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 

______________

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!