What Explains America’s Fifty Years of Trade Deficits and Job Losses to Foreign Countries?

The United States had reasonably balanced trade for about 70 years from the turn of the 20th century until the OPEC oil crisis in the 1970s when it began suffering increasingly regular trade deficits. These deficits have grown over the last 50 years to the point that, in recent years, America has sometimes accounted for up to 60-70 percent of all bilateral trade deficits in the world.  Why did this happen? 

By definition, trade deficits indicate that a country's exchange rate is overvalued. Yes, a trade or current account deficit of up to roughly 3% of GDP may be “sustainable” if the country is growing by 3% per year and debt service costs are not rising; in such cases, the outstanding debt will not rise as a share of GDP. However, for reasons that go well beyond the scope of this note, such trade deficits are rarely desirable. In any case, if there is a trade deficit, the currency is by definition overvalued with respect to the rate that, all other things being equal, would produce balanced trade. Thus, the question to be answered here is this:  Why has the US currency been overvalued for about 50 years?

Changes in Exchange Rate Systems

The simple answer is that, because of the dramatic change in the early 1970s in the way exchange rates are determined, the dollar's exchange rates for the past 50 years have had little or no connection to the dollar exchange rates needed to balance American trade.

• Gold Standard: Until the 1970s, exchange rates were generally fixed in terms of currency units per ounce of gold. For example, an ounce of gold from 1934 to 1972 was priced at $35. 

• As explained by the Scottish philosopher-economist David Hume in the late 1700s, with the gold standard, domestic prices adjusted automatically to maintain balanced trade. When a country ran a trade deficit and started running out of gold, the domestic money supply would shrink, a recession would be triggered, and domestic prices would fall. This would make the country's exports more price-competitive internationally and make its imports more expensive relative to domestic products. The country’s trade deficits would naturally shrink, and trade would rebalance. 

• Floating Exchange Rates: After the gold standard was abandoned in the early-1970s, the world went from fixed to floating exchange rates. Since then, the dollar’s exchange rate has been determined by the global demand and supply for dollars in the world’s foreign exchange markets.

This means that, since the 1970s, exchange rates for the dollar have been set, not by the balance between imports and exports as in Hume’s time, but rather by the world’s for-profit, speculative forex markets. 

Further evidence that exchange rates are now set by speculative currency trading is the relative size of the global markets for real goods and services compared to the size of global foreign exchange markets as shown in the chart below, which is based on data from the Bank for International Settlements (BIS).  The change has been truly dramatic. 

Less than 40 years ago, forex market turnover per year was “only” twenty times the size of foreign trade turnover in goods and services. Today, with the increasing financialization of world trade and the hourly speculation in currencies, the forex transaction volumes have been running eighty to ninety times real export/import transactions. 

This demonstrates beyond doubt that the largest factor determining exchange rates today is transactions in private for-profit forex markets. The solution to our trade deficits thus lies in moderating the casino-like flood of money into America's forex markets. 

Furthermore, the global demand for dollars and dollar-based assets is greatly increased because of the facts that the dollar is the world’s premier currency for (a) invoicing and settling international transactions, (b) providing an “intermediary” currency for forex transactions involving non-standard currency pairs, (c) accessing America’s exceptionally strong/deep/liquid/broad financial markets, and (d) holding financial reserves— especially in times of turmoil. These factors driving excess demand for the dollar means that the dollar's exchange rate set in forex markets is inevitably higher than the exchange rate that would balance real US imports and exports. 

Thus, for many reasons, the dollar is almost always overvalued and, as a result, America almost always has major trade deficits that reflect lost opportunities for growth. 

For example, if the trade deficit was three percent and we reduced it to zero from one year to the next by increasing exports and by replacing imports with globally competitive domestically-produced goods, GDP growth would increase by roughly three percentage points. In reality, the change would probably take several years so the annual boost to economic growth would be less, but the principle is the same. Regardless of what some people may say, trade deficit drags on growth are a reality.

Unfortunately, this is seen in America’s growth rates since the trade deficits began in the 1970s. Over the past 50 years, average economic growth in America has slowed by about half.

Even more important are the hidden costs of our trade imbalances such as lost jobs, lost family incomes and lives, lost communities, and lost lines of production due to offshoring. With our needless trade deficits and budget deficits caused to a significant degree by the overvalued dollar, we are literally living beyond our means and stealing from future generations in the process.

The MAC can fix these problems because it would restore balanced trade for America. 

America Needs a Competitive Dollar - Now!

The Market Access Charge Can Create a Competitive Dollar and Fix US Economic Problems Now

The rising value of the U.S. dollar on foreign exchanges has generated anxiety in the global financial community, foreign governments, and the media. Reports suggest some of Donald Trump’s campaign advisors are considering ways to devalue the dollar should Trump triumph in November’s election. Commentators at the Washington Post and the New York Times quickly reacted to those reports, calling such policies quackery and “economically destructive.”

