In the context of expressing concern with trade imbalances, a recent piece by Michael Pettis and Erica Hogan argues that high foreign savings in some countries (e.g. China and Germany) is linked to the growing U.S. fiscal deficit (among other things):
The global trade system is broken. Current trade rules allow and even incentivize the perverse flow of capital away from where it is most needed and most productive toward the wealthiest parts of the world. Beyond depriving countries of much needed investment, the global trade system reflects broader problems that negatively impact consumers worldwide. By failing to recognize that industrial policy acts as a form of trade policy, current rules have perpetuated a system characterized by large, persistent, trade imbalances. Taking advantage of the free flow of capital, surplus countries subsidize their manufacturing industries but pass on the costs of these subsidies to deficit countries.
This has had important implications for U.S. manufacturing, unemployment, and debt. American assets are among the most attractive in the world. As a result, countries that subsidize their production via industrial and trade policy are acquiring American assets to balance their surplus and, in turn, the United States is running trade deficits. Because surplus countries have subsidized their manufacturing at the expense of domestic consumption, the U.S. manufacturing industry has been forced to indirectly subsidize American consumption. This has caused the decline of American manufacturing and a shift of global manufacturing from deficit countries to surplus countries over the past five decades. It has also depressed U.S. savings rates through a combination of higher unemployment, higher household debt, investment bubbles, and an ever-growing fiscal deficit, all caused by the influx of excess savings from surplus countries.
(emphasis added)
The quote above attributes a lot of things to excess savings in foreign countries, but I want to focus here on the reference to "an ever-growing fiscal deficit." If I'm reading this correctly, they think that excess savings in other countries is a significant cause of the U.S. fiscal deficit.
I have some thoughts on this, and may have expressed them on social media or even in some long forgotten blog post, but first let me point to a good response from Kim Clausing as part of an FT interview with Soumaya Keynes:
Soumaya Keynes:
... So just sort of analysing, thinking about some of the Trump team’s arguments about tariffs, one of the big bugbears you hear about is the size of the US trade deficit, right? And so this idea is it’s very large. I’m not talking about bilateral trade deficits here. I’m talking about the overall trade deficit. The idea is that that is the product of kind of global imbalances. Something needs to happen to get it in check. And of various imperfect options, tariffs are the best one.
Kimberly Clausing:
It’s quite unclear to most economists that look at this situation that the tariffs will on that improve the US trade deficit. So let me explain why that’s unclear. First, we need to know not just what happens to the volume of US imports, but what happens to the value of US imports. If we’re buying fewer of them at a higher price, right, that doesn’t change the total value of the imports. Second, we need to know what happens to exports. If our trading partners retaliate to our tariffs, that undoes the positive effects on the trade balance through the export channel. But perhaps even more fundamentally than those two questions I just raised, we know that trade deficits are basically the flip side of a savings and investment imbalance. So let me explain that.
The US every year consumes more than it produces. Right? We don’t save enough to fund all of our investment. And because of that, we must borrow from abroad. And the flipside of that borrowing from abroad is a large trade deficit. If you look at why it is that we consume more than we produce, a big factor there is the US budget deficit. And we’re forecast to have budget deficits in excess of 6 per cent of GDP for every one of the next 10 years, and that’s before you take into account any tax cuts including the extensions that we spoke of earlier. So the US has this massive fiscal imbalance and doesn’t have high savings rates. Yet we want to blame the rest of the world for the fact that we’re borrowing from them. So there’s something a little bit hypocritical about that.
Now you may say, OK, well, some other countries have imbalances of their own. China, Germany tend to run surpluses because they have distortions in their own economy. And so the US is just this recipient of all of this excess savings abroad. And, you know, I’m sympathetic to elements of that argument, but I just don’t think you can say that the US Congress is deciding every year to spend 6 per cent of GDP more than it raises in taxes because people in China and Germany have saved a lot. I just don’t see the mechanism there, maybe because that drives down global interest rates and therefore the deficit doesn’t seem as challenging. But I don’t think if you’ve met a few members of Congress that this is exactly what’s motivating that. I think it’s much more political considerations.
So I would suspect that absent a fundamental US macroeconomic adjustment or likewise adjustments in other countries, that our trade deficit will be every bit as large after these tariffs as it would have been before the tariffs, which is, by the way, exactly what we saw with respect to the China tariffs. It’s true we diverted some trade from China elsewhere, but it didn’t reduce the US trade deficit at all.
(emphasis added)
I think Kim is right that the explanation for U.S. budget deficits is mainly "political considerations." To elaborate on that a bit, my impression of U.S fiscal policy over the past 30+ years is that for the most part budget deficits have not been a major political concern, but every now and then something gets people motivated to rein them in. For example, in response to the 1990-1991 recession, and with Ross Perot making it an issue, the mid-1990s saw a concerted effort reduce deficits. Then after the 2007-2008 financial crisis and the Obama administration's stimulus, there was another effort. And in recent months, there has once again been some talk about reducing spending, although there has also been more concrete talk about lowering taxes, so I don't think it's likely we'll see a move towards fiscal balance soon. (Strangely, U.S. fiscal policy is somewhat pro-cyclical rather than counter-cyclical, with recessions often motivating people to balance the budget and strong economies leading to more borrowing).
The main point here is that explanations for U.S. fiscal policy come almost exclusively from domestic politics. Excess savings in other countries doesn't enter into the political thinking. As Kim says, there is a logic to how excess savings could drive down interest rates and make borrowing easier. But practically speaking, from what I've seen, I don't think that plays much of a role in the fiscal decision-making.
The trade policy upshot, of course, is that when you have both government savings and personal savings in the U.S. being relatively low, you end up with a trade deficit, which causes concerns for some people. But unless they are willing to address the macroeconomic causes, I don't think the trade deficit is going away.
