The Trump trilemma: The contradiction at the heart of Trumponomics

From The Economist here: The Trump trilemma - The contradiction at the heart of Trumponomics

You can’t have tax cuts, an investment boom and a smaller trade deficit

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Period.

THE currents of trade, President Donald Trump accepts, will ebb and flow: “Sometimes they can be up and sometimes we can be up,” he said in an interview with The Economist on May 4th. A long-term trade deficit, though—such as that between America and Mexico, which ran to $56bn in 2016—is bad. Bad because it shows that a poor trade deal has been made (see article); bad because money is being thrown away. Achieving more balanced trade, Mr Trump and his team say, will, along with cutting taxes and encouraging more business investment, create jobs and boost growth.

Unfortunately the three proposed pillars of this new prosperity are incompatible. When Americans import more than they sell abroad, foreigners accumulate dollars. Rather than sit on that cash, they invest it in dollar-denominated assets. It is as if container ships arrived at American ports to deliver furniture, computers and cars, and departed filled with American
stocks and bonds. Over time, those assets yield returns in the form of interest, dividends and capital gains. For instance, American taxpayers must pay interest to Japanese holders of Treasury bonds.

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America's debt comes cheap because countries world-wide love to hold it since it is denominated in dollars. Which is why, when the dollar drops, countries sell the debt (which only drives the price paid and the dollar lower)! So, foreign trade (which Americans like particularly) becomes more expensive. And, since most of that trade has never or no longer is manufactured in America, there is good reason (depending upon the tradeoff) to kick-start manufacturing. That could be economic goodness, if we had the qualified personnel to man highly automated production lines - but that is not going to create that much employment.

Viewing the trade deficit as cheap borrowing exposes the tension at the heart of Trumponomics. If they are to do without the foreign capital they currently import, thus closing the trade deficit, Americans must save more. Yet rather than squirrelling away its money, Mr Trump wants the private sector to go on a spending-and-investment spree, spurred on by deficit-financed tax cuts. “We have to prime the pump,” he says, quite the Keynesian.

It is by no means certain that the thus-primed pump will provide growth on the scale he wants. But history illustrates the likely effect on the trade deficit. In 1981 Ronald Reagan’s tax cuts sent the federal government’s deficit soaring, from 2.5% of GDP in 1981 to 4.9% in 1986. The current account lurched into deficit almost simultaneously. Following this experience, the notion of “twin deficits”—in government borrowing and trade—became popular.

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It is difficult to understand from where Trump is getting his Economics Advice, but there is something very wrong with it. Because the advice is at cross-purposes to what the private-sector is likely to do. That is, go on a spending-spree to boost production and thus higher personal incomes that are subsequently spent on Demand.

After the Great Recession, in 2014 (long before Trump arrived on the scene) America was already creating jobs. (See the Employment-to-population Ratio History from the BLS). There is no reason to think that job-creation will accelerate with the Unemployment Rate already at rock-bottom.

Lafayette said:

From The Economist here: The Trump trilemma - The contradiction at the heart of Trumponomics



Period.



America's debt comes cheap because countries world-wide love to hold it since it is denominated in dollars. Which is why, when the dollar drops, countries sell the debt (which only drives the price paid and the dollar lower)! So, foreign trade (which Americans like particularly) becomes more expensive. And, since most of that trade has never or no longer is manufactured in America, there is good reason (depending upon the tradeoff) to kick-start manufacturing. That could be economic goodness, if we had the qualified personnel to man highly automated production lines - but that is not going to create that much employment.



It is difficult to understand from where Trump is getting his Economics Advice, but there is something very wrong with it. Because the advice is at cross-purposes to what the private-sector is likely to do. That is, go on a spending-spree to boost production and thus higher personal incomes that are subsequently spent on Demand.

After the Great Recession, in 2014 (long before Trump arrived on the scene) America was already creating jobs. (See the Employment-to-population Ratio History from the BLS). There is no reason to think that job-creation will accelerate with the Unemployment Rate already at rock-bottom.

Click to expand...

You can’t have tax cuts, an investment boom and a smaller trade deficit?? Why not???