NCPA - National Center for Policy Analysis


March 18, 2008

The trade deficit (when more goods and services are imported than exported), the budget deficit (when government spends more than its tax revenues), and the balance between domestic saving and investment are related to each other.  In fact, their sum must equal zero.  A change in any of them affects all of them, says Bob McTeer, a distinguished fellow with the National Center for Policy Analysis.

What are the policy implications of these interdependent imbalances?

  • Tax incentives to encourage saving would likely also stimulate investment and lower both the budget deficit and the trade deficit.
  • Reducing the budget deficit would reduce the vulnerability of the U.S. economy to foreign creditors; rising deficits could lead to foreigners dumping dollar assets, causing equities to decline, interest rates to spike and the dollar to plunge.
  • Reducing the budget deficit doesn't necessarily mean higher tax rates; marginal rate cuts reinforced by slower government spending growth would be ideal incentives.

Unfortunately, the recent tax "rebates" designed to stimulate the economy dealt a setback to budget discipline.  Most people probably understand that.  What they probably don't understand is that the increased budget deficit will also tend to worsen our international balance of payments and weaken the dollar.  Policymakers need to study these interconnected deficits, says McTeer.

Source: Bob McTeer, "Our Triple Deficits," National Center for Policy Analysis, Brief Analysis No. 613, March 18, 2008.

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