The Balance of Trade (and Labor)
In the past couple of months, there is growing concern about the global impact of President Trump's initiative to install tariffs on imports from China. Most media outlets have lots to say about how this change will hurt our economy and the investment markets. Before jumping on the bandwagon and making the obvious point that if we have to pay more for goods, that cannot be a good thing. I'd like to offer some understandable insight as to what President Trump might actually be attempting to accomplish, and why it matters. Consider the economic problems the USA has faced for the past decade as fallout from the 08' Great Recession - Despite low unemployment statistics, only 62% or so of our population is working full time. (source: JPMorgan)
Wages have grown at the slowest pace in any economic expansion in U.S history over the past 10 years, not motivating people to get out and work because many don't think it's worth their time. (Source: BEA) With so many Americans disinterested in working full time jobs, the government is poised to pay out 3x to 4x more in Social Security and Medicare benefits relative to what the government is bringing in to fund these entitlements for the next 15 to 20 years.(source: BEA) Because such a large portion of our population is not working full time, the government has a difficult time collecting wage based taxes needed to balance the federal budget.
Taxing imports to motivate corporations to bring jobs back to the USA can become part of a sustainable solution.
Consider the ramifications of forcing more products to be made here in America while at the same time, tightening our borders to severely limit immigrant workers. Flooding our country with jobs while not having a noticeable increase in available workers creates wage inflation. Companies have to pay more to attract and retain employees, due to the intense competition for workers that results from these policies. As wages rise, previously disinterested or underemployed workers become more interested in getting back to work full time. As more of our population gets back to work, more payroll taxes are collected and less entitlements / welfare monies are paid out. As companies have to pay more for labor, prices rise and it costs us all more to live. How is that for motivation for the non-working population to go take one of the hundreds of thousands of currently available jobs across the USA?
How might Inflation impact investments?
JP Morgan has done some extensive research on the impact of rising inflation on stock prices. Their findings have been that so long as inflation does not exceed 4-5%, in most historical periods of time, stock prices tend to rise at a greater pace than inflation itself. (The rational for this is that companies can pass along cost increases to consumers up to about 4-5% per year without experiencing noticeable slowdown in demand for goods and services.) Another benefit of these inflationary government policies (ie- restricting immigration and taxing imports) is that as asset prices rise, the government collects more tax revenue on capital gains that can further help ease budget woes.
Bottom line: Tariffs and immigration reform is about much more than how much goods cost. Don't get caught up in the media hype on tariffs and rising prices. Owning stock in U.S. companies is a proven method to growing your nest-egg at a pace greater than inflation over time.