Folks Who Believe In Secular Stagnation Don’t Think The Trade Deficit Is Determined By The National Savings-Investment Balance

It is common for economists to assert that the trade deficit is equal to the gap between national savings and national investment. If the United States invests more than it saves (combining private savings and government savings) then it is running a trade deficit. This is true by definition.

Intro econ fans may remember that we have the basic accounting identity saying that output is equal to income:

C+I+ G + (X-M) = Y

where C is consumption, I is investment, G is government spending, and X-M is net exports (exports minus imports). Y is income.

We also can say that Y = S+C+ T

where S is savings, C is consumption, and T is taxes.

The basic story is that the government taxes away some of our income and the rest is either saved or consumed (saved means it is not consumed).

This gets us C+I+G+(X-M) = S + C +T

since we have C on both sides, we can just say I+G + (X-M) = S+ T

then we subtract I+G from both sides and get(X-M) = (S-I) + (T-G)

This is our basic story where the trade surplus (X-M) is equal to the surplus of private savings (S-I) plus the surplus of public savings (T-G). If we have a trade deficit rather than a trade surplus, then it must mean that the sum of private and public savings is negative.

All of this is 100 percent true, we are in definition land. The problem is when economists try to turn this into a story of causation as we got in Eduardo Porter’s NYT piece on trade:

“The American current account deficit — a broad measure of its trade — is the mirror image of the gap between the United States’ national savings and its national investment. Because it invests more than it saves, it draws money from abroad and spends it on foreign goods and services. Until it closes the savings gap, no amount of diplomacy, bullying or cajoling will close the gap in trade. ….

“But even if Mr. Trump’s Nafta gambit worked and bilateral trade came into balance, it wouldn’t necessarily change the balance of American trade over all. …

“As another Dartmouth economist, Robert Staiger, told me, unless the American savings-investment imbalance corrected itself, too, the former deficit with Mexico would simply pop up somewhere else.

“‘Bilateral deficits are going to keep popping up everywhere,’ he said. ‘Trump is going to be playing Whac-a-Mole.'”

Print Friendly, PDF & Email

Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

Share This Post On

Submit a Comment

Your email address will not be published. Required fields are marked *