What is NAFTA and Who Cares?

What is NAFTA and Who Cares?

Trump says NAFTA is a “bad deal” … and it is. NAFTA – the North American Free Trade Agreement – is currently going through an administrative review, and early talks on negotiating points are occurring between the three countries involved:  the U.S., Canada, and Mexico.

Arguing over Trump’s wall, Mexico has already stormed out of the early negotiations on revisiting the treaty.  Canada is concerned over U.S. protectionism.  There seems to be little momentum on changing the agreement, and it remains to be seen if President Trump would unilaterally withdraw, as he promised his supporters during the campaign.

A crucial plank in his 2016 Presidential campaign was his commitment to tear up the NAFTA trade agreement and negotiate a “better deal” for the country.  There were pros and cons with our existing NAFTA treaty, and it is important to consider what the good and the bad looks like regarding NAFTA.

I. What are the PROS of the U.S. being in the NAFTA treaty?

  1. NAFTA quadrupled trade between Mexico, Canada and the U.S. More trade usually means more jobs and more money.  Trade between the 3 parties increased to $1.15 trillion in 2015.   Most studies have concluded that U.S. economic growth is 0.5% higher each year thanks to NAFTA trade.
  2. NAFTA lowered prices. The long-term price trend of oil reversed itself, as oil is much lower than what it was projected to be back in the late 1980s.  Food prices have dropped.  Farm products dropped in price as well.
  3. NAFTA increased job creation and investment. NAFTA is believed to have created 5 million plus jobs since its inception, and foreign investment capital into the United States has tripled since it passed.  Multiple industries benefited such as health care, farming, and financial services.

II. What are the CONS of the U.S. being in the NAFTA treaty?

  1. Massive job loss in the manufacturing industry. While a net 5 million+ additional jobs were created under NAFTA, no one knows how to quantify job creation if NAFTA had never passed.  It is possible those 5 million jobs would have been created anyways as a function of supply and demand in the free market.  Much of the job creation was in the low wage service sector, and much of those jobs go to immigrants.  We do know over 1.5 million jobs have been lost in the manufacturing sector, and the sectors hardest hit included the automotive and textile industries.
  2. Suppressed wages across all blue-collar industries. With low wage competition from Mexico, the remaining productive sectors of the economy, from oil drilling, energy production, automotive manufacturing and more – ALL lost wages to cross-border competition.
  3. U.S. market share lost. U.S. market share in several industries was lost due to the out-sourcing of employment under NAFTA.  Losing the lead in key industries has impacted talent retention and our historic leadership role in business innovation.

NAFTA has been a mixed bag.  But President Trump’s larger point is more nuanced than that – by simply sticking with a deal that has cost the U.S. numerous jobs and in many cases entire industries, we have not made good use of our unique advantage as the “indispensable” market-place.  Re-opening the agreement to find ways to improve the deal – by committing to fair trade, not just free trade – is a responsible way to protect the interests of the American people.

Tax Cuts Equal Growth

Our country has a debt problem.  Will tax cuts help solve it?  We have a budget crisis in Washington in which our political leaders cannot fulfill their budget responsibilities on behalf of the country.  The Banking Crisis of 2008 … the political decisions of the Obama era … the daily drama that is the Trump Administration … these issues and more have prevented the public from focusing on a ticking time bomb that could affect our way of life just as much as conflict with North Korea, and dwarf the financial Armageddon we faced with the market collapse in 2008.

Are tax cuts the economic growth cure all?

Economic growth, which we will refer to as GDP growth, has been the hallmark of the past American century.   Growth in the private sector increases net revenue in the tax receipts to the government that we collect, and helps the government pay its bills.  It goes without saying that the historically awful 1.9% growth of the Obama era was simply not enough to meet the demands of an ever-growing Federal government.  Furthermore, Congress lacked the discipline (historically nothing new) and in many areas the Obama Administration simply violated the law and the Constitution to keep spending money illegally (shutdown threats, Obamacare subsidies).

Trump has made several promises both on the campaign trail and as president that suggests a return to the normal budget process, and tax and spending policies which could help foster significant economic growth and provide a “fairer” tax system.  But so far, Congress has been slow-walking the process.  Some believe that many Republicans wish to sabotage the Trump presidency by not doing anything.  Even worse, if true, some Republicans may simply be big-government liberals who prefer the current budgeting failures.

Needless to say, this is a challenging environment to pass, and benefit from, pro-growth Tax Policy.  But if we could pull it off, we could be looking at GDP numbers which could turn the tide on our debt crisis, reverse the Obama-era stagnation, and help fund the government for years to come.

