Thursday, January 26, 2017

Hey Holtz-Eakin, the Dollar Went Up and the Peso Went Down - and Guacamole???

As they say on tonight, enjoy your Super Bowl guacamole while you can.  When
Trump proposed a 20% "border adjustment tax" on Mexican goods to pay for his new Southwestern real estate development, panic broke out. Who will pay for this?

Let's guess.

It's a serious issue. Mexico has little competition at scale for the supply of avocados to the U.S. They sent over 53 million pounds . . . last week.

Other folks are noting that your margaritas are threatened, too.  Tequila is a Mexican product. Hmmm.

Golly, I'm so confused.  Pardon me, a little dimwitted here.  There are so many smart, smart people proposing Border Adjustment Taxes.  It's tough for us Small Business people to figure it out. After all, if we're small, we must be dumb.  And no one is as smart as an economist.

We can all agree on that, can't we?!

So Douglas Holtz-Eakin and his sidekick Alan Auerbach assure us that the Border Adjustment Tax will cause the dollar to appreciate by 25% "immediately" and that, they promise, is a good thing. Among the many wondrous benefits is that costs will melt, they'll just MELT, as the dollar rises and those incredible savings will be passed on to you, noble consumer, through normal action in the competitive market. Absolutely nothing to worry about, you darned worryworts.  Or so they say.

It must be easy to be an economist.  You are in the predicting business, not the performance business. If you are good at predicting, like a weatherman, you are primo in your field.  Who cares if you turn out to be wrong?  You can always find an excuse to justify it.  Doesn't matter.  Have you ever seen a weatherman fired because it rained. Please!

But the Mexican peso seems to test the theory doesn't it?  With Trump talking down the peso, every day gets worse and worse for those poor people.  The dollar is rocketing up. This is good for people selling with peso costs.  Companies that employ Mexican labor are saving money, yes. But many of those companies have U.S. or other non-Mexican inputs which are rapidly becoming more expensive.  And the workers are getting poorer and usually have a lot of dollar-based costs themselves since many of those factories are near the U.S. U.S. companies operating in Mexico are having a hard time ignoring this reality and are choosing to bonus their Mexican labor to ease the extremis. Finally, and importantly, fixed investments in Mexico paid for in dollars are getting creamed, just whacked. Think of what you could sell your vacation home, or factory, for today with the peso down nearly 50%, and going down every day.  It's ugly.

And it's not wondrous.

Today's action by Trump to threaten a "border adjustment tax" (where have I heard that term before???) has triggered an absolute panic over the cost of imports from Mexico, and a direct and immediate fear of rising prices in the U.S.  To be paid by you, of course.

Hey, Holtz-Eakin, I wonder why your crystal ball seems cracked.  How is your magic wand doing?

And in the meantime, enjoy that guac.   I hope it's really good, because it will cost more next time, and to be worth it, it had better be good.  Or else you'll eat something else, or just play with your phone.  Fantastic!

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