In his most recent column in the Washington Post George Will gets one of the important economic lessons right:
If there is going to be growth-igniting tax reform — and if there isn’t, American politics will sink deeper into distributional strife — Brady will begin it. Fortunately, the Houston congressman is focused on this simple arithmetic: Three percent growth is not 1 percent better than 2 percent growth, it is 50 percent better.
If the Obama era’s average annual growth of 2.2 percent becomes the “new normal,†over the next 50 years real gross domestic product will grow from today’s $16.3 trillion (in 2009 dollars) to $48.3 trillion. If, however, growth averages 3.2 percent, real GDP in 2065 will be $78.6 trillion. At 2.2 percent growth, the cumulative lost wealth would be $521 trillion.
and that is the power of compound interest. Small differences over time can make an enormous difference. But he fluffs the other:
Trump, who works himself into a lather because Nabisco is making some Oreo cookies outside the country, is obsessed with the United States’ trade with China. “We’re going to get Apple to start building their damn computers and things in this country,†he says, aiming to raise the price Americans pay for Apple products that today are assembled in China, which, according to trade attorney Scott Lincicome, makes about $6 by assembling an iPhone from parts (many of which China has imported).
Trump favors a 45 percent tariff to protect customers of Walmart and similar retailers from the onslaught of inexpensive Chinese apparel, appliances and food. He can explain the glorious privilege of paying taxes-as-tariffs when he makes his next visit to a Walmart, perhaps the one in Secaucus, N.J., just seven miles from his Fifth Avenue penthouse.
which is absurd. If you make the tariffs on bringing iPhones into the U. S. from China high enough, it won’t result Apple paying huge tariffs and increasing the price of an iPhone by 45%. Using Mr. Will’s figures, Apple nets about $6 per unit by assembling iPhones in China. According to IHS as cited at Forbes it’s more like $8.
The price of an iPhone is about $300. I don’t think increasing that price by $8 will result in any lost sales for Apple but imagine that it would. What would it be? 1%? Raising those tariffs will result in Apple assembling iPhones here rather than in China.
That would mean an extra $2 billion in wages that would go to American workers rather than to a handful of people who own a lot of Apple stock. Those people are already multi-millionaires. I honestly don’t care whether they divvy up that $2 billion among them or not. Overwhelmingly, they won’t take that 2 bil and invest it in more U. S. plants which would create U. S. jobs. They’ll invest overseas (creating jobs there) or in financial assets which creates practically no jobs.
So here’s the other lesson: what is done with the money derived from trade matters. When the factors of production are themselves transportable (as is overwhelmingly the case today) comparative advantage no longer applies. Only absolute advantage does.
We shouldn’t care about gross domestic product. We should care about median income.
Compounding also applies to the interest that is financed to service debt. In a credit based monetary system, the aggregate debt must continuously be replaced, and the interest is rolled into the back of the new debt. This is why those who supply the credit will always make money. In reality, they actually create money, and the rich will always get richer.
The only way to stop the rich from getting richer is to confiscate their assets, but compounding will allow even the smallest financial asset to grow faster than its surrounding medium.
Government backed, credit based fiat money is like nuclear energy. It is mostly really, really bad, but it can be useful if handled properly. It can be used to generate electricity, for medical applications, and to build explosives. While explosives are usually destructive, they can be constructive when used properly.
With nuclear applications, the government has retained exclusive use of the explosive capability, and commercial use of the other applications is regulated. If nuclear were like our monetary system, construction companies would be able to use nuclear explosives rather than TNT to collapse buildings, bridges, etc., and they would be able to dig holes using nuclear explosives. If the analogy were to hold, the nuclear industry would need to be lightly regulated.
In this environment, it would not matter how responsible the government handled its nuclear explosives. Its arsenal would be minimal compared to the larger industry. Any environmental damage would be long term. With light regulations, the private sector would create numerous new products either using it in manufacturing or as a component of the final product.
None of this would require any conspiracy or special cabal of nuclear bankers. It would occur as a natural progression of events, and the country would slowly stair-step up becoming contaminated. It would start at the bottom and silently work up. Each new group defends the status quo until their hair and teeth began falling out.
Median income AND employment.
Steve