I. What is the History of Pro-Growth Tax Policy?

  1. Pro-growth tax policy doubles the economy every 18-20 years. Three and a half to four percent economic growth doubles the economy roughly every 20 years.  That’s extraordinary.  While the top tax rates were between 70-90% from 1945-1973, those rates only hit a few hundred people nationwide.  With lower rates at the middle-income level, and a post-war dollar policy tied to gold, America sustained a growth rate of 3.3% during this time.  The same 3.3 growth rate occurred during the low tax era beginning with Reagan.  From 1982-2007 the US again averaged 3.3% growth.
  2. High tax rates and multiple brackets lead to stagnation.  Keynesian policies of high government spending, high levels of government debt, and substantial increases in government regulation, stagnated the economy in the 1970’s and recently again during the Obama era, with devastating effects for employment and retirement savings.
  3. GDP goes up when tax rates are lowered, and tax brackets are flattened. Not only is tax reduction a boon for economic growth, the resulting free market expansion has always led to increased revenue for the government to pay its bills.  Tax receipts go up because there are more transactions to tax, more people paying more payroll taxes.  As an example – tax receipts during the Reagan era (1981-89) by 60%…….the Nixon/Ford/Carter era they grew only 40% (1972-80).  Yes – you can increase government revenue by simply taxing and taking more from the people.  But you only get GDP growth, increases in tax revenue, AND a healthy free society from reducing taxes and flattening the tax code.

According to Peter Ferrara of the Heartland Institute, there are several policy decisions the Obama Administration pursued to get the WRONG outcomes for tax collections and economic growth.  They included:

 II. What NOT to do for Robust GDP Growth:

  1. Raise the top tax rate of every U.S. tax, with the exception of the top corporate rate, since it was already one of the highest in the world.
  2. Impose massive new regulations on health care, finance, and energy production.
  3. Raise all federal spending with the exception of defense, and create a debt without tracking the costs and benefits of the expense.
  4. Support unprecedented Federal Reserve monetary policy even after the crisis which led to the policy has abated.”
  5. Weak dollar policy through massive money printing and bank bailouts.

 This was the previous Administration’s agenda.  This was a textbook case on how NOT to grow an economy.

So, the opposite is true, right?  Well… yes.  The Reagan prescription for solid economic growth is the same today as it always been, because it is a free market, capitalist solution to our economic growth and debt woes.

III.       What we SHOULD do for robust GDP growth:

1)            Cut taxes and GDP will grow.  Reagan cut tax rates and restored incentives for production and capital investment.  He did this with a 25 percent tax cut for every taxpayer, and his 1986 tax reform together reduced the top income tax rate from 70 percent to 28 percent.

2)            Deregulate the marketplace across multiple industries.  Deregulation reduces the challenges for business start-ups as well as existing businesses to produce, expand and grow.

3)            Cut government spending.  Reagan cut government spending which is contrary to Keynesian economics, as government spending, deficits and debt subtract from rather than add to the economy.  While deficits went up during Reagan, this had more to do with a Democratic congress not cutting as much from the budget fat as Reagan requested.

4)            Strong dollar policy, tight fiscal and monetary policies.  Strong dollar monetary policy helped eradicate double digit inflation and rampant unemployment within three years of taking office.  This also led to an unprecedented expansion of global investment in the U.S. economy, and led an 18-year expansion of American GDP growth.

Economic growth requires flat, fair and lower tax rates.  It is the hallmark of the free market system – you keep what you produce.

Economic growth does not just benefit the individual, but it also is necessary to help improve the bottom line for government revenue, and to help us meet our unprecedented financial obligations.

The Republicans have released their Trump influenced tax plan.  They haven’t passed anything yet since the election.  Let’s hope they get tax reform passed… and soon.

Do You Invest on Emotion or Logic?

As reported in the USA Today and many other media outlets, American economist Richard Thaler, a professor at the University of Chicago, won the Nobel Prize in Economics this year for his theories and contributions regarding “behavioral economics.”  Thaler’s life-long studies have revolved around how psychology and economic decision making intersect.   Thaler’s conclusions are well-known in the number of books he has written on the subject: “….that people’s emotions, biases and lack of self-control often end up hurting their bottom line.”

Do You Invest on Emotion or Logic? - Richard Thaler

Thaler’s studies have the most relevance to your money and how you use it.  In summary, Thaler contends and the data he provides supports the idea that we could be far wealthier, and much more financially safe, if we could control our emotional decision making and be more focused on the logical decisions we should be making with our money.

