deficits

Trade Deficit Rising!

Since 2017Q1. By Mr. Trump’s own metric, we’re losing. But it’s a stoopid metric for evaluating “unfair”-ness. From the last GDP release (which incorporates March trade release):Figure 1: Net exports to GDP (blue), and net exports excluding petroleum products (red), as a ratio to GDP, SAAR. NBER defined recession dates shaded gray. Orange denotes 2017Q1-2018Q1. Source: BEA 2018Q1 second release, NBER, and author’s calculations. Here’s a detail, in nominal dollar terms: Figure 2: Net exports to GDP (blue), and net exports excluding petroleum products (red), both nominal, SAAR. NBER defined recession dates shaded gray. Orange denotes 2017Q1-2018Q1. Source: BEA 2018Q1 second release, NBER, and author’s calculations. As noted in numerous instances (EconoFact, Steil/BI), trade deficits usually ...

Guest Contribution: “An Economic Platform for the Democrats”

Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. An earlier version appeared in Project Syndicate. Democrats are gearing up for the November mid-term elections, in which they hope to take back the US House of Representatives. Candidates are finding that the voters are not necessarily paying close attention to foreign affairs or even Trump scandals, and are more concerned about “pocketbook issues.” The conventional wisdom still stands: underlying the shock election of Mr Trump was a perception by the median household that it has been left behind by globalization and technological change and that the gains have been going to the rich instead. The Democr...

Maybe We Will Get That Crowding Out That Rep. Paul Ryan Feared

Remember? “Borrowing and spending by the public sector will crowd out investment and growth in the private sector.” Paul Ryan, “Path to Prosperity” (April 2012). The reasons why interest rates did not rise appreciably in the wake of the American Recovery and Reinvestment Act included the accommodative Fed policy (see this post for graphical analysis augmented by a very little algebra), and the slack in the economy. Neither of these conditions hold in 2018, so one might think that elevated interest rates due to the massive increase in Federal government deficits and debt will now show up. A recent Goldman Sachs report (Hatzius et al, May 12, 2018) makes this point, as shown in the impulse response functions (IRFs) associated with a 1 percentage point of GDP increase in the structural budget...

The Reagan Tax Cuts and Defense Buildup: Supply-Side Miracle or Keynesian Stimulus?

I keep on hearing about the supply-side miracle associated with the the Reagan era tax cuts. What do changes in estimated potential versus actual output suggest? Figure 1: Year-on-year growth rate of real GDP (blue), and of potential GDP (red), calculated as 4th differences of logged values. Dashed lines at effective dates for Economic Recovery Tax Act of 1981 and Tax Reform Act of 1986. Source: BEA, CBO. The variation in actual output clearly exceeds that of potential GDP, suggestive of a nonvertical aggregate supply curve. (It’s also interesting to see that potential GDP growth was accelerating before the enactment of the first Reagan tax cut; it also decelerated after the 1986 Tax Reform Act.) Now, it could be that CBO mismeasured potential GDP. Is there another way to determine whether...

Twin Deficits Redux? CBO Predicts

From the recent CBO Budget and Economic Outlook, the projected current account and implied cyclically adjusted budget balance. Figure 1: Structural/cyclically adjusted Federal budget balance (dark blue), and current account balance (dark red), both as a share of GDP. NBER defined recession dates shaded gray. CBO projection period shaded gray. Projection of structural budget balance estimated by author using June 2017 estimate, adding in legislative changes reported in CBO (2018). Source: BEA 2017Q4 3rd release, CBO (2018), and author’s calculations. So, the twin deficits re-appear, as many of us had predicted. Interest rates rise as fiscal policy collides with tighter monetary policy. Today, the IMF released its forecasts in the semi-annual World Economic Outlook, the CBO forecast for the ...

Tax Cut and Budget Balance Mythologies

In the current discourse, there seems to be some amnesia with respect to when tax cuts occurred, why they occurred, and how they affected Federal budget deficits. Here is some data (read comments to this post. Figure 1: Federal budget balance as share of GDP (blue), cyclically adjusted budget balance as share of GDP (red), June 2017 estimates. NBER defined recession dates shaded gray. Source: BEA 2017Q4 3rd release, CBO (2017), NBER, and author’s calculations. EGTRRA is the Economic Growth and Tax Relief Reconciliation Act, JGTRRA is the Jobs and Growth Tax Relief Reconciliation Act. Some people have argued that these tax cut acts actually improved the budget balance (or increased tax revenues). The data shown above argues against this point (as does a large empirical literature).

