Mitchell’s Musings 10-24-16: Who Will Re-Invent Buffett’s Wheel First?

21 Oct 2016 11:47 AM | Daniel Mitchell (Administrator)

Mitchell’s Musings 10-24-16: Who Will Re-Invent Buffett’s Wheel First?


Daniel J.B. Mitchell


As numerous past musings have noted, back in the 1980s – when the U.S. trade deficit became particularly marked - financier Warren Buffett in a Washington Post op ed proposed a system to force balanced trade by means of a cap-and-trade type system.[1] Essentially, exporters would receive vouchers for each $1 of goods and services exported from the U.S. The vouchers would entitle the holder to import $1 of goods and services. The voucher could be exercised by the recipient or sold to someone else. Trade would become balanced since the value of exports would equal the value of imports.[2]


At the time, the trade villain de jour was Japan which tended to follow mercantilist trade policies. But the Buffett system would not involve Japan-bashing by the U.S. since it was non-discriminatory as to the target of exports and the source of imports. A side effect, however, of the Buffett plan is that all countries wishing to export to the U.S. would have reason to put pressure on any country that sought to advantage its exports artificially through currency manipulation or other means.


Today, the villain de jour is China but the argument for the Buffett plan remains the same.


Despite the cogency of the Buffett proposal, it was never taken seriously by the folks Paul Krugman calls “Very Serious People.” Indeed, among those VSPs was (is) Krugman himself. The Buffett plan was easy to dismiss as “protectionist” or simply as an idea that didn’t come from a professional economist.


The trade issue has made it back into the public conscious thanks to the presidential election campaign. Bernie Sanders raised the issue on the Democratic side, but – of course – he did not become that party’s candidate. Donald Trump raised it on the Republican side and did become the GOP nominee. Exactly what Sanders would have done if elected about the trade issue was never clear (to me). Trump says he would make better trade deals and somehow address currency manipulation. I don’t find that approach to be much clearer than Sanders’. The only comprehensive proposal anyone has ever advanced is Buffett’s.


I have noted in past musings that bringing U.S. trade into balance would not restore some manufacturing golden age of job opportunities. Thanks to rising productivity and technological change in manufacturing, we are not going back to an era where manufacturing stood in its share of employment circa the 1950s and 1960s. But balanced trade would make the current manufacturing sector bigger by, say, 15-20% than it currently is. And that impact would provide some immediate relief to the displaced workers who are currently in play in terms of political affiliation. It would do so in ways that alternative proposals aimed at that group for such benefits as free community colleges – which seems to be the remedy of choice among the VSPs – can’t hope to do.


At this writing, polls indicate that Hillary Clinton is the likely victor in the 2016 presidential campaign – not because of her trade policies, but because of being the not-Trump candidate. So now the question arises: In the political outfall that is likely to occur post-election, which party will reinvent Buffett’s wheel? Or will the issue Buffett was trying to address three decades ago remain unaddressed?


There is already some indication that remedies to achieve balanced trade will be on the Republican agenda, in order to retain the disillusioned workers who were attracted to Trump and who might at one time been Democrats.[3] The VSP view – “those jobs are not coming back,” “protectionism,” “education is the key,” etc., that predominate on the Democratic side – is not going to be attractive to anyone except those who are stuck with such phrases. It’s up for grabs.

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[1] Warren E. Buffett, “How to solve our trade mess without ruining our economy,” Washington Post, May 3, 1987, p. B1. Available at: https://drive.google.com/open?id=0BzVLYPK7QI_4NmYyOGQzYzQtMWU1MC00MDEwLWI0ZGUtMzYxYmM2OTY5NjMz 

[2] There would be some administrative issues regarding such services as tourism, verification of values of exports and imports, etc., as there are with any system.  

[3] https://www.buzzfeed.com/bensmith/saving-gop-for-capitalism

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