The causation between reduced price and interest rate appears hurried in here. Drop in prices cause the interest rate to rise only if the drop in price is caused by monetary tightening policies that raise interest rate based on the dynamics presented in the Liquidity Preference Curve

Trade deficit at 2.5% of GDP sounds bad but is a great benefit to Americans. They use other people's savings (which are excessive in mainly Asian countries) in a globalised world economy. So long as the US dollar is a reserve currency and foreigners are buying US securities there is no adjustment needed. There is no prospect whatever of foreigners not wanting to invest in US bonds, stocks, real estate and anything else they can get hold of to hold US dollar assets instead of their own volatile and declining currencies. Switzerland may be the only exception.

To balance trade, America should import less, meaning it should produce domestically what it is importing in any given year. Exporting more of America's comparative advantage does not hurt either.

Ora, se "The United States has a trade deficit of about $450 billion, or 2,5% of GDP". It not powed "...exports and imports are 15% and 12% of GDP, respectively..." but 12% and 15% of GDP, respectively.

ABSTRACT

Os especialistas em comércio estimam que a redução do déficit comercial dos EUA em um por cento do PIB exige que os preços de exportação baixem 10% ou os preços de importação aumentem 10%. Uma combinação dessas mudanças de preços é sobre o que seria necessário para reduzir o atual déficit comercial em 2% do nosso PIB, trazendo os EUA perto da balança comercial. Mas, como as exportações e importações dos EUA são 15% e 12% do PIB, respectivamente, uma queda de 10% nos preços de exportação reduziria o rendimento real médio (ajustado pela inflação) em 1,5%, enquanto um aumento de 10% nos preços das importações reduziria o real De 1,2%.
oRA SE OS ESTADOS UNIDOS POSSUI UM DÉFICIT COMERCIAL DE u$450 BILHÕES OU 2,5% DO PNB, ELE NÃO PODE EXPORTAR 15 % DO PNB E IMPORTAR 12% DO PNB, MAS EXPORTAR 12% E IMPORTAR 15%.

Here are some inconvenient truths about China's idea of a true market economy...See http://www.prosperousamerica.org/inquiry_into_the_status_of_the_people_s_republic_of_china_as_a_nonmarket_economy_country

beutifull

Americans are paid too much. Robber barons skim too much.

'Twas ever thus.

Typical nonsense from a tenured academic who hasn't had a new thought in 30 years. Suddenly, a short-term accounting identity becomes the basis for a national policy to reduce the incomes of millions of poor Americans and increasing the unemployment rate by a significant amount.

Feldstein does not attempt to make any second-order appraisal of what his short-term solution would entail. Who bears the brunt of the proposed adjustments? Not the people with whom he hob- nobs. The people who spend more than they earn do so with debt, a factor Feldstein ignores. They do so because their incomes already are inadequate to maintain their basic consumption needs.

Perhaps PS should eliminate the BS.

“But if the trade deficit narrows because households save more and government deficits are reduced, it is possible to have a higher level of investment – and thus higher incomes in the long term.”

Americans who live paycheque-to-paycheque — of which there are (way too) many — aren’t suddenly gonna be saving something. And slashing their meagre social programs as a way to achieve reduction of government deficits will only exacerbate their plight and won’t do nearly enough in the way of reducing government deficits. Indeed, the only way government deficits are gonna be reduced by an amount significant enough to affect the trade deficit is if American legislators kick their addiction to private sector money, reclaim their responsibility-to-govern (R2G), and quit throwing taxpayer money into the many sinkholes euphemistically called “national defence.” But as everyone knows, that ain’t gonna happen because, on the decline-and-fall scale, America is past the point of no return.

A 5% decline in real total income is about 2 years worth of growth. When you look at it that way, it's not a big deal. It's only a big deal if it were to arrive as a shock.

I wish I lived in a nation where foreigners are just too happy to send us goods and services in exchange for our printed paper, aka money. We can then all retire and enjoy life w/o having to work.
The real "trade deficit" did happen historically and to some extent and form still exist today. It is called colonialism, slavery, gunboat diplomacy.

