Donald Trump will build a big and beautiful deficit and will depend on China to help pay for it


The tax plans of the Republicans will clash head-on with President Trump's anti-China rhetoric against the trade deficit. It's just a simple economy.

Assuming they pbad, it is anticipated that Republican tax plans will increase the federal debt by about $ 1.3 trillion to $ 1.6 trillion over the next decade, although ratings and details vary. This is the same debt that, campaigning in Ohio, Trump called "a weight on the future of every young person in this country." As the debt grew under its predecessor, Trump did not mince words:

Our deficit spending is China's profit. @BarackObama is bankrupting our country.

– Donald J. Trump (@ realDonaldTrump) September 23, 2011

And he did not stop once he was elected:

China has been pulling large amounts of money and wealth from the US. UU in a totally unilateral trade, but it will not help with North Korea. Nice!

– Donald J. Trump (@realDonaldTrump) January 2, 2017

But now that it's time to approve a fiscal plan that non-partisan observers agree will require a deficit spending, Republicans are on board with The growth of federal debt Large-scale loans will help offset the reduction in tax revenues and avoid some painful cuts to government programs.

[37 of 38 economists said the GOP tax plans would grow the debt. The 38th misread the question.]

To cover this deficit, the Trump government and its successors will issue additional Treasury bonds in the coming decades, with Eric Toder, co-director of the Tax Policy Center, publishing that one version of the bill would increase the debt as a portion of the economy by 6 percentage points in 2017, and 10.1 percentage points in 2037. About half of those bonds will end up abroad, according to Joseph Gagnon, principal investigator at Peterson Institute for International Economics

Treasury data compiled by the San Luis Fed show that central banks, investors and foreign corporations already hold $ 6.17 billion in Treasury bonds in the second quarter, compared to $ 5.73 billion for private national investors. More than a third of these international investors are based in two countries: China and Japan.

China, which in combination with Hong Kong had $ 1.38 trillion in September, is the largest foreign creditor in the United States and its role is increasing it resumed purchases of Treasury bills earlier this year.

Those trillions of dollars in external financing do not appear out of the blue. There's another side to that balance, and it's one that Trump likes even less.

How the Republican tax cut could help foreign competitors and increase the trade deficit

Republicans say the cuts are intended to increase economic growth and employment, but there are many signs of that the economy is already running at full speed. For example, the unemployment rate is 4.1 percent, and economists do not think it can go much lower.

Meanwhile, the economy has been growing at 3 percent in recent quarters; Economists do not believe that it can grow much faster (or even maintain that speed for much longer).

A tax cut would inject more money into this rather hot economy, effectively putting more money in a container that is almost full. [19659006] "It's going to put a little more money in people's pockets," said Gary Hufbauer, an expert and trade expert at the Peterson Institute for International Economics.

The extra money has to go somewhere. Part of this could be saved by individuals and corporations. But the USA UU They have a quite low savings rate in general. That means that the money is likely to go abroad, in the form of Americans who buy goods and services.

When Americans buy those goods and services, they give dollars to foreign countries. These dollars can in turn be used to grant loans to the US. UU To finance the tax cut.

This economic cycle increases the trade deficit. Academic research has shown that deficit spending leads to greater trade deficits. The IMF has discovered that each additional dollar of deficit spending generates approximately 60 cents of trade deficit.

According to this calculation, $ 1.5 trillion in additional loans to finance the tax cuts would increase the trade deficit by $ 900 billion.

[How a Trump presidency could give a big advantage to Chinese and Mexican factories]

The Trump team tried to explain the contradiction, arguing that the fiscal plan would increase domestic investment in the US. UU And eventually it would increase exports, attacking the trade deficit from another direction. [19659006] "The way we primarily want to reduce the trade deficit is by increasing our exports instead of restricting imports," Commerce Secretary Wilbur Ross told the Wall Street Journal Executive Council. "That way, you have more total trade and you have a reduction in the deficit."

Taken alone, the trade deficit is not a very useful indicator of economic health. A country can prosper even if it has a deficit and dies of hunger during a surplus.

But Trump developed a campaign around the use of trade deficits as a measure of whether the United States was "winning" or "great." Now that he is in a position where his policies will have a clear effect on that measure, he is dealing with the reality that some of his promises hurt others.

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