Category: Donald Trump

Econ 101: Trade deficits

A trade deficit is the difference between what we buy from the rest of the world and what it buys from us. To that extent rather than buying our goods and services, the rest of the world holds our dollars. These dollars are most often held in the form of US securities (Treasury bonds, etc.). Though trade deficits help finance Uncle Sam’s spending that is not financed with tax revenue, and thus reduce the crowding out of domestic investment by government deficit spending, President Trump doesn’t like them. Our trade deficit in 2024 was $918 billion.

Trade deficits can be reduced by reducing our imports (this is what tariffs tend to do) and/or by increasing our exports. We export many things including food and oil. Tourism and foreign students studying in the US generate about 9% of our export revenue. This has dropped sharply this year as the Trump administration has blocked or discouraged foreign students and badly treated other visitors, denying entry to some. It has suspended entry of new foreign students to Harvard and is threatening to revoke existing student visas at Harvard.

Trump has not only reached into the affairs of Harvard (and those of many other “enemies”), he is also demanding that the US dollar surpluses held by our trading partners be invested as dictated by the Trump administration. This was stated explicitly by US Treasury Secretary Bessent in an interview by Larry Kudlow on Fox Business. https://www.youtube.com/watch?v=IgcmRJpE1pc  

It is hard to see much free market here. Gregg Ip nails it in his recent WSJ article “The U.S. Marches Toward State Capitalism With American Characteristics”  https://x.com/greg_ip?lang=en

U.S. – Japanese trade agreement

Free trade of goods and services produced without government subsidies or restrictions would maximize the incomes of all involved. To promote this result, the World Trade Organization has led the effort to reduce or eliminate tariff and other trade restrictions and has authorized the use of tariffs carefully targeted to nullify the distorting effect of government subsidies or other interferences in the competitive market production of goods and services.

This is not how President Trump has used or threatened in his usual bully style to use tariffs. For Trump, tariffs are not established to improve a level playing field for world trade, and not even always to protect inefficient American manufacturers such as the 50% tariff on imported Steel. An outrageous example was his threat to impose a 50% tariff on all Brazilian imports, effective August 1, 2025, if Brazil went forward with the prosecution of his ally, former President Jair Bolsonaro, who is charged with attempting to stage a coup d’état to overturn the results of the 2022 presidential election in Brazil. Incidentally, the U.S. currently has a trade surplus with Brazil. Go figure.

On July 23, “President Donald J. Trump announced a landmark economic agreement with Japan…. [In exchange for a reduction of US tariffs on all Japanese imports from 25% to 15%, it] will invest $550 billion directed by the United States to rebuild and expand core American industries…. The United States will retain 90% of the profits from this investment…. In addition to raising billions in revenue, this new tariff framework, combined with expanded U.S. exports and investment-driven production, will help narrow the trade deficit with Japan and restore greater balance to the overall U.S. trade position.” “Whitehouse fact-sheets/2025/07/”  

As an aside, Trump has also threated to punish any country that stops using U.S. dollars as its reserve and trade vehicle currency. Somehow, he fails to understand that for a country to acquire these dollars (and for Japan to acquire the $550 billion it is to invest in the US) they must have a trade surplus (US trade deficit). Oh well.

“Japanese officials said there was no written agreement with Washington — and no legally binding one would be drawn up — after Trump administration officials claimed Tokyo would back investments in the US from which American taxpayers would reap nine-tenths of the profits.”  https://www.ft.com/content/c1183b13-9135-41f6-9206-7b52af66f0a5

In addition to the fact that Japanese officials are disputing that they have agreed to such a deal, I hope that you are surprised that the American government is proposing to create new state owned companies. The world’s experience with state own companies has not been good. Our private enterprise dominated economy has served us (our standard of living) very well.

If this all seems rather confusing, welcome to Trump land.