Today's "trade deficit" is good for the nation as a whole, very good for large corporations. If you lost your job because of "trade deficit" it is NOT the foreigners' fault, rather it is because you did not buy your own politician - wealthy individuals and corporation did.

That households will save more under almost any circumstances is a pretty dream.

Total personal (not government) debt approaches $19 trillion ($56,000 per person, not per worker). 42 million Americans live in poverty; 61 million are retired or disabled; 31 million are without health insurance (the 42, 61, and 31 million likely overlap). Reportedly, 70% of Americans have saved less than $1,000. Exactly who will be the big new savers?

Personal bankruptcy, lack of credit, loss of job, and similar stumbles aside, little will slow Americans’ consumption of non-essentials.

MF’s conclusions seem logical ON PAPER assuming economic man. Given the dearth of long-term thinking and understanding of economics among Americans, we are doomed to continuing deficits, trade and otherwise.

I'm confused. We can reduce the trade deficit by saving more and investing less? Aren't savings turned into investments? My 401k constitutes savings for me, but investments for the companies whose stock it buys. Perhaps Feldstein meant consumption, not investment? Or maybe he's speaking some insider "econo-speak" that we laymen don't understand.

Shares of US exports and imports are 12% and 15% of GDP, resepctively, not 12% and 15% as you state. Otherwise the US would not be running a trade deficit.
While you point about savings and investments is well taken and has been repeated by many (most recently by Martin Wolf in the FT), using accounting identities explains nothing about the causation and policy implications. The Triffin Dilemma alone forces the US to run a current-account deficit as long as the dollar remains the world reserve currency.

A good case in point is US Steel (X, whose stock plunged by over 25% this week). With all this Federal "stimulus" and record low borrowing rates, X never bothered to spend anything to upgrade its mills. Now the demand is up some, and X isn't modernized, so won't be able to keep up with the other 95% of the mills. What happened to X? They had a pension obligation to fulfill.

This article reaches wrong conclusions because it is based on unsupported and unstated implicit assumptions, such as 1) the US cannot produce more, 2) low savings rates are a result of overconsumption rather than under production, 3) the actions/policies of foreign governments do not affect US production, 4) the US and world economic production is primarily supply constrained as opposed to demand constrained, and 5) there is an inadequate supply of capital that is significantly constraining US investment and hence production capacity.
Feldstein: “But foreign import barriers and exports subsidies are not the reason for the US trade deficit. The real reason is that Americans are spending more than they produce….. So reducing the US trade deficit requires Americans to save more or invest less. On their own, policies that open other countries’ markets to US products, or close US markets to foreign products, will not change the overall trade balance. ”
I believe that a primary contributor to the persistent US trade deficit is that the US has been producing below its capacity, and that in order to reduce the trade deficit the US needs to increase production. Foreign import barriers and export subsidies can and do affect US demand and production; and hence net savings, investment and the overall trade deficit. Over the past two decades a flood of low priced imports has resulting in a crushing of US manufacturing with thousands of factories shutting down, whole industries virtually wiped out, and others significantly reduced. As can be seen from the accounting identities, when production drops faster than consumption net savings rates drop. The resulting reduced savings is closely related to the increase in the trade/current account deficits. US investment and production is primarily constrained by insufficient demand. If demand materializes at profitable selling prices increased investment and production will follow shortly.

Mr. Feldstein's distinction between saving and investing departs from convention. Do I know what he's talking about? Does he?

Mr. Feldstein's differentiating between saving and investing departs from convention. Do I know what he's talking about? Does he?

"Over the longer run, the growth rate of national output depends on what happens to overall US investment in plant and equipment."

Good point, but our investment in human capital is at least as important.

Perhaps addressing Trumps concerns over the existence of Chinese dual currency, and EU VAT regimes would be a way of demonstrating your point. But your article is worthless as instead you are setting up a straw man to argue against. Its a multiple repeat offence by PJ so come on, make the arguments as to what is the correct response to trade abuse with examples, preferably the ones Trump has been using, and argue your case if you can?!

