Make America’s deficits great again
Two and a half years into his term, President Trump has little to show for breaking with erstwhile Republican Party orthodoxy on trade and budget policy.
Indeed, far from delivering on his promise to cut America’s trade deficit, Trump has presided over a ballooning deficit that’s on pace to be some 25 percent higher than when he took office. This is happening at a time when the budget deficit is widening and the country’s public debt is well on its way to exceeding 90 percent of GDP.
Sadly, the Trump administration seems unfazed by the country’s deteriorating long-run financial position. It shows no indication of correcting policy course to put the economy on a sounder long-run economic footing. This makes it all too likely that the country’s incipient twin deficit problem will only worsen in the remaining 18 months of Trump’s first term. That in turn will further mortgage the country’s economic future and diminish the U.S. dollar’s attractiveness as an international reserve currency.
Two defining pillars of the Trump administration’s macroeconomic policy have flown in the face of pre-Trump-era Republican Party orthodoxy.
The first involved the ready resort to import tariffs and the repeated calls for a weak dollar with the supposed intention of leveling the international playing field and eliminating the trade deficit.
The second involved the introduction in 2017, a time of relative economic strength, of a massive unfunded tax cut centered on a large reduction in the corporate tax rate. This budget-busting tax cut gave short shrift to earlier Republican Party strictures that budget deficits mattered and that a rising public debt effectively mortgaged our children’s future. The supposed intent of the Trump tax cut was to spur corporate investment as a means to put the country on a faster growth track.
Needless to say, it is far too early to make a definitive assessment of the major shift in U.S. trade and budget policy on Trump’s watch. But the initial indications give reason for considerable concern.
Far from strengthening the country’s external accounts, the Trump import tariffs and budget largesse are doing the reverse, as indicated by a widening U.S. trade deficit.
The import tariffs are doing so by raising the prospect of a world trade war, by sowing economic uncertainty in our trade partners and by contributing to a generalized economic slowdown abroad. That in turn is inducing our trade partners to demand less of our exports and to loosen their monetary policies. By causing the dollar to appreciate, that relative monetary policy loosening worsens the international competitive position of our exporters in foreign markets.
For its part, our widening budget deficit is damaging our external position by reducing the country’s saving level. That perpetuates a situation whereby the U.S. continues to consume more than it produces, thereby forcing it to import more than it exports.
If the Trump import tariff and budget policy has weakened our external position, the Trump budget stimulus has seriously undermined our long-run public finances. And it has done so without delivering the promised investment boom that was supposed to put our economy on a very much faster growth path than that experienced over the past decade.
According to the independent Congressional Budget Office (CBO), even on optimistic assumptions regarding economic growth, over the next decade the Trump tax cuts will result in an increase in the U.S. budget deficit to an average 4.25 percent of GDP. That would be up from an average of less than 3 percent of GDP over the preceding fifty years. The CBO estimates that those deficits will result in a disturbing rise in the public debt-to-GDP ratio from 78 percent at present to 92 percent by 2029.
An undisciplined budget policy at a time of economic strength limits the scope for fiscal policy support at a time of economic weakness.
This could prove to be particularly unfortunate at a time that already-low interest rates limit the amount of support that the Federal Reserve might be able to provide the economy in the event of an economic downturn. As a result, it could mean that our next economic recession will prove to be more pronounced than need be.
The Trump administration is not known for introspection or for drawing the right lessons from past economic policy disappointments. We should therefore reconcile ourselves to the dismal prospect of having to live with growing twin budget and trade deficit problems.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
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