Trade Deficit and Federal Budget Deficit are mixed bags

Posted on: November 2, 2020 at 02:41:10 CT

The largest single reason the U.S. has a trade deficit is that over the years manufacturing has moved offshore into countries with lower labor costs. A trade deficit is commonly considered by economists to have a negative effect on national income. It's effect on individuals depends to some degree on the individual's position in America. If the individual performed one of the jobs that moved offshore, it's obviously negatively. If the individual is a consumer and buying a good that has a lower price because it was made in a foreign country, that's not bad. One solution to the foreign trade deficit is to sell more goods and services to foreign nations.

The Federal budget deficit has ballooned for a couple of reasons, tax reductions and stimulus to offset the impact of virus shutdowns. Trump has reduced income taxes. Over time that should have a positive effect on growth and the additional growth generate more income which will produce more tax revenue despite the lower rates.

The only effective counter measures to the virus is lockdowns/quarantines/extreme social distancing. They create a substantial negative effect on economic activity and national income. Keynesian Economics dictate that one counter measure is increased government spending. The theory is simply additional spending now will stimulate growth (as well as relieve some of the hardships being faced by society) and the growth will in time eliminate the deficit. It is standard well accepted economic theory for how to deal with a recession, including one caused by a pandemic.

The author of the cited story is simply attempting to present a negative picture of Trump and his administration's policies. There's no analysis of the rationale for those policies, whether or not they are likely to accomplish their intended purposes, etc.