WASHINGTON: The NYTimes (NYT) showed a lack of understanding of basic economic and business principles, in the article “How China Tariffs Could Make Your Sweaters and Pants Cost More” the writer’s lack of knowledge resulted in conclusions that are simply not incorrect. President Trump would call this fake news. The NYTimes did the same thing on May 8 with the story, “Decade in the red: Trump Tax figures show over a $1 billion losses.”
Again, the writers exhibiting a lack of knowledge of basic accounting principles.
In the May 8 piece, the NYTimes did obtain a copy of Trump’s tax information for 1985 to 1994. Those tax documents showed losses totaling over $1 billion. The NYTimes claimed that those losses show Trump was a poor businessperson:
“Mr. Trump was propelled to the presidency, in part, by a self-spun narrative of business success and of setbacks triumphantly overcome. He has attributed his first run of reversals and bankruptcies to the recession that took hold in 1990. But 10 years of tax information obtained by The New York Times paints a different, and far bleaker, picture of his deal-making abilities and financial condition.”
The NYTimes fails, however, to note that Trump did build an extensive collection of high income producing properties worldwide. An accomplishment made due to Trump maintaining positive cash flow.
Anyone with any accounting knowledge knows the difference between cash flow and taxable income.
Suppose a businessperson buys or builds a factory for $100,000. She uses capital from after-tax income. The IRS says they will allow that person to recover her $100,000 investment over say a 25-year period at $4,000 per year by taking an annual depreciation expense.
Without paying any new taxes on the recovered capital, the funds come from the profits that the factory generates.
Now suppose the factory generates $3,000 in before-tax profit the first year. With no depreciation expense, their total tax bill could be as much as $1,400, leaving them just $1,600 cash flow. But with the $4,000 depreciation expense, the income would be negative (a loss), so the businessperson pays no taxes.
As a result, the cash flow is $3,000 instead of $1,600. This allows the businessperson to use that cash flow to reinvest and build their company.
And cash flow determines success which is why Trump was so successful. His losses minimized or eliminated his tax liability while he had positive cash flows.
When and how tariffs are imposed
The June 5 tariff article is equally lacking. This time the NYTimes is lacking in the understanding of basic economics and even some basic business principles. The conclusion of the article is that if Trump imposes another round of tariffs, a sweater manufacturer could see an $11 tariff (the current tariff is $2) placed on sweaters made in China.
The NYTimes concludes this will result in a $24 increase in the price of the sweater.
While the rest of the economically literate world debates about how much of the $11 tariff will be passed on to the consumer, this article concludes that not only will all $11 of the tariff be passed onto the consumer, the tariff will allow the sweater retailer to raise the price by $24.
The writer concludes that an $11 tariff will result in a $24 increase in price. The article reaches the same conclusion about men’s pants. There the NYT concludes that a $6 tariff will raise the price $16. And women’s slacks where a $4 tariff will raise prices $11.
The article tries to explain their position. They even cite a young clothing company that verifies these numbers. Hopefully, the clothing company checks with their accountant, or finance person or marketing person, before they start following this doomed to fail logic.
Basically, they say that the sweater currently retails for $100. Of that total $44 is the cost of the sweater to manufacture in China. Add in the current $2 tariff and the total cost is $46. Since they sell for $100, they have a gross profit of $54 or 54% of the price.
The article says that the clothing company will set the price of the sweater so that they maintain the 54% profit margin. That would result in the price increasing to $124.
What they did not consider was how the market responds to that price increase. In fact, it is the response in the market that will determine how much of the new tariff is passed onto consumers.
Suppose there are similar sweaters in the market selling for $110 or $115. Currently, the consumers view this company’s $100 sweater as a better value. But maybe the other companies’ sweaters are not made in China. Maybe their price is not affected by the tariffs.
If the clothing company tries to raise the price from $100 to $124 they will likely lose considerable sales to their competitors. In fact, if they raise the price to $115, they may lose sales. Even if they raise the price to $110 they may lose sales.
The market, not tariffs, determine consumer prices
The market might force them to be priced below the competition, so maybe they can only raise the price to $106. That means they were able to pass along only $6 of the increased tariff.
Economists would say that it is the elasticity of market demand that will determine how much of the tariff is passed along to the consumer. Knowledgeable businesspeople would know that increasing tariffs tend to squeeze profit margins. Marketing experts know that if your customer has the perception that yours is a $100 sweater, raising that perception to $124 or $120 or even $110 will be extremely difficult
Once again, it appears that the NYTimes doesn’t look knowledgeably or objectively at policies suggested by the President. They reach inaccurate conclusions which the President terms like fake news.
In this case, it looks like he is right.
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