Deficits — indefinitely
‘Trump’s fiscal largesse will expand the US’s external deficits at just the same time that the tariff increases are supposed to be reducing them’
If trade wars are easy to win, as Donald Trump assures us, what will victory look like? And how long do we have to wait for its announcement? Trump does not pretend to be a high-powered and sophisticated theorist about international financial relations. He sees trade in simple terms, as if the United States of America were a business conglomerate with profit- and loss-making subsidiaries. A plus sign means a surplus and is good, and a negative sign means a deficit and is bad.
In 2017 the US had a deficit on trade in goods of $568.4 billion (about 3 per cent of output) and a deficit on current account transactions of $449.1 billion. In Trump’s view, both numbers are bad and something must be done. As Brigadier Ritchie-Hook explained in Evelyn Waugh’s Sword of Honour trilogy, foreigners are there to be biffed. Tariff increases constitute the weapons in the “war” Trump is now conducting. Their purpose is to make foreign goods more expensive in the US, so that higher prices reduce the amount that Americans buy, payments to foreigners fall and the deficits become surpluses. Victory can be declared when the US’s surpluses on its international payments are well-established and consistent.
How long will we have to wait? The short answer is, “indefinitely”. The problem is that American economic policy under Donald Trump has more than one dimension and suffers from contradictions. Even if it were true that tariff increases would by themselves have positive effects on the deficits, his government’s other actions are certain to expand external borrowing on an enormous scale. In 2017 it was able to secure the passage through Congress of the Tax Cuts and Jobs Act, with large tax cuts for companies and the middle classes. The overall effect is to be an increase in public debt over the next decade of $2,000 billion more than would otherwise have been the case.
The phrase “than would otherwise have been the case” carries a nasty sting. The point is that — if the Tax Cuts and Jobs Act had not become law — American public debt would already have been on a strongly upward path. Before the Obama presidency, gross government debt was roughly two-thirds of US national output. But Obama responded to the Great Recession with Keynesian public works and red ink, which took the figure to almost 110 per cent of national output in 2016. The ratio of public debt to output was still climbing as Trump was elected president. The tax cuts will now accelerate the increase. A figure of 117 per cent will be reached by 2023, according to the International Monetary Fund.
Let it be admitted that domestic public debt and international debt are not the same thing. The relationship between a nation’s budget deficit and its current account deficit is not a mechanical one-to-one match. Every country has private savers as well as the government. It is conceivable — or anyhow conceivable theoretically — that the American private sector will absorb all of the extra public debt being issued because of Obama’s and Trump’s fiscal profligacy. However, abundant experience — from both the US and elsewhere — is that the private sector’s financial behaviour is quite stable over the decades. A big jump in the rate at which the US private sector acquires financial assets is not a likely sequel to the Tax Cuts and Jobs Act.
Suppose, plausibly, that the American private saver does not change his or her behaviour very much. The only buyers of the extra public debt must then be those much-despised and resented foreigners, whether Donald Trump is biffing them or not. The increase in the internal budget deficit will therefore be accompanied by an increase in the external deficits. Trump’s fiscal largesse will expand the US’s external deficits at just the same time that the tariff increases are supposed to be reducing them. Far from a victory becoming evident on the US’s international accounts after a trade war that is meant to be “easy to win”, deficits will be worse than ever. For the simpletons who equate minus numbers in international transactions with negativity, failure and defeat, the US will have lost the opening phases of its “war” with its trading partners. Trump’s behaviour thereafter can only be guessed, but it is not to be ruled out that he will see the persistence of the US’s external deficits as justifying yet another round of tariff hikes.
It is frightening that the Trump administration seems not to have noticed that a major deterioration in the US’s external accounts — as well as in the overall sustainability of its public finances — is made inevitable by the tax cuts it has engineered. Rather obviously, fiscal expansionism is not the way for a nation to improve its balance of payments. Big budget deficits and increased barriers to imports are the ugly twins of economic populism. An attempt to correct payments deficits by protectionism harks back to the crude and naive mercantilism of the early 18th century; it will not end the deficits, and will prove as misguided as Adam Smith and David Hume argued in the earliest classics of political economy.