Trump is an economic illiterate compared to Sachs? Really? More Fake News actually. Trump’s grasp of trade economics is a lot more substantive than Sachs, even if his ideas are not sufficiently PC for the PS set. A few points should make this clear.



First, trade economics is definitely not a first year topic. Second or third year? Perhaps. Graduate level? Definitely by that point.



However, the notion (from Sachs and others) that the saving rate (as in low) drives the trade deficit is an inversion of causality. At least in the case of the U.S., the trade deficit has driven the saving rate. Let me offer a key example.



From 2000 to the crash of 2007/8 the U.S. trade deficit exploded to the highest level in U.S. (and indeed world history). At its peak, the trade deficit exceeded 6% of GDP. Of course, this caused immense pain (lost jobs, lost wages, depression conditions, etc.) in much of the USA. How did the administration (Bush 43) respond? By blowing up the housing bubble which crashed the saving rate. How did the housing bubble slash the saving rate? First, MEW (Mortgage Equity Withdrawal) peaked at 9% of Disposable Personal Income (over $800 billion per year at the peak). Second, the housing bubble brought a surge in capital investment in commercial and residential construction.



Of course, the housing bubble was mandatory for the Bush (43) administration given the fanatical fixation of the Bush administration on “free trade” (really outsourcing, offshoring, domestic economic destruction). Of course, the housing bubble ended in disaster. What should be clear is that Trade Deficit led inexorably to the crash of 2007/2008. To put this bluntly Bushinomics/Sachynomics brought economic ruin to the USA (and much of the world). Note that there is nothing uniquely American about any of this. Large trade deficits have led to major crashes all over the world.



There is a deeper point here. If they U.S. (hypothetically) took steps to raise the saving rate, the consequences would be dire. The U.S. economy would immediately crash. Note that both parties in the U.S. recognize this. The Republicans promote “lower taxes” and “infrastructure investments” to stimulate the economy. The Democrats promote “more spending” and “infrastructure investments” to stimulate the economy. In both cases, it’s just closet (from Bruce Bartlett) trade deficit driven Keynesianism.



Could the U.S. raise the saving rate and not crash? Sure it could. However, that would require a dramatic increase in exports and/or reduction in imports. Both require a large reduction in the value of the U.S. dollar and dramatically lower trade surpluses in other nations (Germany, China, etc.). Are these countries willing to give up their surpluses and accept a lower dollar? Not at this point.



The bottom line is easy. Sachs is economic illiterate compared to Trump. Sachs is PC. Trump is not. Sachs is still wrong. Just the facts, not the Fake News.