The Budget Deficit Outlook, Post-TCJA and Omnibus Budget

Relative to before. Source: CBO, Budget and Economic Outlook, April 2018 via Kaplan/NYT. these estimates include macro feedback effects (i.e., dynamic scoring). So much for tax cuts paying for themselves (if anybody ever really believed that).

What’s the End Game?

From Toles: The question we should be asking (prompted by my thinking about the relevance of game theory) is which payoff matrix is of relevance. Here, it makes sense to differentiate between the objectives of Mr. Trump and the United States as a whole. To degrade China’s ability to ascend the quality ladder, and maintain US technical leadership in advanced production technologies. To reduce the bilateral trade deficit with China. To reduce the overall US trade deficit. To increase the Republican party’s ability to retain control of the legislative branch. To activate nativist and xenophobic groups within the Trump electoral coalition. To satisfy atavistic desires to impose pain on foreign parties. Surely, this is not an exhaustive list, but I think it covers a lot of possibilities. It is ...

The “Real” Trade Balance: Measurement and Prospects

The conventionally reported trade balance (or “net exports”) for the United States from the National Income and Product Accounts (NIPA) is net exports of goods and services, in nominal terms. (There are also trade balance measures on a Census basis and Balance of Payments basis, which differ in coverage and definitions.) The inflation adjusted trade balance is hard to calculate correctly, given the use of chain weighted measures of exports and imports. Here I plot a (Törnqvist) approximation to the real trade balance. Figure 1: Net exports in billions of US$ (blue), and in billions of Ch.2009$ (red), SAAR. NBER defined recession dates. Orange denotes 2017Q1 onward data. Source: BEA 2017Q4 second release, and author’s calculations. Notice both in nominal and real terms, net exports have det...

The Trump Trade Deficit Is A Grower AND A Show-er

(Getty Images) Donald Trump has, for thirty years, characterized the U.S. trade deficit as an economic scorecard—arguing that the American habit of annually importing more than it exports is like running a business that loses money every year. This is, of course, utter nonsense. A national economy is nothing like a business, and the U.S. trade deficit, when compared to the nation’s trillions upon trillions in national wealth is a mere rounding error that is affected by far more than just U.S. economic policy. (It’s perhaps terrible analogies like these that led Trump economic advisor Gary Cohn to tell Michael Wolff that the president is “dumb as shit”) This isn’t to say that the trade deficit is of no consequence—more balanced trade could mean more domestic jobs, but then again, with unemp...

Trump’s Trade Deficit

A progress report (the deficit is increasing, if you were wondering…) Figure 1: Trade balance in billions of dollars, SAAR (blue), and 12 month moving average (red). Orange denotes Trump administration. Source: BEA/Census December trade release, and FRED. Notice the deterioration in the moving average of the trade balance starting around November. A longer perspective, normalized by GDP, is provided by Figure 2. In this figure, I depict a “non-petroleum” net exports series, to control Figure 2: Net exports to GDP (blue), and net exports excluding petroleum products (red). NBER defined recession dates shaded gray. Trump administration shaded orange. Source: BEA 2017Q4 advance release, NBER, author’s calcuations. The non-petroleum deficit has increased over the past year, while the overall i...

More on Portfolio Crowding Out in the Context of Normalized Fed Policy

The algebra and graphical analysis (from my undergrad course) is here. If you don’t understand it, don’t bother commenting. Source: Irwin, NYT, 9 Feb 2018. Back in 2000, when I was an economist on the Council of Economic Advisers (under Bill Clinton), we worried about what would happen when the Federal debt was all retired, particularly with respect to the implementation of monetary policy. George W. Bush and the Republicans in Congress solved that problem with two sets of tax cuts, and gave us record deficits in subsequent years (little help — around a trillion — coming from the Iraq invasion). In 2017, we didn’t need to worry about retiring the Federal debt, nor did we need to worry about a negative output gap. But Mr. Trump and the Republican Congress will likely help solve the problem ...

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