However, there is one way the U.S. Government could engineer a gradual adjustment in the value of the dollar that would boost the domestic economy without any of the dangers that worry the media pundits. That solution is called the Market Access Charge or MAC.

The MAC is an innovative, internationally legal, centrist economic policy based on solid economic principles that would solve many of America’s key problems today.

The MAC was prepared by experts from the Coalition for a Prosperous America (CPA), the Economic Policy Institute (EPI), the Peterson Institute for International Economics (PIIE), and the World Bank (IBRD) working together in their personal capacities for a better America.

The legislation for the MAC that they created was presented to the US Senate on a bipartisan basis in 2019. Their proposal has received favorable commentary from many including, for example, the American Compass, the Coalition for a Prosperous America, the Reshoring Initiative, the Wall Street Journal, and the Washington Post. Furthermore, in his most recent book, former USTR Robert Lighthizer noted the MAC as one of the most promising ways to solve our trade deficits and many associated problems.

Unfortunately, some of America’s key trade policies today are based on the implicit assumption that exchange rates are still determined as they were over 200 years ago when the Scottish philosopher David Hume explained the mechanism by which exchange rates were determined in a way that created a strong link between exchange rates and balanced trade.

However, with the demise of the gold standard, and with the emergence of global foreign exchange markets with 80-90 times the turnover of global markets in real goods and services, the link between exchange rates and balanced trade has been lost.

Today, America needs a policy to restore the link between exchange rates and balanced trade.

The urgency of this need is seen in the following: Compared to the US dollar, the currencies of China and Japan are now 40-60 percent cheaper than they would be if the yuan and yen were set at trade-balancing levels. As a result of exchange rate distortions like these, we Americans spent nearly one trillion dollars more on imports in 2022 than we earned producing exports.

By destroying the competitiveness of America-made goods both here and abroad, today’s distorted exchange rates have also created trillions of dollars of debt that our children will have to repay. In fact, our net debt to foreigners is currently almost $20 trillion dollars – over 70% of GDP.

Excessively cheap foreign currencies relative to the dollar are also the key source of related problems including millions of lost jobs, tens of thousands of closed factories, economic growth that on average has slowed by half since the 1960s, lower tax revenues, and higher government expenditures to support our factories, farms, banks, and workers who are suffering as a result of trade deficits.

The MAC would fix these serious problems by collecting a small charge of about two percent on the excessive inflows of foreign-source money. This small charge would be just enough to eliminate much of the average gap between the low interest rates abroad and the higher interest rates in America. By taxing away the difference between US and foreign interest rates that drive largely speculative inflows, the MAC would keep inflows of foreign-source money consistent with our real need for foreign capital.

The MAC would also allow the Federal Reserve to maintain higher domestic interest rates when needed to fight domestic inflation without stimulating the massive inflows of foreign-source money that today are undermining its inflation-fighting efforts and risking yet another recession.

The sooner the MAC is approved, the sooner it can begin to help fix these and the following problems facing Americans today. In sum, implementing the MAC will:

·        Accelerate economic growth by eliminating the current trade deficit drag that reduces our GDP growth rate.

·        Restore millions of middle-class jobs for Americans who have lost their jobs because of made-in-America goods that can no longer compete with imports because of the artificially cheap currencies of countries like Japan and China.

·        Reduce income inequality and socio-political fragmentation by giving more Americans the opportunity to earn middle-class incomes.

·        Increase tax revenues by hundreds of billions of dollars per year – all paid by foreign speculators, not by Americans.

·        Make the Fed’s efforts to fight inflation more effective by discouraging excessive
inflows of foreign-source money – inflows that increase domestic credit availability just when the Fed is trying to tighten credit.

·        Reduce inflation by increasing the efficiency of making goods in America, by increasing domestic competition by keeping more US businesses in operation, and by reducing the Government’s need to print money to help failing banks, companies, and families who have lost their jobs.

·        Reduce the $3 billion dollars per day that the Government spends on interest payments.

·        Sharply reduce the US budget deficit and start reducing our huge outstanding public debt.

·        Finance urgently needed government investments in physical and social infrastructure – without raising domestic taxes.

·        Support the development and production of advanced technology goods in America, including the equipment and products needed to meet our environmental goals, to enhance our international security, and to improve our health at more affordable costs.

Implementing the MAC as soon as possible will help prevent our outdated international trade and currency policies from tanking our economy and the country we love

John R. Hansen, PhD
International Economist
World Bank Economic Advisor (retd.)

Alexandria VA
June 24, 2024

 

 

America Needs a Competitive Dollar - Now!

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.

4/8/2024

________________________________________

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!