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Does Low American Savings Rate Cause Trade Deficits?

July 28, 2017

Mainstream trade news continues to assert that trade deficits don’t matter. Economists help reporters write these fake news stories by claiming that America’s failure to save money is the problem, not foreign trade cheating. On June 20, 2017, the Coalition for a Prosperous America released a research paper, “Do Savings Rates Cause Trade Deficits?” by CEO Michael Stumo and Research Director Jeff Ferry that shows why globalist economists are wrong about what causes trade deficits, offshoring and job losses.

[Michele Nash-Hoff | July 26, 2017 |Industry Week]

They write, “A popular, but misleading, claim is that low U.S. savings, relative to investment, causes our trade deficit. For example, Harvard professor and former Reagan administration advisor Martin Feldstein.has said that the U.S. fiscal deficit, which indeed reduces national savings, is the cause of the trade deficit. ‘If a country consumes more than it produces [thus saving little], it must import more than it exports.’”

These macroeconomists “claim that Americans spend too much, save too little, produce too little, and thus must import to support their gluttony.” They are incorrect.

White House economists use the “savings rate causes trade deficits” claim to create the false illusion that nothing can be done. But the real problem is that a few foreign countries – like China, Japan, Germany and South Korea – have economic strategies to overproduce, under consume and ship their overcapacity to the U.S. Their growth strategy is their full employment program. They export their unemployment to the U.S. 

Mainstream trade news continues to assert that trade deficits don’t matter. Economists help reporters write these fake news stories by claiming that America’s failure to save money is the problem, not foreign trade cheating. On June 20, 2017, the Coalition for a Prosperous America released a research paper, “Do Savings Rates Cause Trade Deficits?” by CEO Michael Stumo and Research Director Jeff Ferry that shows why globalist economists are wrong about what causes trade deficits, offshoring and job losses.

They write, “A popular, but misleading, claim is that low U.S. savings, relative to investment, causes our trade deficit. For example, Harvard professor and former Reagan administration advisor Martin Feldstein.has said that the U.S. fiscal deficit, which indeed reduces national savings, is the cause of the trade deficit. ‘If a country consumes more than it produces [thus saving little], it must import more than it exports.’”

These macroeconomists “claim that Americans spend too much, save too little, produce too little, and thus must import to support their gluttony.” They are incorrect.

White House economists use the “savings rate causes trade deficits” claim to create the false illusion that nothing can be done. But the real problem is that a few foreign countries – like China, Japan, Germany and South Korea – have economic strategies to overproduce, under consume and ship their overcapacity to the U.S. Their growth strategy is their full employment program. They export their unemployment to the U.S.

Distinguishing Causes from Mathematical Interrelationships

To macroeconomists, the “national savings, investment and net trade are variables within equations or formulas known as ‘national income identities’. Because the variables are within the identity, they are called “’endogenous’ and are explained by the equation.” But they do not explain what causes the changes.

“The basic Gross Domestic Product equation is referred to as a national income identity, expressed in the following equation:

Net Exports are also expressed as X – M in another version of this equation. When the Net Exports is a negative figure as it has been since 1979, this reduces the GDP. According to previous research by the Coalition for a Prosperous America, “the annual trade deficit has reduced each year’s GDP by some 3% to 5.5% each year, and those reductions compound over time.”

The purpose of the paper is to explain “how to distinguish (a) causation from (b) mathematical interrelationships in the national income identity or equation that underlies this debate. For reasons explained below, real world changes (exogenous factors) outside the identity are the true causes. These real-world changes directly impact one or more variables within the identity, transmitting through the equation by mathematical necessity. In short, national savings is related to the trade deficit in an accounting sense but does not cause it.”

Government policies often affect each one of the variables of the above equation. For example, the income tax rate may affect consumption.  If rates are high, then American consumers have less money to devote to consumption.  If government consumption and expenditures through procurement is down as it was under sequestration, then companies that sell to the government make less money and have less money to buy products as business and corporate consumers. 

Read more at Industry Week


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