The Fed’s policy interest rate

Among the things our protectionist, isolationist President fails to understand correctly is the role of the Federal Reserve’s policy rate. He wants interest rates to be lower and thinks that the Fed can cause that by lowering its policy rate. That rate used to be the overnight money market rate. If the Fed lowered that target it would supply more money (bank deposits at one of the twelve Federal Reserve Banks) to banks and thus the interbank money market for managing bank liquidity by buying government securities from banks. If banks’ liquidity (“reserves”) is increased, their demand to borrow in the interbank money market will be reduced and thus the interest rate prevailing in that market will be reduced. Thus, raising or lowering the Fed’s policy rate (and the consequent change in base –Fed reserve—money) was the instrument by which the Fed controlled the money supply (its own base money and the more relevant boarder bank money—M1, M2, etc.)

If you are into this subject, you will already understand what money is and where it comes from. If you would like a refresher read this: https://wcoats.blog/2024/11/08/econ-101-money/  

The above description of the policy rate was applicable until 2008 when banks held minimal reserves (or excess reserves when there was still a minimum reserve requirement) at the Fed. But in response to the financial crisis in 2008 when the Fed purchased huge quantities of government debt (and mortgage-backed securities), the Fed began to pay banks interest on their now very large deposits at the Fed to keep them from lending them in the market and thus expanding the money supply excessively. So, the relevant Fed policy rate now is the rate it pays on banks’ reserves at the Fed, the so-called Interest on Reserve Balances (IORB).

As with the policy rate in the old regime, the IORB is the instrument by which the Fed now controls the growth in the money supply. When the IORB is reduced below prevailing overnight market rates banks will draw down their Fed deposits to lend at the higher market rate thus increasing money growth.

Interest rates in the market are determined in and by the supply and demand for credit in the market. If the Fed lowers its IORB it will increase the growth rate of dollars. The Fed will do so when it judges that appropriate for achieving its inflation rate target of 2.0 percent. The twelve-month inflation rate in May was 2.4% and rose to 2.7% in June. The Fed decided not to lower the rate further at this time. Doing so could well lead market participants to expect higher inflation in the future, which would raise (not lower) market rates for say 10 year Treasury bills.

Current Fed policy seems appropriate to me. It adheres to an inflation forecast targeting regime that has become popular in recent years in major central banks. But it reacted by raising rates too slowly in response to the surge in inflation in 2021-2 during the Covid pandemic. Inflation reached 9% in mid 2022. A better system is to return control of the money supply to the public that can buy and redeem dollars at a fixed price for a hard anchor (such as a gold standard). I laid this out in the following blog: https://wcoats.blog/2022/06/06/econ-101-the-value-of-money/

Police state

Congress has struggled for decades to adopt a workable immigration and border security policy. Several reasonable proposals have been advanced over the past several decades but never crossed the finish line. We need more immigrants but of the legal sort. But getting the balance right is not easy.

The path for legal immigration should be widened while border enforcement and workplace employment of illegal residents should be made more difficult. More judges are needed to process refugee applicants much more quickly. How tighter rules are implemented matter. The Trump administration’s current approach is wrong and contrary to American norms. It’s as if he is leading the country step by step to a coup. https://www.washingtonpost.com/opinions/2025/06/11/immigration-arrests-ice-raid-masks/

A perfect world (economically)

The goal of policy should be to maximize world income (output) and its distribution that reflects the contribution of each player. That occurs when resources (capital and labor) are allocate to their most productive uses. But how is that achieved? First by ensuring that the government does not interfere. If the government subsidizes an activity, it will draw resources from its most productive use to the subsidized one thus reducing income.

The government’s role is important for defining and protecting property rights and the rule of law and the basic infrastructure on which firms operate. For example, in the U.S. the government funded basic research because there is no market incentive to undertake it. Much of it provides knowledge that is never used or exploited, but some is exploited by private firms for purposes the government could not guess in advance.

In the real world, consumers’ tastes change and the products and services being offered evolve and the optimal allocation of resources (capital and labor) must evolve as well. Those that are not the most productive tend to go out of business, freeing those resources for better uses. When governments intervene via subsidies or differential taxes they invariably reduce the efficiency of resource allocation and thus lower incomes. Bilateral trade deals introduce large distortions in resource allocation and thus lower global income.

