Yes, it is time for the United States to adopt the Big Mac. No, it’s not the burger. It is the Market Access Charge (MAC) that former Bell South Economist John Hansen has been urging the U.S. government to adopt as a way of reducing over-valuation of the U.S. dollar, the U.S. trade deficit, and inflation, while promoting development of U.S. infra-structure, domestic manufacturing production, and jobs.
Hansen’s MAC would be a charge imposed on certain funds flowing from abroad into the United States. If the money were destined to create new manufacturing operations in the United States or to keep existing facilities operating, there would be no charge. But if it were destined for investment in real estate, financial assets, or existing services industry operations, a U.S. government fee would be imposed on the transaction. It would be flexible, ranging from 0 to maybe 10 percent depending on circumstances, and it would flow into an Infrastructure Improvement Bank run jointly by the U.S. Treasury and the U.S. Commerce Department for the purpose of maintaining the U.S. infrastructure in good condition.
The rationale for this measure arises from two key facts. The first is the U.S. trade deficit, which will reach more than $1 trillion this year. The problem is not just that this year’s trade (technically- current account) is immense, it is also that the deficit is chronic. The last time the U.S. trade was in balance was nearly fifty years ago.
There are a lot of causes of the deficit, but a very important one is that many of America’s trading partners pursue policies to keep their currencies undervalued versus the U.S. dollar, which artificially makes their products less expensive in the U.S. market than those of domestically made products. They do this either by directly controlling the flow of their currencies (e.g., in China, individuals or corporations owning dollars must change them into RMB at a government-set rate) or by intervening in global currency markets to sell their own currencies to buy dollars. They may even engage in both practices. The point is that some countries (Japan, South Korea, China, Singapore, etc.) pursue export-led economic growth strategies and manage the value of their currencies to promote exports and restrain imports.
Because these and other countries (Germany, Mexico, etc.) sell a lot to America while buying little from it, they constantly have large amounts of dollars that they seek to invest mostly in the U.S. Sometimes, they invest in new production facilities such as a BMW assembly plant in South Carolina, but most often they invest by buying U.S. real estate or U.S. securities; especially U.S. Treasury notes which are considered one of the world’s safest investments. (Readers will note that in the wake of recent market volatility around the world, capital has been rushing into U.S. securities in recent months and weeks, especially Treasuries – Why? Because they are considered to be safe.).
Demand for dollar investments in the U.S. has two negative long-term effects on the United States. Firstly, demand for dollars drives up the price (exchange rate) of dollars and thereby reduces the ability of U.S. based producers to export or even to compete profitably in the U.S. market. In short, it tends to drive American manufacturers out of business, resulting in the layoff of American workers. Secondly, it essentially amounts to selling the farm. The chronic trade deficit means Americans are consuming more than they are producing. To finance this habit, they sell off some of the “farm” (U.S. assets- rental properties, office buildings, stocks, etc.) to foreigners, but of course, that means that the foreign owners of the U.S. assets must be paid a return on those assets. So, the need to pay foreigners grows along with the trade deficit every year.
I have noted that the great attraction of U.S. treasuries is their safety. The fundamental concept of the MAC is that the investors should pay something in return for that guarantee of safety, or they should pay something for having manipulated the currency markets in a mercantilist manner to promote their export-led growth strategies.
Next year, about $1 trillion of foreign investments will enter the U.S. to finance the U.S. trade deficit this year. A MAC of 4 percent would raise $40 billion for U.S. infra-structure renewals or for R&D investments. At 10 percent it would raise $100 billion. I mean, we could be talking real money.
It gets even better: The MAC would effectively reduce the U.S. budget deficit, decrease the chronic over-valuation of the dollar, increase U.S. based production, exports, and jobs while also reducing inflation.
What’s not to like? Let’s do the MAC now.
