Tariffs versus Capital Surplus

"Trump is Completely Wrong on the Trade Deficit." Let Levin, Sowell, and Friedman Explain. In this interview, Melton Friedman claimed that "deficits are not bad. What's not to like about a capital surplus." In his book Arguing with Zombies, Paul Krugman, a Nobel Prize economist, said, "An end to trade deficits? That's not something trade policy can or should do." The surplus profit earned through cheap foreign labor seeks the most profitable place to go. As the safest and most profitable option, that capital surplus lands in the US stock market. What's not to like about a capital surplus? That fondness intensifies with any threat of it going away, but why would tariffs be such a threat? Scott Bassett, US Secretary of the Treasury, on CNBC's Squawk Box, 4/8/25, said, "If we put up a tariff wall, the ultimate goal would be to bring manufacturing and jobs back to the US. In the meantime, we will be collecting substantial tariffs. As I said, if we are successful, tariffs would be a melting ice cube. You are taking in the revenue as the manufacturing facilities are built in the US. There should be some symmetry between the taxes we began taking from the new industry as the tariffs declined." There is more to it. Besides the national security vulnerability created by the loss of manufacturing, Melton Friedman's capital surplus made billionaires out of the dwindling wealth of our middle class. That concentration of wealth threatens the economy with depression, war, revolution, and migration. Tariffs now pose an equal challenge to the US and foreign equities markets, a conundrum. Wall Street is reacting with the most violent volatility in memory. To understand why, let's look more closely at where the money goes. These macroeconomic capital flows are in the trillions. "Thomas Piketty, in his book Capital, 2014, with five hundred years of economic history, captures the mechanisms by which wealth accumulates in the hands of the winners. Capital finds investments that grow faster than income, thus creating instability. Furthermore, sequestered capital no longer churns in the mainstream economy, so the disparity grows. Piketty's history paints a fair description of today's oligarchy, critical in much the same way. Ray Dalio describes the economic cycles. Debt accumulates in predictable short-term and long-term waves. As the debt becomes unsustainable, a recession accompanies the reduction of debt. He further points to the far less predictable long-term crash resulting from an excess concentration of wealth. In Monopoly, three hotels on boardwalk, one winner, game over. In the 1992 presidential campaign, Ross Perot illustrated the drain deficit trade placed on working America. His view did not prevail. In their book Macro Economics (1983), T Francis Creek and Wayne Godley outline the formula by which trillion-dollar capital displacements accrue between government, trade, investments, and the private sector. Wall Street and Main Street look at the elephant from two different ends. Wall Street views capital surplus as manna from heaven, whilst Main Street feels it as a shot in the gut. The question here is why, how, and what does deficit trade or tariffs have to do with it? In his blog on NYT, Paul Krugman describes the deficit trade between states within the US. He shows surplus capital in deficit states and not in the exporting states. How can that be? The money follows the profit like Colonialism. With equal trading partners, companies are free to go where resources are most favorable, and employees can choose employment where their specific skills are most needed. Adam Smith called it a division of labor and the magic hand of free choice. The efficiencies are apparent, as in the Industrial Revolution and the freewheeling finance and innovations of Corporate America. The magic hand of free enterprise is not free of abuse, however. How can we referee fair practices without overregulating? Ideally, capital remains in production on a level playing field with less accumulating as surplus. But that's another argument. From the street, deficit trade means we lose money. That perception looks valid in the reality of stagnation. There is no question that deficit trade brings lower income to half of America, including most of the private sector. Deficit Trade for the supply side, however, here and abroad, means greater profit and enthusiastic investing. Those who benefit directly invest in the market and in people to keep it that way, to legislators, bureaucracy, media, and educators. Two entirely different realities split our country right down the middle. Deficit trade among equal trading partners with free movement of labor capital and industry works well. Productivity on the demand side offsets the sequestration of Capital surpluses in a growing economy. The financial reports from the Bureau of Economic Analysis (BEA) show the trillion-dollar money flows. These BEA numbers, the inflation, the somnolence on Main Street, and the behavior of the Stock Market confirm the following. The macroeconomic analysis of Godley and Cripps frames the money flows and the balance between trade, private savings, investment, and government spending. First, in the trade deficit with China, If this imbalance of goods and services were to increase from half a trillion to a full trillion, that increase would result in an increase in consumer debt, a flood of investments, and a government budget deficit totaling half a trillion. The balance remains intact. The investments amount to the capital surplus that Friedman was so fond of. Let's pretend that tariffs can cut the trade deficit with China from a trillion dollars a year to half that amount. The above capital flows would reverse. First, the stock market anticipated that decreased investment liquidity would fall. Second, treasury revenue from tariffs would increase. Third, consumer and supply shortages would lead to disruptions and demand for replacement. Fourth, with some delay, local production rapidly increases to meet demand. Fifth, employment and income will grow along with personal savings. Can tariffs accomplish such a reversal? Can the public hold tight until they see results? The Godley and Cripps equation is S + (im-ex) = Inv + (gs-tr). Their acronyms will drive you crazy but put it in words. S, savings im, imports ex, exports