The Republican congressmen spent the entire mandate of Obama ranting against the budget deficits, warning incessantly that at any moment we would suffer a fiscal crisis like the Greek one. Donald Trump, for his part, has focused his anger mainly on trade deficits, and insists that "we are giving our jobs and our wealth to other countries that have taken advantage of us".
But over two years of unified control of the public administration by the Republican Party something curious has happened: both deficits have skyrocketed. The budget deficit has reached unprecedented levels except in times of war or after major economic crises; The merchandise trade deficit has set a record. How important is this tide of red numbers? Let's be clear: neither the budget nor the commercial deficit pose a clear and present danger to the economy. The advanced countries that are indebted in their own currency can accumulate, and often accumulate, considerable debts without drastic consequences, which is why the panic of a few years ago to the debt was always absurd.
But Trump's double deficit tells us a lot about the chief Twitterist and his party: namely, that they are dishonest and ignorant. About dishonesty: is there anyone who believes that Republicans have ever really worried about debt and deficits? The truth is that the falsity of his fiscal posture should have been evident from the beginning. In any case, it is undeniable that his apocalyptic rhetoric against the debt was nothing more than a pose, an attempt to use the deficit as a weapon to block and weaken President Obama's program.
As soon as they had the opportunity, the same politicians who were talking about the need for fiscal responsibility hurriedly forced the approval of a huge tax reduction for multinationals and the rich, a reduction that is the main reason why the budget deficit has soared . Oh, and the tax cut has failed to attract the promised increase in investment. The companies have not used this barrage of money fallen from the sky to build new factories and increase productivity, but to buy back many shares, transferring the benefits to wealthy investors.
Luckily, a great country like the US can survive many things, including dishonesty at the top.
And what about ignorance? As many have pointed out in vain, Trump is completely wrong about what commercial deficits do. It is true that in times of high unemployment deficits can cost jobs. But in normal times, they do not reduce total employment, nor do they impoverish us. On the contrary, other countries send us valuable goods and services, which we pay with debt, which pays very low interest rates. Again, who wins? But aside from that, Trump is, to begin with, completely wrong about what is the cause of the deficits. In fact, their own policies have provided a practical lesson about the inaccuracy of their point of view.
In the trumpiano universe, the commercial deficits take place because we have reached bad agreements; we let foreigners sell things here, but they do not let us sell ours there. So the solution is to put barriers to foreign products. "I am a man of tariffs," he proclaimed with pride. The reality, however, is that trade deficits have almost nothing to do with tariffs or other trade restrictions. The total trade deficit is always equal to the difference between domestic investment spending and domestic saving (both private and public). It's simple accounting.
The reason why the United States maintains persistent trade deficits is not that it has yielded too much in trade agreements, but that it saves little in comparison with other countries. Naturally, tariffs can reduce imports of the products subject to the tariff, and consequently, reduce the trade deficit in that particular sector. But it's like pushing a balloon: we can squeeze it on the one hand, but what it will do is inflate it in the same amount on the other hand. The process by which this conservation of deficits takes place may vary, although the rise of the dollar, which hurts exports, is usually one of the main channels. But the basic result, that is, that tariffs do not really reduce the total trade deficit, is clear.
As expected, the tariffs applied by Trump in 2018 actually caused a drastic fall in imports of products subject to tariffs. But imports of other products increased, while exports did not obtain good results. And the total trade deficit rose substantially, which is exactly what should have been expected. After all, the great tax cut to the rich has reduced national savings. And the supposed cause of the deficit is not Trump's only mistake when it comes to trade policy. He also continues to insist that foreigners are paying the tariffs that he has imposed. In reality, the prices received by foreign exporters have not fallen. What has happened, on the contrary, is that the prices paid by American consumers have gone up.
I repeat, the increase in the trade deficit does not pose an immediate threat to the US economy. And probably, the Trumpian trade war has only caused limited economic damage; the one that has come out the most harmed is the American credibility. But Trump's double deficit shows that his party has lied about its political priorities, and that the president is completely ignorant about his priority political issue. Luckily, a great country like the United States can survive many things, including dishonesty and ignorance at the top.
Paul Krugman is a Nobel Prize in Economics.
© The New York Times, 2019. Translation of News Clips.