Will Trumponomics Actually Work?

My Comments: No need to freak out here; it’s not written in a strange language. This is a short, understandable comment that appeared in a fundamentally sound forum about business and economics.

Unless we are happy being in debt to someone else, our primary effort is to spend less than we actually earn, since taxes also have to be paid. Some of what we earn is spent on food, shelter, transportation and health. Think of that as foundational capital. The rest is discretionary capital and we either save it (invest) or spend it. What we do individually is an example of micro-economics at work. What we do collectively as a nation is called macro-economics.

Tim Worstall, Contributor to Forbes / Apr 2, 2017

An interesting and useful observation here. It’s not really possible to cut taxes, increase public investment and also shrink the trade deficit. Not without at the same time massively increasing the savings rate within the US. Thus, without massively increasing the savings rate it’s not really going to be possible to increase that spending upon infrastructure, cut taxes and also cut the trade deficit.

Desmond Lachman explains this:
A basic truism of macroeconomics is that a country’s trade balance is determined by the difference between the rate at which it saves and the rate at which it invests. Should a country’s investment rate exceed its saving rate, the country will necessarily have a trade deficit.

Conversely, if it saves more than it invests it will necessarily have a trade surplus. This implies that there are only two ways that a country can improve its trade balance. It either has to increase its savings rate or it has to reduce its investment rate.

When we start talking about basic truisms we mean that there’s no way to avoid this little conundrum. To reduce that trade deficit we must either increase the savings rate or reduce investment – there is no other way.

By proposing large unfunded tax cuts and substantial increases in infrastructure and defense spending at a time that the country is close to full employment, Mr. Trump is pushing for policies that would significantly widen the US budget deficit and reduce US public savings.

That decline in savings in turn would inevitably lead to an increase in the US trade deficit irrespective of what might be done to clamp down on trade abuses by our trade partners.

That essential premise of Trumponomics, that we’re going to invest, and cut taxes, while also reducing the trade deficit, just isn’t going to work, is it? Because how are we going to increase the savings rate?

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