By Raymond Richman, Howard Richman, Jesse Richman and Molly Inspektor
web posted December 31, 2007
In the movie It's a Wonderful Life, Jimmy Stewart (playing George Bailey) faces a tough decision about the future of his family's Building and Loan and the future of Bedford Falls. There is a run on the bank, and he is staring at the possibility that the Bailey Brothers Building and Loan will have to close its doors. Potter offers to bail out the Building and Loan depositors by paying them 50¢ on the dollar in return for their shares. Will Potter get a stake in the Building & Loan in return for his ready cash?
Morgan Stanley is the new Jimmy Stewart, China the new Potter. With the implosion of the sub-prime mortgage market Morgan Stanley faces financial difficulties. China is willing to come to its rescue, and last week Morgan Stanley sold out. On December 19, Morgan Stanley CEO John Mack announced that he had given the Chinese government a 9.9% interest in his bank in return for an infusion of $5 billion of China's trade-surplus dollars. Morgan Stanley, the unprincipled version of Jimmy Stewart, just sold out to Potter.
The current US financial crisis and the long-term US trade deficits are both the result of the foreign loans produced by US government and foreign government policies. Morgan Stanley and other banks have made huge profits by passing along these foreign loans to American consumers, but now neither the American consumer, nor the United States as a whole, can afford to pay its debts. The United States has been going deeper into debt since 1985 while losing its only way to get out of debt, its trade-oriented industries.
There is a solution which can keep the United States as a beacon of freedom. We lay it out in our forthcoming book Trading Away Our Future. We make these recommendations:
- Adopt a progressive consumption tax, such as the FairTax being promoted by Governor Huckabee. Such a tax would enhance domestic savings so that the United States would no longer be dependent upon foreign loans. The FairTax is a national sales tax that would replace the corporate income tax, the personal income tax, the payroll taxes, and the gift and estate taxes. It would enhance US savings by leaving corporate savings (undistributed corporate profits) untaxed. Also, it would let households save their earnings tax free. Even though it exempts net savings from taxation, it lowers tax rates for lower and middle class Americans because the net imports (which would be taxed) are currently much higher ($760 billion in 2006) than the net savings that would be exempt ($245 billion in 2006). Not only that, but since the FairTax would be charged on imports into the United States, but not on exports from the United States, it would help level the international playing field for products produced by American workers, while strengthening the dollar.
- Restore taxation of interest on loans by foreigners to Americans. At the short-sighted urging of Treasury Secretary Donald Regan back in 1984, the withholding tax on interest earned by foreigners was eliminated so that the United States could get more foreign loans. At the hearings on Regan's proposal, unprincipled Morgan Stanley, represented by John C. Evans, endorsed Regan's proposal, while their responsible sibling Morgan Guarantee, represented by Roberto C. Mendoza, warned that it would cause trade deficits. Bob McIntyre of Citizens for Tax Justice went even further, pointing out that Regan's proposal would "cost thousands of Americans their jobs in export- and import-sensitive industries." He predicted that the United States "will soon move into a position of being a net international debtor – along the lines of Third World countries." McIntyre was correct. The United States became a debtor nation in 1985 and has since lost industry after industry to these foreign loans.
- Limit imports to the United States from countries with chronic trade surpluses. We could issue Import Certificates to the Pacific Rim countries in relation to their imports from us. If this step is taken, then China and the other Pacific Rim countries would no longer be able to manipulate their currencies, practicing dollar mercantilism, in order to destroy or capture US industries. The Chinese government has already built up dollar reserves of about $1,200 billion as a by-product of their currency manipulations. (The $5 billion that they are spending to buy 10% of Morgan Stanley is pocket change to them.) They lend these dollars to Americans (often using banks as intermediaries), and they use them to buy US assets (such as Morgan Stanley). If China continues this policy and the US government lets them, the United States could eventually become a wholly-owned subsidiary of a resolutely non-democratic government that has murdered hundreds of thousands of its own citizens and supports murderous regimes in Sudan, North Korea, and Burma.
With these steps the United States would get the trade deficits under control, ending their erosion of the American economy, American capitalism, and American sovereignty. Not only that, but the FairTax would leave American corporations more American savings to invest, and the prospect of reduced trade deficits would get them to invest those savings in US production. The result would be a rosy future for the American economy.
In It's a Wonderful Life, Jimmy Stewart resists Potter's easy buyouts and instead preserves the Bailey Brothers Building and Loan from Potter's control. Because of this, the people in his town are able to become homeowners and earn self-respect. When Stewart is shown what life in Bedford Falls would have been like without his principled stand, he sees the dissolute city of Pottersville, in which residents have no reason to work hard, save money, or maintain their values, because they are all hopelessly indebted to Potter.
Morgan Stanley has made its choice, but the United States as a whole can still take a stand. We can accept China's buyouts and trade away our future and freedom, or we can make decisions that will ultimately preserve our financial independence. We hope that our Bedford Falls never becomes Pottersville. 
Dr. Raymond Richman is the president of Ideal Taxes Association. He is professor emeritus of public and international affairs at the University of Pittsburgh with a PhD in economics from the University of Chicago. Dr. Howard Richman is executive director of a non-profit (Pennsylvania Homeschoolers Accreditation Agency) and an Internet economics teacher. Dr. Jesse Richman is an assistant professor at Old Dominion University with a PhD in political economy from Carnegie-Mellon University. Molly Inspektor is Secretary of the Ideal Taxes Association. Raymond, Howard, and Jesse are co-authors of Ideal Tax Association's forthcoming book, due out February 1: Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it's Too Late.