Huge Federal Budget Deficits and Trade Deficits are Linked



First year economics students are introduced to the concept of "National Savings Identity" . That is the equation that real gross domestic product (the sum of all the goods and services produced in the U.S. in a year) is equal to private consumption expenditure + capital investment into new plants and equipment + net government expenditures on good and services + net exports. E.g., in equation form:

Y = C + I +G + Net exports



 or restated algebraically, 

Net exports = Y – C – I – G = Real gross domestic product – private consumption expenditure – capital investment into new plants and equipment – net government expenditures on good and services

What follows logically is that if Real gross domestic product, private consumption expenditure and capital investment into new plants and equipment are relatively constant, negative “net government expenditures on goods and services” (i.e., budget deficits) increase, net exports will decrease. 

In other words, the larger the budget deficits, the larger the trade deficits. The larger the trade deficits, the more U.S. jobs are lost. 

Conclusion: Large budget deficits are inconsistent with trying to reduce the trade deficit. The huge tax cuts in 2017 work against President Trump’s insistence that our trade deficit be reduced. Large budget deficits that are created by tax cuts have a positive economic stimulus effect, but also a trade off in terms of jobs lost to overseas manufacturers.

Caveat: there isn't a direct 1-to-1 relationship due to all of the many interactions, and there are lags in time among the effects, if for no other reason that it takes time for supply chains to be revised. Nonetheless, the link between federal budget deficits  and trade deficits is real and should be considered.



Paid for by (even if free) Rick Olson for Congress Committee, P.O. Box 1079, Prior Lake, MN 55372


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