The achilles’ heel of Trumponomics

BY STEPHEN S. ROACH

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.

Trumponomics has the cause and effect behind this development backwards. It fixates on country-specific sources of the trade deficit, like China and Mexico, but misses the fundamental point that these bilateral deficits are symptoms of America’s far deeper saving problem. Presume for the moment that the US closes down trade with China and Mexico the first and fourth largest components of the overall trade deficit through a combination of tariffs and other protectionist measures (including the proposed renegotiation of NAFTA and a Mexican-funded border wall). Without addressing America’s chronic saving shortage, the Chinese and Mexican components of the trade deficit would simply be redistributed to other countries most likely to higher-cost producers. The result would be the functional equivalent of a tax hike on beleaguered middle-class US families.

In short, there is no bilateral fix for a multilateral problem. The US had trade deficits with 101 countries in 2015 a multilateral problem stemming from a saving shortfall that cannot be effectively addressed through country-specific “remedies.” That’s not to say that America’s trading partners should be let off the hook for unfair practices. But it does mean that there is limited hope for resolving seemingly chronic trade deficits and the related erosion of domestic hiring traceable to these imbalances if the US doesn’t start saving again.

Alas, this plot is about to thicken. Trumponomics seems likely to exacerbate America’s saving shortfall in the years ahead. Analyses by the Tax Policy Center, the Tax Foundation, and Moody’s Analytics all indicate that federal budget deficits under Trump’s economic plan are headed back toward at least 7% of GDP over the next ten years.

Trump’s senior economic-policy advisers, Peter Navarro and Wilbur Ross (Trump’s pick for commerce secretary), argued in a position paper in September that these estimates are flawed, because they don’t take into account “growth-inducing windfalls” from regulatory and energy reforms, or the added bonanza that should arise from a sharp narrowing of America’s trade deficit.

Indeed, the Navarro-Ross analysis attributes fully 73% of the growth-inducing revenue windfall of Trumponomics to a massive improvement in the overall trade balance over the next decade. Yet, as stressed above, barring a miraculous surge in national saving, this is highly dubious. Creative accounting, long a staple of supply-side economics, has never been more imaginative.

Therein lies one of the most glaring disconnects of Trumponomics. Getting tough on trade at a time when national saving is about to come under ever-greater pressure simply doesn’t add up. Even the most conservative estimates of the federal budget deficit suggest that the already-depressed net national saving rate could re-enter negative territory at some point in the 2018-2019 period. That would put renewed pressure on the current-account and trade deficits, making it extremely difficult to reverse the loss of jobs and income that politicians are quick to blame on America’s trading partners.

Ironically, in the coming era of negative saving, the US will find itself increasingly dependent on surplus saving from abroad. If the Trump administration takes aim at major foreign lenders namely, China its strategy could quickly backfire. At a minimum, there could be an adverse impact on the terms by which America borrows from abroad; that could mean higher interest rates hints of which are already evident and ultimately downward pressure on the dollar. And, of course, there is the worst-case scenario of an escalating global trade war.

Protectionism, anemic saving, and deficit spending make for an especially toxic cocktail. Under Trumponomics, it will be exceedingly difficult to make America great again.

• Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. He is the author of Unbalanced: The Codependency of America and China.