Thursday, September 29, 2016

Trump’s Economic Proposals Continue to Make No Sense

A headline that “Trump makes no sense” would not surprise many people.

But in this case, it’s the more official economics pronouncements of the Trump campaign that have problems:

Trump proposes eliminating America’s $500 billion trade deficit through a combination of increased exports and reduced imports. [pg 18]

Note that this isn’t a policy. Instead it’s a description of one way the numbers might change if the trade deficit were reduced to zero.

What’s worse is that this non-explanation of how things will work is then used to argue that this is a way to increase real GDP growth:

To illustrate this, suppose the US had been able to completely eliminate its roughly $500 billion 2015 trade deficit through a combination of increased exports and decreased imports rather than simply closing its borders to trade. This would have resulted in a onetime gain of 3.38 real GDP points and a real GDP growth rate that year of 5.97%.

This is why economists talk do so much math, and talk about theory. It’s in our math that we make sure that all the connections are there that should be. And it’s our theory that suggests what those connections ought to be.

The big missing piece here is that, with flexible exchange rates, our current account deficit is balanced by our capital account surplus. Trump is presuming that through “negotiation” he can move one down without thinking about the other. I think it’s dubious to begin with that any trade negotiation between governments is even a large part of international transactions made by millions of people and firms. But anyway, will the capital account just tag along? What if it’s actually the capital account surplus that’s causing the current account deficit (a position I’ve taught in my macro classes for going on 30 years)?

This is sad. In this election cycle we seem to have gone past potential policymakers making up hopeful but plausible stories about their proposals, to potential policymakers just making the whole thing up. This is not politics as usual; it’s way beyond that.

N.B. I’m not the only macroeconomist that was floored when I saw the quotes in the news (see Marginal Revolution, Greg Mankiw’s Blog, or Paul Krugman’s column).

No comments:

Post a Comment