Everyone on the right is suddenly worried about trade deficits. Everyone on the left is suddenly worried about tariffs. It is amazing how Freaky Friday politics are on display.
But if you’re truly concerned about trade deficits, and the inevitable response to tariffs on countries the United States maintains a deficit with, then why not sound the alarm on the personal savings rate?
Today, the national savings rate is averaging about 7 percent, up from the putrid four to five percent of the last several years. As a percentage of the gross domestic product, it’s about 2.8 percent.
Stephen Roach, a columnist for MarketWatch, wrote a superb column recently, titled “With China today as with Japan in 1980s the U.S. is in denial about source of deficits.”
He makes the case that the trade battle of the ’80s with Japan is happening again, but this time the villain is China.
Roach opines:
When Reagan took office in January 1981, the net domestic saving rate stood at 7.8% of national income, and the current account was basically balanced. Within two and a half years, courtesy of Reagan’s wildly popular tax cuts, the domestic saving rate had plunged to 3.7%, and the current account and the merchandise trade balances swung into perpetual deficit.
In this important respect, America’s so-called trade problem was very much of its own making.
Yet the Reagan administration was in denial. There was little or no appreciation of the link between saving and trade imbalances. Instead, the blame was pinned on Japan, which accounted for 42% of U.S. goods trade deficits in the first half of the 1980s.
Japan bashing then took on a life of its own with a wide range of grievances over unfair and illegal trade practices. Leading the charge back then was a young deputy U.S. trade representative named Robert Lighthizer.
Fast-forward some 30 years and the similarities are painfully evident.
Unlike Reagan, President Donald Trump did not inherit a U.S. economy with an ample reservoir of saving. When Trump took office in January 2017, the net domestic saving rate was just 3%, well below half the rate at the onset of the Reagan era. But, like his predecessor, who waxed eloquently of a new “morning in America,” Trump also opted for large tax cuts — this time to “make America great again.”
The result was a predictable widening of the federal budget deficit, which more than offset the cyclical surge in private saving that normally accompanies a maturing economic expansion. As a result, the net domestic saving rate actually edged down to 2.8% of national income by late 2018, keeping America’s international balances deep in the red — with the current-account deficit at 2.6% of gross domestic product and the merchandise trade gap at 4.5% in late 2018.
And that’s where China assumes the role that Japan played in the 1980s. On the surface, the threat seems more dire.
After all, China accounted for 48% of the U.S. merchandise trade deficit in 2018, compared to Japan’s 42% share in the first half of the 1980s. But the comparison is distorted by global supply chains, which basically didn’t exist in the 1980s.
Now, there is nothing inherently wrong with the trade deficit. There is a strong correlation between trade deficits and rising incomes. At the same time, saving and investment are what drive an economy, not consumption.
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