Wednesday, March 20, 2019

Create a Bust to Reduce Deficits

You may have seen the news that we had record-setting trade deficits last year...and next week, we’ll have another Bureau of Economic Analysis report. President Trump campaigned on how bad the trade deficit was—and now it’s worse—and he may be his own worst enemy. When he provided a major tax cut, that caused the economy to surge in the short-term. Some other steps may have helped grow the US economy. Many economists say that imports increase when the domestic economy improves. People spend more in a good economy. And proportionally that means they’re spending more on imported goods. And depending on how the rest of the world is doing, exports may not rise in a good economy. Thus, the deficit (exports - imports) will increase in boom times.

The US trade deficit shrinks in bust periods.

You can see that deficits were low (up on the chart because it’s in the negative range on the axis) back during the recession, and basically continued to increase through the recovery and ongoing ‘bull’ economy.

Maybe his push for tariffs is a way to cool the economy and reduce the level of imports. Maybe his restrictions on immigration is similar. The labor pool is tightened without immigration—we now have more job openings than we have unemployed—and that will restrict how well businesses can grow. If so, both efforts may work on reducing the trade deficit.

However, it’s the wrong focus if that’s what he’s trying to do.

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