How Trump has made both the trade and budget deficits worse

Guest Post by Paul Brandus

The law finally seems to have caught up with President Trump.

Not lawmen like special counsel Robert Mueller, or the G-men of the Southern District of New York—though they may soon catch up with him, for all I know. No, I’m talking about the law of unintended consequences, which has already overtaken the president in two big areas: economic and fiscal policy

By definition, the law of unintended consequences is when someone takes action on something, and that action has an unanticipated or unintended effect on something else.

That is what has happened to Trump. He took office vowing to eliminate the entire national debt in eight years, but it has only gotten worse, thanks to the skyrocketing budget deficit. In turn—and this is the unanticipated or unintended effect on something else—it has made the trade deficit worse as well. The Census Bureau said Wednesday that the trade deficit for goods soared to an all-time high in 2018: a whopping $891 billion.

Meantime, how big is the national debt? When Trump took office, it was—according to President Obama’s last budget for fiscal year 2017, which ended Sept. 30 2017—$20.24 trillion. Yet by the end of Trump’s first full fiscal year—Sept. 30, 2018—it had jumped more than 5% to $21.51 trillion.

That gargantuan figure has since accelerated: In the first four months of the current fiscal year (through Jan. 31), it has jumped nearly 2.2% more, to $21.09 trillion.

And get this: By fiscal year 2028, which begins Oct. 1, 2027, the debt is projected to be—hold on—$33 trillion.

Trump tied both issues together during his 2016 campaign, telling, in a stunningly ignorant interview with Bob Woodward of the Washington Post, that by simply cutting better trade deals, he could wipe out that debt. At the time, the total U.S. trade deficit with the world was $531 billion—or about 2.5% of the debt.

Trump made it sound like eliminating the debt would be a piece of cake, and yet the red ink continues to gush. What happened? For starters, the president and Republicans—who dominated Congress for his first two years in office—spent big and passed a a tax cut that hasn’t been paid for.

You don’t have to be a rocket scientist to know what happens when the government spends more while taking in less: the deficit goes up. The federal deficit, $665 billion in fiscal 2017, is projected to be $984 billion in fiscal year 2019 (which began on October 1). That’s an increase of 48% in three years. To finance it, we have to borrow more, and guess who our biggest foreign lender is? Hint: It’s a five-letter word starting in “C” and ending in “A.” All this gets added tacked on to the debt, of course, and as the interest piles up, we’ll have to borrow even more. It’s a vicious and costly circle.

In turn, this foreign borrowing makes the trade deficit worse.

“If foreigners buy more government bonds (which is how the Treasury borrows money), that causes an appreciation of the exchange rate,” points out Sherman Robinson, a senior fellow at the Peterson Institute for International Economics in Washington. “This makes our exports more expensive abroad and imports cheaper to U.S. citizens.”

Which means foreigners buy fewer of our exports and we buy more of their imports. It’s that simple.

Thus the law of unintended consequences: Trump said his policies would curb both the debt and the trade deficit—but he has only made both worse.

This helps explain why Robinson agrees with the assessment of former Federal Reserve Chair Janet Yellen that Trump doesn’t know what he’s doing. Asked on the public radio show Marketplace, if the president “has a grasp of economic policy,” Yellen responded, “No, I do not.”

This failure to grasp even basic Econ 101 hasn’t stopped Trump from telling his base—or them believing him—that everything’s going great. He keeps talking about the how the economy is growing like gangbusters. Here, his grasp of reality falls short again: GDP did grow at an impressive 4.2% pace in the second quarter of 2018, but that was then. It slowed to a 2.6% pace by the end of last year, and a recent survey of economists by the Wall Street Journal forecasts a growth rate of 2.0% for the first quarter of this year. We are shifting into a lower gear whether Trump—or his base— believes it or not.

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