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Mr. Trump on Economics and Accounting

Summary:
“For many, many years, the United States has suffered through massive trade deficits. That’s why we have trillion in debt. So we’ll be changing that.” This statement was made during the meeting with the South Korean President on June 30th [1] Observations The United States has experienced large trade deficits for years, starting with the Presidency of Ronald Reagan. Gross Federal debt at the end of 2017Q1 was .8 trillion. The US trade deficit is the excess of exports over imports. It is measured in a variety of ways. On a national income and product accounts (NIPA) basis, net exports is -2.8 billion (Seasonally Adjusted at Annual Rates, SAAR) in 2017Q1. The gross national debt is the cumulated Federal budget balance, including interest accrued, and includes debt held by other

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“For many, many years, the United States has suffered through massive trade deficits. That’s why we have $20 trillion in debt. So we’ll be changing that.”

This statement was made during the meeting with the South Korean President on June 30th [1]

Observations

  • The United States has experienced large trade deficits for years, starting with the Presidency of Ronald Reagan.
  • Gross Federal debt at the end of 2017Q1 was $19.8 trillion.
  • The US trade deficit is the excess of exports over imports. It is measured in a variety of ways. On a national income and product accounts (NIPA) basis, net exports is -$562.8 billion (Seasonally Adjusted at Annual Rates, SAAR) in 2017Q1.
  • The gross national debt is the cumulated Federal budget balance, including interest accrued, and includes debt held by other agencies of the Federal government (e.g., Social Security trust funds).
  • Net Federal government saving on a NIPA basis was -660.3 billion (SAAR) in 2017Q1.
  • The budget balance and the trade balance (net exports) are:

    Budget balance ≡ taxes – government transfers – government spending

    Trade balance ≡ exports – imports

  • These two accounting identities are pertain to different sectors – one is the (Federal) government sector, the other the aggregate economy with respect to the rest-of-the-world.

The fact that the two deficits are unrelated in accounting terms does not mean that they are not somehow economically related. However, a causal mechanism has to be laid out in order to make the argument they are. Take a look at Figure 1.

Mr. Trump on Economics and Accounting

Figure 1: Share of Federal government net saving (blue), and net exports (red), as share of nominal GDP. Source: BEA, 2017Q1 3rd release.

It’s clear the correlation, even with a lag, does not always fit in with President Trump’s story. And the correlation changes over time. To the extent they are related, I would say the causality more likely goes from budget balance to trade balance, rather than the reverse. For instance, higher government spending leads to a budget deficit, and at the same time higher imports due to higher consumption of imported goods, and less exports and higher imports due to an appreciated currency (Figure 2).

Mr. Trump on Economics and Accounting

Figure 2: Share of Federal government net saving vs. net exports, as share of nominal GDP, 1967-85. Source: BEA, 2017Q1 3rd release.

Or, a positive shock to investment leads to higher income, a boom in tax revenues, so the budget balance improves. But higher economic activity draws in more imports (for consumption, investment purposes).

Mr. Trump on Economics and Accounting

Figure 3: Share of Federal government net saving vs. net exports, as share of nominal GDP, 1986-07. Source: BEA, 2017Q1 3rd release.

Or something else, like the US growing faster than the rest-of-the-world.

Mr. Trump on Economics and Accounting

Figure 4: Share of Federal government net saving vs. net exports, as share of nominal GDP, 2008-2017Q1. Source: BEA, 2017Q1 3rd release.

It could be that Mr. Trump meant to point to US net indebtedness with respect to the rest-of-the-world, as summarized by the US Net International Investment Position. However, this is not quite correct, as the NIIP (which includes equities and direct investment) does not match up with the cumulated current account deficit. External debt kind of does, but even that is not exact (and it’s not clear why cumulated current account balances should equal only the net position in debt).

So, I am forced to conclude (and here I’m going out on a limb(!)), Mr. Trump is (not for the first time) confused.

Menzie Chinn
He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

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