As Trump’s Infrastructure Plan Takes Shape, Many Already Have Concerns How It Will Be Funded

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Part of President Trump’s promise to voters was to deliver his $1 trillion infrastructure plan to congress within his first 100 days in office. While it now seems unlikely to be completed in that time horizon, or possibly even in 2017, work has begun to shape what Trump’s infrastructure plan will resemble and it already has many from both sides concerned.

One of the major road blocks to Trump’s proposal is how it will be financed. Trump has pledged to cut taxes and reduce government spending, both of which are hurdles to funding a $1 trillion infrastructure deal. So how will Trump fund his infrastructure plan?

In his first address to congress last month, Trump provided a brief statement on his plan. “To launch our national rebuilding, I will be asking the congress to approve legislation that produces a $1 trillion investment in the infrastructure of the United States – financed through both public and private capital – creating millions of jobs.”

President Trump during his first address to congress (Photo by Jonathan Ernst/Reuters)

One issue both republicans and democrats see with this is the use of the private sector to help build the country’s infrastructure. Trump’s proposal calls for tax credits to be provided to companies who invest in and create roads, track’s, bridges, etc. while allowing the private companies to then charge tolls to recoup costs. These types of projects have had some success in the past, but they are often limited to large scale projects in populated areas. Rural communities tend to not like this solution as companies are not going to want to create new roads that have small potential earnings. No private company will build anything unless it can make some money off of it. So many needed projects would never be built.

Additionally, citizens, especially those needing to use these roads, bridges, etc., tend to dislike this system as they are essentially charged a tax every time they make use of the infrastructure. Although, often they are well maintained, as some of the money made is used on continual maintenance. This is a problem with most of the current U.S. roads and bridges, as they are often just patched like sticking on a band aid.

Another way Trump plans to finance the plan is with a repatriation tax holiday that he believes will bring back around $200 billion in funding to the United States, a repatriation tax holiday being a brief period where U.S. companies can bring cash earned overseas back to the U.S. at a lower tax rate than normal. The issue with this is that many economists and other experts believe that a repatriation tax holiday will only lead companies to bring back cash to pay shareholders via dividends or to buy back their own stock. While good for shareholders, there wouldn’t be a significant increase in U.S. investments or jobs. The only way the money would be spent on new investments is if firms that were capital constrained needed the money to make investments. Although with the current record low borrowing rates, they would have just borrowed money if an investment was worthwhile.

One additional option available to Trump that both he many others are most likely against, is to raise the money needed by selling U.S. Treasury securities, the issue of course being that doing so will further increase the federal deficit, something that is already being looked at with Trump’s planned tax cuts.

We will hopefully know more about the future of American infrastructure, but one thing is for certain: figuring out how to fund it will be heavily debated.

Sources:

http://www.businessinsider.com/how-will-trumps-infrastructure-plan-be-paid-for-2017-1

http://www.usatoday.com/story/news/politics/2017/02/28/full-transcript-trump-speech-to-congress/98535746/

http://thehill.com/policy/transportation/323784-work-begins-on-1t-infrastructure-plan

http://www.cnbc.com/2017/03/14/both-parties-say-trumps-infrastructure-plan-needs-repair.html

 

 

 

 

A Trade War with China May Be Imminent

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As Donald Trump is now into his third week as President of the United States his policies have started to become more and more clear. In terms of President Trump’s trade policies, he has made it very clear that he thinks America is “losing” in trade and that current trade deficit needs to be reduced. But where does our trade deficit come from?

The United States’ number one importer of goods is China. In 2015 China and the United States traded about $660 billion worth of goods and services. U.S. exports to China were $162 billion, while Chinese imports accounted for $498 billion. The result is a trade deficit of $336 billion and that is what President Trump wants to reduce. But how will President Trump start “winning” with China? There are a couple options that President Trump could use. Although many believe his choice of preference to be enacting new tariffs on Chinese goods, this could easily lead to a trade war that would affect not only the United states, but the whole world.

President Trump has already started us down the path towards a trade war.

Trump has already formally withdrawn from the TPP, or Trans-Pacific Partnership, which was an agreement between 12 countries (that didn’t include China, although China potentially wanted to join) that border the Pacific Ocean and together represented 40 percent of the world’s economic output. Trump has said that pulling out of TPP will protect American workers from low-wage countries included in the TPP, such as Vietnam and Malaysia. Some Economists have also come out in opposition of the TPP, arguing that tariffs between the 12 countries are already very low and that the U.S. doesn’t gain a competitive advantage in enough areas to warrant the reduction of tariffs into America.

Theoretically all the above reasons are true, as trade would expand under the deal, labor intensive jobs in the U.S would fall, as they are shifted to lower wage countries, such as Vietnam and Malaysia. Tariffs between the 12 countries also are already very low and many of the countries don’t import many goods from America, but do export goods to America which furthers our trade deficit.

The issue that remains is that many in support of the TPP saw it as an opportunity to combat China in the Asia Pacific region. That pulling out is handing China the keys to control the region for the foreseeable future. These people saw the TPP as more than just a trade deal, but a matter of national security for not only the United States, but for everyone involved. Increasing trade between the 12 members would help to contain and increase multilateral pressure on China and its growth into the South China Sea.

