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Tariffs, Deficits and Debt – Econlib

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Scott Sumner recently Potential Relationships The relationship between trade deficits and government debt. To summarize, debt must be financed from savings, so when domestic savings are too low relative to domestic investment, foreign savings must flow in to make up the difference. The United States imports foreign savings. When a government runs a deficit and decides to finance it with debt, the savings to pay the debt can come from domestic or foreign sources. In the United States, part of its trade deficit is financed from foreign sources.

Some protectionists use the relationship between trade deficits and government debt to argue that classical liberals (like me) and those concerned about government debt should support tariffs to reduce the trade deficit. Reducing the amount of foreign savings flowing into the United States would raise interest rates, which would increase the government’s borrowing costs. As a result, the government would reduce its budget deficit. However, this argument is unjustified for two reasons.

First, interest rates are likely to rise, but it is not clear that this will reduce government budget deficits. Those who make spending and budget decisions do not bear the full cost of those decisions, nor do voters (indeed, the costs are spread across all taxpayers). As a result, the government is likely to continue to operate in a more flexible and transparent manner, as James Buchanan and Richard Wagner put it:Democracy’s flawsPoliticians prefer easy choices to hard ones, and generally support more spending and lower taxes.

Voters face similar incentives. absolute When tariffs are used to reduce government debt, more resources are used to generate the same amount of spending (assuming the same amount of deficit spending is incurred, but financed at a higher interest rate than would be the case with a larger trade deficit; therefore, the amount needed to service the debt is higher than would otherwise be the case). No one in the political process faces an incentive to reduce deficit spending. Even if interest rates are high Because “government” is not a monolithic selector like individuals in the market. Rather, it is a multi-factorial Independent Each chooser acts according to his or her own will and self-interest.

Second, tariffs are a blunt instrument. Even if we assume (contrary to the evidence) that tariffs can reduce the trade deficit, there is no certainty that debt reduction will come from reducing government deficit spending. It will likely come at the expense of private investment (and, given the public choice constraints noted above, probably will), making it harder for domestic business owners to expand, hire, acquire, and produce. Domestic business owners will have to pay more for the debt. do If business leaders bear the full cost of their actions, they will feel the effects of rising interest rates more severely than government choosers. Using tariffs to reduce the government deficit is like burning down a house to kill a spider: the spider may indeed die, but the collateral damage is much greater.

Ultimately, trying to use tariffs to reduce the trade deficit and therefore the government’s budget deficit is confusing the cause of the disease with the symptoms. May This is a sign of excessive government spending, but if it is, the goal should be to actually reduce government spending, which is of course a much harder problem for the reasons mentioned above, but just because it is difficult does not mean we should choose the easier, but perhaps more harmful, option.

Many economists are From Adam Smith To this day, many have dismissed trade deficits as “irrational” and argued that their existence brings more confusion than clarity. The link between trade deficits and government debt supports their conclusion.


John Murphy is an assistant professor of economics at Nicholls State University.

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