Inv, investments (capital surplus) gs, government spending tr, treasury revenue Without documenting these capital flows to the same degree as the Chicago School of Economics or Thomas Piketty's meticulous economic history, there is no way to prove that history will play out as this sectoral balance equation suggests, but let's see what a tariff might do to the balance. With the understanding that the goal is to bring back manufacturing, jobs, peace, and prosperity, the tariff on China will cut the trade deficit by 20% or about 200 billion. We already see what the stock market did and how loud some more vulnerable corporations and banks complain. Suppose some portion of that deficit reduction goes to savings and or reduces government spending. That sounds like decreased inflation and increased earnings, more jobs. It also sounds like retrenching and misery for companies dependent on imports. How does a tariff work? For example, some 20 years ago, I did the logistics for a small us coffee company, fair trade, buying from indigenous mountain towns in Guatemala and elsewhere. We were importers of coffee and coffee bags. The bags were as challenging as the coffee. There was only one bag manufacturer in the US. His name was Oliver. His factory was in Oregon. His prices were about three times those of a firm in China, state-financed and sponsored with the latest in automated manufacturing equipment, packaging, and shipping. Coffee bags were available in Guatemala City, too. They were from India. The cost and excise tax were of a similar price. The purchase and shipping from China were as painless as Amazon, but when the product reached the port in San Francisco, the only available customs broker was China. They owned the docks and all the brokers. You can't do it yourself. You have to use a broker. The broker has a warehouse and receives the shipment. He collects government fees and tariffs from the importer before releasing imported items to the importer. The importer must coordinate further shipping arrangements with the brokerage. We did not have a tariff on coffee bags, but the broker did not have the least cost, which was more than the coffee bags. Shipping the bags to Guatemala required a much more reasonable customs broker, with some shortcuts because our product was for the endogenous, but we paid an excise tax on top of an added value tax. My point is that the importer pays the tariffs, added value, and excise taxes. That cost passes to the retailer, but nothing changes the supply and demand formula. A customer has the final say to buy, not buy or go elsewhere. So long as the product is not a monopoly of an essential item. International trade is good, but bad trade agreements are not. The trade policy resembles Colonialism and the East India Company when we outsource services and manufacturing. The fifty years of extreme deficit trade with China reminds me of the sequestration of wealth and the squaller of the Industrial Revolution. The rich get richer, and the poor get poorer. . It is clear why and how a trade deficit raises a capital surplus. It is less apparent why and how trade deficits or surpluses affect personal savings. So much so that most commentators call tariffs a tax on the consumer, but the tax is actually on the producer, not the customer. Small businesses that depend on lower-cost imported packaging, customer support, and parts also suffer. However, increased local demand inevitably leads to greater local production, more jobs, and heightened economic activity. The fact is that any purchase of a foreign-made product eliminates the potential productivity of those dollars in the US while giving the equivalent productivity to the producing country. These dollars would have otherwise circulated within the US local economy, multiplying the regional gross domestic product (GDP). Think of the GDP as the product of the money available times the number of times that money turns over in the economy in a given time. The St Louis Federal Reserve reports that turnover is velocity. Thus, velocity times money supply (M1 or M2) equals GDP. On Main Street, cheap goods from China mean the loss of jobs, savings, and participation in the economy's productivity. If tariffs reverse the nearly trillion-dollar capital shift caused by deficit trade, even partially, capital should flow back to consumers, restoring their savings and dignity. These benefits will occur by money not leaving and through new jobs, better pay, and lower inflation. By reducing debt, the government lowers interest rates. With less debt, fewer bonds will be in the market, leading to higher bond values and lower bond yields. As Scott Bassett, SOTUS, stated, the goal is manufacturing, jobs, and reciprocal trade. Progressives might embrace wealth redistribution, which could avert a major depression or war. An unstated goal might be recovering middle-class wealth at the expense of the wealthier investment class and corporations that earned excess profit through outsourcing. From a liberal perspective, this amounts to redistribution of wealth—a Keynesian solution. Will Rrogers, a comedian and philosopher of a bygone era, commented, "The money was all appropriated for the top in the hopes that it would trickle down to the needy. Mr. Hoover didn't know that money trickled up. Give it to the people at the bottom, and the people at the top will have it before night, anyhow. But it will at least have passed through the poor fellow's hands." The fact that approximately forty percent of the population works for the government at some level carries a significant burden on the productive half of the economy as well. From a practical view, returning many government employees to the private sector will increase productivity and do more for productivity than massive immigration ever could. While this apparent shift does not bear on the effects of tariffs, it does come at an opportune time, reinforcing the expected rapid growth in local business and employment demand based on the shortages produced by tariffs. Change is upon us. Both war and depression pose further risks. A new administration seems willing to risk change and adapt along the way. It is strong and decisive leadership, whether you like it or not. What we started from was unsustainable. National security alone must drive the return of manufacturing. Famously, we'll see what happens.