Feldstein’s comments on trade and tariffs need to be seen in context. The economics profession has systematically deceived everyone about trade for years. People who dissemble for a living have no credibility, nor do they deserve any. Could it possibly be that Feldstein is somehow exempt from the dishonesty that is pervasive in his profession? Could he be the one and only honest economist. I doubt it, but everyone should decide for themselves. The quotes below from Dani Rodrik (in the pages of PS) make it clear that economists are not to be trusted on the subject of trade (or any other subject?).

‘Are economists partly responsible for Donald Trump’s shocking victory in the US presidential election? Even if they may not have stopped Trump, economists would have had a greater impact on the public debate had they stuck closer to their discipline’s teaching, instead of siding with globalization’s cheerleaders.

“It has long been an unspoken rule of public engagement for economists that they should champion trade and not dwell too much on the fine print. This has produced a curious situation. The standard models of trade with which economists work typically yield sharp distributional effects: income losses by certain groups of producers or worker categories are the flip side of the “gains from trade.” And economists have long known that market failures – including poorly functioning labor markets, credit market imperfections, knowledge or environmental externalities, and monopolies – can interfere with reaping those gains.”

As my book Has Globalization Gone Too Far? went to press nearly two decades ago, I approached a well-known economist to ask him if he would provide an endorsement for the back cover. I claimed in the book that, in the absence of a more concerted government response, too much globalization would deepen societal cleavages, exacerbate distributional problems, and undermine domestic social bargains – arguments that have become conventional wisdom since.

The economist demurred. He said he didn’t really disagree with any of the analysis, but worried that my book would provide “ammunition for the barbarians.” Protectionists would latch on to the book’s arguments about the downsides of globalization to provide cover for their narrow, selfish agenda.
There is always a risk that our arguments will be hijacked in the public debate by those with whom we disagree. But I have never understood why many economists believe this implies we should skew our argument about trade in one particular direction. The implicit premise seems to be that there are barbarians on only one side of the trade debate. Apparently, those who complain about World Trade Organization rules or trade agreements are awful protectionists, while those who support them are always on the side of the angels.
In truth, many trade enthusiasts are no less motivated by their own narrow, selfish agendas. The pharmaceutical firms pursuing tougher patent rules, the banks pushing for unfettered access to foreign markets, or the multinationals seeking special arbitration tribunals have no greater regard for the public interest than the protectionists do. So when economists shade their arguments, they effectively favor one set of barbarians over another.’

In my experience, some major areas of US production are discriminated against. For example, European standards of safety and nit picking detail make exporting woodworking machinery from the US to Europe so difficult that there is little interest in the US to do so. This, combined with the US standard use of 110v power against the 240 volts in many countries, seems a relatively simple problem to solve but no-one wants to do it. I ran into this problem trying to buy an industrial planing machine. Prices in the US were 30% of prices in Europe, but it is not possible to import US machines without the kite mark etc. This is a small part of a massive problem, but seems to me to introduce a few ideas which could easily be solved. I do not think that accidents on US wood working machines in th US are any higher than similar accidents in Europe.

This assumes that the US trade deficit is entirely the result of US-based decisions. Maybe the author has heard about a little thing called globalisation.

The truth about savings.
In reality there must be net zero savings.
All savings must be borrowed by someone to spend it.
If savings is more than the borrowing than the gdp turns negative.
Of course the government must equalize the trade deficit what is basically an income deficit with government debt.
To really understand the trade deficit one must understand the cost and the price of an economic output.
The cost is influenced by government's policies taxes and regulations.
If the usa would have a true freemarket economic, than wages would have adjusted to the level where it wouldn't be worth to import many products.
The government only keeping the standard of living by deficit spending.
To hope for more export and less import but at the same time interfering with the costs of an economic output shows how little the politicans understand true free market economic within a country.

Trump is an economic genius compared to Feldstein. Trump’s grasp of trade economics is a lot more substantive than Feldstein, even if his ideas are not sufficiently PC for the PS set. A few points should make this clear.

However, the notion (from Feldstein and others) that the saving rate (as in low) drives the trade deficit is an inversion of causality. At least in the case of the U.S., the trade deficit has driven the saving rate. Let me offer a key example.

