Scott Sumner recently published an article discussing a potential relationship between trade deficits and government debt. In short, since debt must come from savings, if domestic savings are too low relative to domestic investment, then foreign savings must step in and make up the difference; the United States imports foreign savings. When the government runs deficits and decides to finance them by borrowing, the savings used to pay off that debt can come from domestic or foreign sources. In the United States, a large portion of savings comes from foreign sources, accounting for part of the trade deficit.
Some protectionists have used this relationship between trade deficits and government debt to argue that classical liberals (like me) and others concerned about government debt should support tariffs to reduce the trade deficit. Reducing the amount of foreign savings coming into the United States would raise interest rates and thus make government borrowing more expensive. The government would therefore reduce its deficit spending. This argument is specious, however, for two reasons.
First: Interest rates will probably go up, but it is not clear that they will go down. government budget deficitThe people who make budget and spending decisions do not face the full costs of their decisions. Neither do voters (in fact, the costs are spread across all taxpayers). As a result, we end up in a situation where James Buchanan and Richard Wagner call “Democracy in deficit“: Politicians prefer easy choices to hard choices and generally support higher spending and lower taxes.
Voters face similar incentives. Indeed, absolute The amount of resources used to produce the same amount of spending will increase if tariffs are used to try to tackle the public debt (assuming the same amount of deficit spending occurs, it will be financed at a higher interest rate than would have been the case with larger trade deficits. Thus, the amount needed to repay the debt would be higher than otherwise). No one in the political process has any incentive to reduce deficit spending. even with a higher interest rate because “the government” is not a monolithic decision maker like the individual in the market. Rather, it is a collective composed of several independent decision-makers, each acting according to their own will and their own interests.
Second: Tariffs are a blunt instrument. Even assuming (contrary to the facts) that tariffs can reduce the trade deficit, there is no guarantee that debt reduction will come from a reduction in the government budget deficit. This could (and perhaps would, given the public choice constraints discussed above) come at the expense of private investment. Domestic business leaders would find it harder to expand, hire, acquire, and produce. TO DO If leaders were to bear the full cost of their actions, they would feel the impact of interest rates more acutely than policymakers. Using tariffs to reduce government deficits is like burning down a house to kill a spider: sure, the spider may be dead, but the collateral damage is much worse.
Ultimately, using tariffs to reduce the trade deficit in the hope of reducing the government’s budget deficit is tantamount to confusing the symptom with the cause of the disease. Trade Deficits can Excessive government spending may be a sign of excessive government spending, but if that is the case, the goal should be to actually reduce government spending. Of course, this is a much harder problem for the reasons mentioned above. But just because it is hard does not mean that we should choose an easier, but probably more harmful, option.
Many economists, by Adam Smith Today, analysts dismiss trade deficits as “absurd” and argue that their existence creates confusion rather than clarity. The link between trade deficits and public debt supports their conclusion.
Jon Murphy is an assistant professor of economics at Nicholls State University.
