NEW HAVEN – Donald Trump’s economic strategy is severely flawed. The US president-elect wants to restore growth via deficit spending in a country with a chronic shortfall of saving. This points to a further compression in national saving, making a widening of an already outsize trade gap all but inevitable.
That dynamic unmasks the Achilles’ heel of Trumponomics: a blatant protectionist bias that collides head-on with America’s inescapable reliance on foreign saving and trade deficits to sustain economic growth.
The Trump administration will not inherit a strong and sound US economy. The pace of recovery since the Great Recession has been running at half that of normal cyclical rebounds – all the more disturbing given the massive size of the contraction in 2008-09. And savings, the seed corn of future prosperity, remain in woefully short supply. The so-called net national saving rate – the depreciation-adjusted sum of business, household, and government saving – stood at just 2.4% of national income in mid-2016. While that’s an improvement from the unprecedented negative saving position in 2008-2011, it remains far short of the 6.3% average that prevailed over the final three decades of the twentieth century.
This is important because it explains the pernicious trade deficits that Trump continues to rail against. Lacking in saving and wanting to grow, the United States must import surplus saving from abroad. And the only way to attract that foreign capital is by running massive current-account and trade deficits. The numbers bear this out: since 2000, when national saving fell well below trend, the current-account deficit has widened to an average of 3.8% of GDP – nearly four times the 1% gap from 1970 to 1999. Similarly, the net export deficit – the broadest measure of a country’s trade imbalance – has been 4% of GDP since 2000, versus an average of 1.1% over the final three decades of the twentieth century.