From 2000 to the crash of 2007/8 the U.S. trade deficit exploded to the highest level in U.S. (and indeed world history). At its peak, the trade deficit exceeded 6% of GDP. Of course, this caused immense pain (lost jobs, lost wages, depression conditions, etc.) in much of the USA. How did the administration (Bush 43) respond? By blowing up the housing bubble which crashed the saving rate. How did the housing bubble slash the saving rate? First, MEW (Mortgage Equity Withdrawal) peaked at 9% of Disposable Personal Income (over $800 billion per year at the peak). Second, the housing bubble brought a surge in capital investment in commercial and residential construction.

Of course, the housing bubble was mandatory for the Bush (43) administration given the fanatical fixation of the Bush administration on “free trade” (really outsourcing, offshoring, domestic economic destruction). Of course, the housing bubble ended in disaster. What should be clear is that Trade Deficit led inexorably to the crash of 2007/2008. To put this bluntly Bushinomics/Feldsteinomics brought economic ruin to the USA (and much of the world). Note that there is nothing uniquely American about any of this. Large trade deficits have led to major crashes all over the world.

There is a deeper point here. If they U.S. (hypothetically) took steps to raise the saving rate, the consequences would be dire. The U.S. economy would immediately crash. Note that both parties in the U.S. recognize this. The Republicans promote “lower taxes” and “infrastructure investments” to stimulate the economy. The Democrats promote “more spending” and “infrastructure investments” to stimulate the economy. In both cases, it’s just closet (from Bruce Bartlett) trade deficit driven Keynesianism.

Could the U.S. raise the saving rate and not crash? Sure it could. However, that would require a dramatic increase in exports and/or reduction in imports. Both require a large reduction in the value of the U.S. dollar and dramatically lower trade surpluses in other nations (Germany, China, etc.). Are these countries willing to give up their surpluses and accept a lower dollar? Not at this point.

The bottom line is easy. Feldstein is economic illiterate compared to Trump. Feldstein is PC. Trump is not. Feldstein is still wrong. Just the facts, not the Fake News.

Feldstein’s grasp of economics is nugatory at best. Feldstein doesn’t dare to say it, but his model is based on an assumption of full employment. Of course, if he was honest enough to admit his assumption of full employment, everyone would just laugh at him. Folks, time to start laughing.

In real life the U.S. has vast unused resources. Tens of millions of Americans are either unemployed or underemployed. Given those realities, slashing imports will make America richer and more prosperous. The economic analysis is straight forwards. Say America backs out $500 billion in imports, using unused resources to produce the same goods and services. National income goes up by $500 billion, not down.

In Feldstein’s world the (S)aving – (I)nvestment gap drives the (E)xports – (I)mports gap. In real life, the truth is much more complex and closer to the reverse. Only at full employment, does a reduction in the trade deficit reduce potential investment or consumption.

Feldstein doesn’t dare to expose this assumption, because of how ridiculous it is. The technical term is that he is using a GE (General Equilibrium) model. Fake news at its best.

Hi Martin,

Fascinating and well-written as always.

Interesting that the U.S. trade deficit of $450 billion for 2017 is almost exactly equal to the spending required to fix America's infrastructure in 2017.

It's almost like a policy lever that should've been activated (say, in 2015/16) wasn't activated. Someone asleep at the switch in policyland?

Still not to late to address it however. The U.S. could still kill 3-birds with one stone -- if it could simply arrive at the right policy.

What needs doing?

1) The deficit lowered to 0% of GDP. It's outrageous that billions of dollars leave the U.S. every year to pay foreign investors to buy American government T Bills. Over decades, that amounts to a lot of lost domestic demand/investment.

2) Some $450 billion needed to be spent on American infrastructure, yesterday. Or even a decade ago. Sixty percent of bridges (for one example) in the U.S. are unsafe, because they are either so ancient, or badly maintained, or both.

3) Domestic demand needs to increase. And when it does, unemployment will drop, wages may rise slightly, and much more tax revenue will be collected by all levels of government -- leading to further spending in the real economy.

