Wednesday, April 27, 2005

Why does US fiscal policy effect trade deficit?

The US trade deficit is an accounting construct that captured whether the US is a net importer of goods (net exporter of cash) or a net exporter of goods (net importer of cash). Now, both goods and cash are handy, so I don't see why either a trade deficit or surplus is desireable, or important. This is doubly so in America's case since the US is a closed economy, only 10% of economic activity comes from trade.

Given that it is unclear why any trade deficit is important, and the US's trade deficit in particular, I don't see why anyone wants to do anything about it, and I further fail to see why any change in the US's fiscal deficit matters to the trade deficit one way or another.

The US fiscal deficit is the cash amount the government spends in one year vs. the cash amount the government takes in that same year. This, incidently, is a meaningless figure because the government has long term obligations (e.g. social security, medicare, medicaid, possibly pensions) that far outweight the year to year inflows and outflows of money. Cash Accounting is good enough for a hot dog stand, it is not good enough for a company of any size, and it is woefully inadequate for a country.

The notion that having annual cash inflows and outflows match better will somehow make America import less stuff and export more cash is, in my mind, incoherent. The US imports stuff because other countries, through export-friendly policies, are strapping hundred dollar bills to their exports. If a Japanese DVD player looked good before, it looks *great* with a hundred dollar bill attachd to it. To refuse such largess would be irresponsible.

Similarly, the US doesn't export cash because where is it going to go? Sclerotic Europe? Corrupt Russia? Opaque China? Catatonic Japan? If any of those countries improved their conditions for economic growth, we would see money going there.

If people think the US saves too little, as I do, the prescriptions are simple.
1) Higher interest rates (this is happening).
2) Government mandated savings (such as privatized social security, and an effort is being made here).

Cutting pork spending from the federal budget, though worthy, will not do a thing about domestic savings rates. Help me here -- what am I missing?


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