession risks rise.

Furthermore, when foreign speculators bring excess money into America to buy dollars, they raise the dollar’s exchange rate. This makes foreign goods cheaper than those produced in America, thereby destroying demand for American products both here and abroad. US producers find it increasingly difficult to compete with foreign-made goods and may well have to go out of business. Ironically, some US officials support shifting demand from American products to cheaper foreign products because that might reduce inflation. Never mind the Americans impoverished in the process or the added debt.

Solution: The Fed’s traditional inflation-fighting tools can be made more effective by moderating inflows of foreign money. This can easily be done by collecting an entrance fee in the form of a market access charge (MAC) on capital inflows. Taxing away away the spread that is driving inflows of foreign-source money will moderate the inflows to levels consistent with America's need for real as opposed to speculative capital. 

If we assume an average spread of 2% and take the $90 trillion used to purchase “long-term” securities in America last year as a very conservative estimate of total gross inflows, the MAC would have generated $1.8 trillion of new net government revenues last year – all out of the pockets of foreign speculators.

Budget Balance: Such revenues would have fully covered the $1.4 trillion deficit for FY2022 with $400 billion left over to support important services, cut taxes, and pay down the national debt. The ability to reduce the number of Fed interest rate increases would lower the cost of borrowing for the Government. Implementing the MAC tomorrow might not save America from defaulting on its debt this year, but doing so would greatly improve America’s fiscal position, sharply reduce the risk of a recession, stimulate economies of scale, reduce inflation, and reduce America’s growing debt.

America Needs a Competitive Dollar - Now!

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Fighting Inflation and Recession Efficiently with a Market Access Charge (MAC): Administrative Details

Lessons Learned from America's Ongoing Crisis: The Fed has been raising interest rates to control inflation, but it also needs to moderate the inflows of foreign capital because these inflows tend to make the Fed's efforts to control inflation less effective. Without inflow moderation, the Fed's policies will continue to increase the inflation it seeks to reduce. This forces the Fed to raise rates even higher, increasing the risk of another recession. 

Widening cross-border spreads between foreign and US interest rates plus anticipated appreciation of the dollar are the primary factors that stimulate excessive inflows of foreign-source money, all other things being equal. The solution therefore lies in breaking the link between rising interest rates in US markets (which are driven up by increases in the Fed Funds Rates) and the interest rates that foreign speculators can earn in America’s financial markets. In short, the Fed needs stop increasing the spread between US and foreign interest rates. 

If the Fed can break this link, it will simultaneously put an end to foreign speculators' anticipation of further dollar appreciation, another major factor that drives excessive inflows of foreign money. Breaking the link would greatly reduce the risk of a recession in the short term, and in the longer term, enhance US competitiveness, output growth, and job creation while reducing government budget deficits and the public debt.

The Need for Immediate Action

Given current trade deficits, budget deficits, inflation, and employment issues, the urgency of moderating foreign capital inflows could not be more clear.

Incidentally, almost none of the incoming foreign capital is used for "real" investment in real factories, roads, and other infrastructure; virtually all of it is used to purchase existing financial assets.

To moderate these excessive inflows, the Fed should introduce an "entrance fee" or market access charge (MAC) on all foreign capital inflows. The charge would act like an import tax on the unwanted foreign capital inflows that damage and distort the American economy. 

The charge would initially be set at a rate equal to today’s spread between the Fed Funds Rate and the average policy rate of the central banks of countries contributing most heavily to the current flows of capital into the United States (e.g. Great Britain, the Eurozone, and Japan). This would eliminate the cross-border interest rate spread that currently draws tens of trillions of dollars of largely speculative capital into America from abroad each year.

Administration: When the FOMC decides that domestic inflation is getting out of hand and needs to be controlled, the Fed staff would do the same analysis that they currently do to support decisions of the Federal Open Market Committee (FOMC), and the FOMC would continue to use its traditional interest rate and QT tools in the traditional manner.

However, once the FOMC decided to increase the lower and upper bounds of the Fed Funds Rate, it would simultaneously announce that the MAC rate has been raised by the same number of basis points. This simple announcement, with no additional analytical work by Fed staff, would prevent creating or increasing a cross-country spread that would otherwise attract more foreign money into America’s already sated capital markets. 

By doing so, the MAC would greatly reduce upward pressures on the dollar’s exchange rate, thereby increasing the competitiveness of American industry and all the benefits that will flow therefrom.

Collection: How would the MAC be collected, you may ask. Very simple. Virtually all significant foreign capital flowing into the United States enters via an international payments system such as SWIFT and is received by a correspondent bank located in the United States. Such banks, which must already file reports with the US Treasury, would simply deduct the amount of the MAC from the incoming payment order, and send it electronically to the US Treasury as part of the transaction process. The remaining funds would be deposited as always in the US bank account of the designated recipient. 

Summary: By eliminating today’s incentives to dump unwanted, damaging foreign capital into America’s financial markets, the MAC would make the Federal Reserve’s Fed Funds Rate (FFR) and Quantitative Tightening (QT) far more effective. It would also reduce or eliminate the overvaluation of the dollar that (a) destroys US growth, jobs, and factories, (b) increases government deficits, public debt, trade deficits, and debt to foreigners, and (c) increases the risk that controlling inflation will cause a recession and will make it harder for America to recover from a recession.

Greater effectiveness of the FFR and QT would reduce the need for the Fed to keep raising the Fed Funds Rate or to sell even more of the Fed’s balance sheet assets to soak up money from America's financial markets. By helping move the dollar to a more fully competitive, trade-balancing rate, the MAC would gradually allow made-in-America goods to become fully competitive domestically against imports and as exports to foreign markets. With less monetary tightening, US businesses would be able to obtain the operating capital they need to respond to the demand created by a more competitive dollar. This would gradually eliminate US trade deficits, and and it would trigger new investments that increase US productivity and efficiency, thus lowering inflationary pressures.

In short, the "entrance fee" or excise tax on foreign capital inflows established by the FED would require no additional analysis by Fed staff and  would significantly increase the Fed’s ability to fulfill its dual mandate from Congress – to keep prices stable by fighting inflation, and to assure maximum feasible domestic employment. At the same time, the MAC would greatly reduce the risk of recessions or worse, allow America to recover more quickly from the pandemic, and help our nation attain the American Dream of steady, sustainable growth with benefits widely shared by all.

And as a side benefit, the billions of dollars that would be collected with the MAC charge could be used to reduce or eliminate US budget deficits, reduce inflation-generating borrowing to finance these deficits, reduce our national debt, and help finance important investments in the future of our country – all with no increase in taxes on Americans.

 

America Needs a Competitive Dollar - Now!