President Trump could solve all three problems and look like a financial genius by simply arriving at the right policy that causes citizens to want to invest in America's infrastructure -- an Infrastructure Bond with a zero tax rate, for example.

And corporations should likewise be encouraged to purchase such Infrastructure Bonds with a zero tax rate. Excess liquidity problems leaving!

It wouldn't take long to accumulate $450 billion to fix America's decaying infrastructure.

The point is... to get started!

There's nothing to be gained by staring at charts for a year or a decade. Trump needs to hit a homer in 2017, and this could be it.

Imagine four years hence; America's infrastructure repairs well past the halfway mark; Unemployment under 5 percent; Increased domestic demand; Higher tax revenues for all levels of government; A zero percent of GDP deficit means fewer U.S. dollars are leaving the country to pay for foreign investment in U.S. Treasury Bills; Wall Street *loves* the $450 billion tax-free Infrastructure Bond and the economic multipliers or at least, spinoffs associated with the I Bonds; A nominal rise in standard of living; lower inequality as the bottom-two quintiles return to almost full employment as a result of hundreds of thousands of new infrastructure-related blue collar jobs.

I can't think of a single reason to *not* do this.

Always great to read you here at ProSyn, Professor!

As always, very best regards, JBS

Here's a bulletin for Mr Feldstein:

The United States doesn’t suffer from insufficient savings. It suffers from insufficient domestic demand, and this almost always means insufficient consumption.

Moreover, the savings rate in an open economy like that of the United States is extremely unlikely to be determined endogenously, and is in fact far more likely to be determined by distortions in economies with significant institutional rigidities and substantial government intervention.

Put differently, there is no reason to assume, as is almost universal practice, that the U.S. savings rate is low for reasons that reflect specific U.S. conditions (and to assume that American household preferences determine the U.S. savings rate is especially absurd).

It is not an independent variable, and the common claim that because Americans are unwilling to save they must rely on foreigners to bridge the funding gap gets it exactly backwards. Americans save so little precisely because of foreign capital inflows, and this must necessarily be the case as long as the capital account is open and the U.S. financial system flexible.

An increase in the U.S. current account deficit must be accompanied either by (1) an increase in productive investment in the United States, or (2) an increase in American unemployment, or (3) an increase in the debt burden (to fund either unproductive investment or consumption).

There is no other meaningful adjustment mechanism consistent with an increase in the U.S. current account deficit.

Washington should initiate policies that cause desired investment to surge, so that the American economy can take advantage of very cheap foreign savings and massively rebuild America’s tattered physical infrastructure. Rebuilding U.S. infrastructure would have the effect of substantially reducing the country’s debt burden even if the full amount of the investment were funded by government debt.

American infrastructure needs are so great that the consequent productivity increases would fully service the associated debt long before they stopped adding value to the economy.

Three points. First, Feldstein's confidence that new creditors will always be ready to step in to finance US current account deficits is charming, but hardly convincing.

Second, it's not that hard to change savings ratios by changing capital values. One of the great virtues of free and open capital markets is that small changes in relative returns can produce major changes in the direction of flows. Changes in relative interest and inflation rates push funds back and forth all the time. Small wealth taxes would have the same effect.

Third, the worst effects of such adjustments in capital values and savings ratios would be narrowly felt, while benefits would be widespread. Property owners would be hurt, but they've enjoyed years (actually decades) of price support from the FED. Producers of goods and services, and those with earned income would benefit.

So, sum it up. Adjustment is necessary, easier than Feldstein suggests and entirely in our hands. The Fed seems to recognize this, but may have to fight a Trump fiscal program that runs exactly in the opposite direction.

Essentially Americans are living beyond their means and passing the bill to future generations. Simple as that. It has been going on for decades but is accelerating. Selling the future into bondage is the foundation of the American Dream. Even if the ongoing deficit was removed tomorrow the future still remains in bondage

'Blessed are the young for they shall inherit the national debt.' - Herbert Hoover

I think you should modernise your terminology - creation of IP, whether tech, medical or scientific is economically equivalent to plant and equipment in that their benefit extends for several years and is not used up in the short term. A new term is needed for these in the collective and I would suggest "Enduring assets".