Without it, President Trump will now have to combat them alone. China has already come out and stated that any tariff increases from Trump would be met with repercussions. Meaning that a trade war (of varying proportions) with China might be right around the corner.

The resulting actions would almost certainly hurt China more than the United States, but American businesses and workers would still suffer as a result. With the world’s two largest economies going after each other, there would be global ramifications.

Sources:

http://www.forbes.com/sites/danikenson/2017/02/06/not-much-left-stopping-trumps-trade-war-with-china/2/#3f592f8c69d5

https://www.ft.com/content/06638c26-d42c-11e6-9341-7393bb2e1b51

http://www.economist.com/blogs/economist-explains/2017/02/economist-explains-2

http://thehill.com/blogs/pundits-blog/international/313168-in-a-us-china-trade-war-these-are-americas-best-options

https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china

Why You Shouldn’t Go Shopping on Black Friday

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Image Source: Good Free Photos

It’s Thanksgiving Day, the turkey has long been gone and the pies have finally stuffed you up. After spending some time with the family, you go to bed early and set your alarm for 5am like many other Americans, but why? Americans have grown to love Black Friday, as they seek “amazing” deals and participate in early Christmas shopping on what is considered the beginning of the holiday season. But this year you shouldn’t go shopping on Black Friday.

While it may seem like Black Friday is a day for the consumers, it’s not. Black Friday is a day for retailers to make money. A day that they go from the red into the black. Retailers offer “amazing” deals on a few high priced items like TV’s or IPads to entice consumers into their stores. While they do lose money on these deals, retailers use smart floor plans to steer consumers to products that are more profitable. Retailers then use the JC Penney pricing model, in that a product that would normally sell for $75, will have its listed price raised to $100, but there will be a sale for 25% off that drops the price back down to $75. These fake sales are there to make consumers feel like they are getting a good deal on the product, but in reality the retailer is.

Black Friday allows retailers to price discriminate and therefore make more money. Price discrimination isn’t based off of race or sex, but is based on the idea that consumers have different amounts they are willing to pay for a certain item. Price discrimination allows the retailer to sell an item to consumers at different prices. Say a retailer is selling an Xbox One to two different people. One is a working mom who values the Xbox at $250, the other is a CEO who values the Xbox at $350. The retailer could offer a few Xbox One’s for $250 but keep the online price at $350. The mom wanting the Xbox for her kids will wait in the long lines and buy the Xbox at $250. The CEO on the other hand will just buy the Xbox at the $350 price as it is not worth it to him to wait in line for the cheaper price when he values the Xbox at $350. If you are the mom in this example then it is worth it to battle the lines for those few great deals, but if you are like most Americans, don’t be pulled into the retailer’s trap.

If consumers truly want to save the most money they should wait until mid to late December to buy Christmas gifts. This is because of retail inventories. Before the holiday season and in particular Black Friday, retailers have high inventories of goods. If consumers wait until after Black Friday and even mid-way through December retailers will have some items that didn’t sell as much as anticipated. This higher than wanted inventory will result in a real decrease in price to reduce inventory and real savings for consumers.

If consumers want to save the most, they should actually wait until after Christmas to buy goods. Most retailers have their fiscal year (meaning the year a company uses for tax and financial purposes) end on or around January 31st. Retail company’s want to have very low inventories at the end of the fiscal year. In order to reach low inventory, retailers will sell goods for even lower prices as it is more beneficial to have the low inventory than to make the highest possible profit. So why go shopping on Black Friday, when you can save more by waiting till mid-December or even until after Christmas.

Then there are the reasons beyond money to not shop on black Friday. Every year somewhere in America people die as a result of being trampled on during black Friday. People too eager for deals are willing to do almost anything to be the first in a store. The unruly crowds combined with potential freezing temperatures is reason enough to stay inside, but consumers should also consider the effect Black Friday has on the people forced to work. Many retailers looking to entice even more customers have started opening on Thursday night, forcing their workers to come in on thanksgiving and be away from their family’s on a national holiday. So if you are going to shop on Black Friday, at least do not go on thanksgiving night.

Even with everything I have said the best reason to not shop on Black Friday is the simplest one. Gift Cash. It is the easiest and most efficient gift to give someone. The famous Economic paper “The Deadweight Loss of Christmas” shows that for a gift costing $100, the recipient only receives only $70-$90 of the value. This means that giving a gift destroys up to a third of the value to the recipient. Giving cash also allows the recipient to benefit on the cheaper prices of goods after Christmas, allowing them to receive even more value from the cash.

So why not avoid the long lines and cold weather of Black Friday. Spend some more quality time with the family and even gift them some cash for Christmas, they will be able to buy anything they want for even cheaper than you would have before Christmas.

Sources:

http://www.forbes.com/sites/quora/2013/11/27/what-are-the-economics-behind-the-black-friday-sales/#7140d110145e

http://www.theatlantic.com/business/archive/2014/11/11-economic-lessons-to-make-you-a-smarter-shopper-for-black-friday/383236/

http://fortune.com/2015/11/28/black-friday-sales-2/