The United States and Canada by Paul J. Quirk

Author:Paul J. Quirk [Quirk, Paul J.]
Language: eng
Format: epub
Publisher: Oxford University Press
Published: 2019-07-11T07:00:00+00:00

The second relationship notes that household spending on domestically produced goods (C) equals total income (GDP) minus taxes (T) minus imports (IM) minus saving (S), or

Combining these two identities, and noting that (IM – X) is the trade deficit and (G – T) is the government budget deficit respectively, we can appreciate that

Roughly speaking, the point is that if the government budget is in deficit, funds must be borrowed. If they are borrowed from abroad, the borrowing counts as imports and increases the trade deficit. Such borrowing from abroad will be required unless households are paying off equivalent foreign debt or buying the added government debt by saving more than domestic firms invest.

President Trump’s policies are projected to substantially increase the budget deficit. At the same time, many of his corporate-friendly initiatives are designed to increase investment. If both government borrowing and domestic investment are increasing, the result must be an increase in borrowing from abroad—increasing the trade deficit—unless domestic saving rises sufficiently to pay for both of them. Barring some dramatic increase in domestic savings, Trump’s tax and budget policies will substantially increase the trade deficit.

Perhaps this latter hope is why President Trump has introduced regressive changes to the personal income tax system. By having more income go to the rich, who are the ones who can afford to save, Trump or his economic advisers may be hoping that saving will increase more than investment. Further, he may be hoping that his tax cuts will pay for themselves, by so stimulating economic activity that the tax base will increase by more than tax rates have decreased. But there is no empirical evidence that this theoretical possibility is relevant—unless the initial tax rates are noticeably higher than they were before the Trump tax-rate cuts. That is, the literature that investigates how much private saving and labor supply respond to tax-rate changes show results that are too small to defend the self-financing-tax-cut proposition—even when the analysis assumes that tax cuts will have a permanent effect on the ongoing growth rate, not just a one-time increase in the level of per capita output (for example, see Trabandt and Uhlig 2011). Given these results, both terms on the right-hand side of the equation above are increased by President Trump’s policies, and it is simply impossible for the trade deficit to decrease.

President Trump may not really care about long-run average living standards. His goal may simply be to bring back (in the short term) some manufacturing jobs that he presumes have vanished because of globalization, no matter what the long-run cost to average living standards. But even this view can be questioned. The empirical literature suggests that globalization is just one of the reasons for recent job losses. It is generally agreed that another consideration—known as skill-biased technological change—is just as important as globalization. The idea is that modern technology (e.g., the emergence of robotics) increases the demand for skilled workers (to design and operate the robots) but decreases the demand for unskilled workers (since the robots can attend to those chores).

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