Sounds like Spock from Star Trek.

And Thaler makes that comparison.  He was quoted as saying:

“…it is about the way actual people behave as opposed to the way economists think people behave – (like) people who are highly rational, unemotional creatures — kind of like Spock in the Star Trek TV series… The people I study are humans that are closer to Homer Simpson.”

“We humans don’t always choose the right thing,” he continued. “Sometimes we over-eat. Sometimes we exercise too little. Many of us have trouble saving enough for retirement.”

 He is right on the money when it comes to your money.

I. How Investors Make Huge Financial Mistakes, Based on Thaler’s Theories Regarding Behavioral Economics:

  1. The ‘hot-hand’ fallacy. A classic error people make, Thaler explained in his cameo appearance in the movie The Big Short, is “thinking whatever is happening now is going to continue to happen in the future.”  “It is called the hot hand fallacy,” he said, the “basketball player who has made 5 shots in a row, somehow the team keeps feeding him the ball, because he has the ‘hot hand,’ even though statistically, the chances of making it are lower and lower each time.”   Obviously, much of the investing world was guilty of this particular behavioral shortcoming during 2008 banking crisis and the dot.com collapse.  Do we not see the same “irrational exuberance” all around us today?
  2. Believing what you own is worth more than what you don’t. Thaler uses Enron employees as the perfect example.  Advisors tell clients to not overly invest in the stocks of their own company, yet many Enron employees had up to 90% of their portfolio in Enron stock.  By 2001, the company was bankrupt and many retirement portfolios had been wiped out.  “Buy and Hold” failed in 2008.  There are other strategies, from diversification to safe-money principles, that better serve your portfolio than holding on to what you have.
  3. Mental Accounting can work against financial planning. Mental accounting is when people divide up liquidity for certain specific purposes.  The example used is the husband who has $25 budgeted for the week for coffee and incidentals.  Because he pays the bill for several co-workers, he has spent his allotted coffee money by Wednesday.  Most people then do not get coffee on Thursday and Friday since they have “spent” their budget on that item.  This is a good aspect of mental accounting.  But it can work against you as well.  The couple with $10,000.00 in the bank assume that they can then borrow $10,000.00 for unneeded items or intangible items such as an extravagant trip.  They “feel” like they have $10,000.00 in the bank, but in reality they have zero net worth since it is off-set with bad debt.

Bottom line – Thaler’s studies have produced mountains of evidence that investors too often use emotional inputs to make financial decisions that are usually wrong, and if they had instead applied logic, they would have pulled out of the market before a major correction impacted their investments.

Mr. Spock hit it right on the head:

“Humans, I find their illogic and foolish emotions a constant irritant.”

Do You Invest on Emotion or Logic?

So, what should an investor do regarding their money?  Can you possibly eliminate emotion from the decision-making process?

II. How to Take “Emotions” Out of the Investment Decision Making Process:

  1. Don’t focus on minute to minute returns. Investments with longer time-horizons or principal guarantee features can take emotion and worry out of retirement planning.
  2. Have a healthy sense of history. Black Monday 1987… Friday the 13th Mini-Crash 1989… Asian Market Crash/Global Downturn 1997… Dot.com Bubble 2000… 9/11 Crash 2001-02… Banking Crisis 2008 (really 2007-09)… Flash Crash 2010… It can’t happen to you?  It can’t happen again?  Irrational exuberance, hubris, you have lived long enough to know that some of your money should be protected right now, and that falling prone to Thaler’s “hot-hand fallacy” is a huge investment risk.
  3. Get protected now before it would be too late. Safe, simple, with a reasonable rate of return?  Sound familiar?  At some point, an investor must realize that their earnings over their work life deserves to be protected from market loss.  In 2008, many investors were wishing they had heeded safe money advice.  In principal protection investment vehicles, you get some of the gains, and more importantly, you endure none of the losses.  The principal protection investment vehicle should be a priority when you are in the 8th year of a bull market.  History says the clock is ticking.

As mentioned above, Thaler’s appearance in the movie The Big Short was cinematic genius His theories were on global display in the Banking Crisis of 2008.  The movie provides many examples of gross excess, and the few who saw the collapse coming.  What was self-evident was that as the crash approached – no one listened to those who were providing the warnings.  What’s different now?

The next market downturn may not be a crash, it may just be an old-school business cycle correction.  Either way, shouldn’t you have some or all of your portfolio protected from those market losses?  Logically, you know what you need to do. Our advisors help people protect and grow their money every single day. Give us a call at 877-912-1919.