Trumponomics’ Exorbitant Burden

A Different Perspective on the US Trade Deficit

A prominent economist once told me that macroeconomic policy debates are all about the prime mover to which other variables respond. The implication, he explained, is that “You can invert policy prescriptions simply by claiming a different forcing variable.” A paper by Stephen Miran, published just before he was nominated to chair US President Donald Trump’s Council of Economic Advisers, does precisely this. Since his views likely reflect those of the administration, they surely warrant close attention.

The Traditional View

The traditional view of why the US runs chronic trade deficits is that it overspends, owing largely to its fiscal deficits (the forcing variable). But the true forcing variable, Miran argues, is the rest of the world’s hunger for US financial assets, especially Treasuries.

Foreign Demand for US Treasury Bonds

Foreigners want ever more US Treasuries for their foreign-exchange reserves and for financial transactions, and the US has had to run large fiscal deficits to meet this exorbitant demand. The resulting capital inflows keep the dollar too strong for US exporters to compete, leading to persistent trade deficits.

Timing Issues

The argument is unpersuasive, for several reasons. First, consider the timing. The US started running a steady trade deficit in the mid-1970s. It began running a steady fiscal deficit around the same time, with the exception of the late 1990s, when capital gains taxes and private consumption soared because of the dot-com boom, temporarily shifting the locus of US overspending from government to households.

Federal Budget Deficits

While foreigners have been buying US financial assets for a long time, and US entities have been repaying the compliment, the “forcing” effect of dollar accumulation by foreign central banks really took off only after the Asian Financial Crisis of 1997, when East Asian economies, seared by the harsh conditions imposed on them by the International Monetary Fund, built reserves to protect against sudden stops in financing. Again, the timing is off.

Trade Deficits in Goods and Services

Moreover, the US does not run a uniform trade deficit. Rather, it has a trade deficit in goods and a net surplus in services (nearly US$300 billion in 2024). When economists encounter that kind of pattern, they see orthodox comparative advantage at work, which benefits the US.

Apple and Foxconn

Apple reaps large profit margins selling the superbly designed iPhone (and its software content) to the world, while Foxconn gets tiny margins manufacturing iPhones in China and India. Even though the overall trade numbers may reflect a large deficit, the US is far from being a victim.

Bond Interest Rates

Another problem is that any excess demand for US Treasuries from the rest of the world should show up in a huge excess premium for US bonds. Yet Miran complains that US bond interest rates don’t reflect such a premium, giving the US little benefit from producing high-demand financial assets. This seems strange. Why would such demand hold up the dollar but not push down US bond rates?

Conclusion

The claim that the dollar’s attractiveness is an exorbitant burden rather than an exorbitant privilege is unpersuasive, especially when those making such arguments are so reluctant to give up the burden. Markets are unnerved by the punishment that the administration, convinced that the US is a victim, is willing to inflict on close allies. If such behavior reduces the attractiveness of the dollar, perhaps it really will become an exorbitant burden. But that is not a future that any American should want.

FAQs

Q: What is the traditional view on the US trade deficit?
A: The traditional view is that the US runs chronic trade deficits due to its fiscal deficits.

Q: What is the forcing variable, according to Stephen Miran?
A: The forcing variable, according to Miran, is the rest of the world’s hunger for US financial assets, especially Treasuries.

Q: What is the timing issue with the argument?
A: The timing of the US trade deficit and fiscal deficit do not match the argument.

Q: What is the pattern of trade deficits in the US?
A: The US has a trade deficit in goods and a net surplus in services.

Q: What is the problem with the argument on bond interest rates?
A: The excess demand for US Treasuries from the rest of the world should show up in a huge excess premium for US bonds, but it does not.

About the Author

Raghuram G. Rajan, a former governor of the Reserve Bank of India and chief economist of the International Monetary Fund, is professor of finance at the University of Chicago Booth School of Business. The views expressed are those of the writer and do not necessarily reflect those of FMT.