The global maximum thus requires common rules for fair trade globally. The World Trade Organization is the institution through which such rules are developed and enforced (or at lease it should be). Bilateral deals undermine the level playing field optimal resource allocation requires and thus lower world income. With the weakening of the WTO and other international rules and norms, the world is increasingly falling below the income it is capable of.

Trump’s Chainsaw

I assume that I approve of many of Trump’s cuts or closers. But how can I know? His executive orders do not include or are not preceded by a discussion of the issues involved and the pros and cons of alternatives, as is customary in free societies.  As our government is supposed to reflect the will of the people, it is essential that “the people” debate the desirability of polices and their adoption. In the end they need to be accepted by us as desirable or at least OK. My goal is a federal government limited to powers granted in our constitution, delivering only those services that are wanted and doing so as well and efficiently as possible.

But Trump takes a different approach.  Lindsey Halligan told Trump that the Smithsonian needs to remove “improper ideology”. He’s ordered her to do it. https://www.washingtonpost.com/style/power/2025/04/21/lindsey-halligan-smithsonian-executive-order/.

Of course we want our museums to reflect our history accurately. But the many controversies about historical facts and their implications have been publicly and transparently debated by historians for decades. It is quite proper to review such representations. Trump’s executive order stated that Halligan “will consult with Vice President JD Vance to ‘remove improper ideology’ from Smithsonian properties.”

The first question is: What is improper ideology, exactly?

The second: Who is Lindsey Halligan, Esq.? (Washington Post above)

The established process of review, appropriate to a free society, has been replaced by a top-down order typical of autocracies.

The point here is that the manner and process of review and reform appropriate to a free society is discarded in the top-down orders of an autocrat.

Some of Trump’s orders reveal enough to know that I oppose them. Trumps tariff proposals reveal a lack of understanding of trade, quite aside from the rules established by the World Trade Organization (WTO). Trump condemns countries with trade surpluses with the US. These are irrelevant—as it is the US trade deficit with the rest of the world that matters—if anything. My trade deficit with Safeway is irrelevant.

Not only is Trump’s reciprocal tariff calculation laughable for its many errors, but other policies directly counter the presumed purpose of his tariffs (though who really knows what that is). His unlawful deportation attempts and cancelling student visa has produced a sharp fall in foreign visits to the US (foreign students studying here has many other benefits for the US as well). These are US exports, generating the money needed to pay for our imports. Why would he do this? This was later reversed, and the student visa reestablished. Or doesn’t he even understand what he is doing? His targeting for deportation those critical of him or Israel is a frightening attack on our First Amendment rights.

His tariff threats, on again, off again, actually seem unrelated to trade objectives. They seem to be bargaining chips for other objectives, whatever those might be. Their unpredictability itself is inflecting damage to our trade and investments. It is a very different (autocratic) approach to trade agreements than provided by the WTO.

Trump’s bargaining style re tariffs may well produce good results six months or a year down the line. But the cost has been the alienation and isolation from our traditional allies (not in our interest), and economic damage in the interim. More alarming it has strengthened China’s world leadership, driving many into closer alliance with it. The proper question is whether his approach or the traditional working though the WTO would have produced better results.

Education, whether in schools or the public square, is vital in free societies. Closing the Wilson Center was a big mistake in my view. I attended many very informative presentations there, often with Abdul Fitrat, former governor of the central bank of Afghanistan (DAB). But most of our think tanks, also presenting excellent and important seminars, are private. Trump wants to dictate what schools teach and what parents must allow or can opt out of for their children. His demands are being challenged in court. What the state can require, and parents can choose, is a challenging issue. Our traditional and more effective approach to its resolution is via public debate—not executive order.

Our cultural scene (opera, ballet, theater, etc.) is an important aspect of a flourishing society. It is quite proper to debate the extent to which our government should help finance it, but not its importance for a healthy, flourishing society. From the settlement of hunter-gatherers into tribes, such culturally binding activities have flourished. I recently watched a very painful film “A Day in the Life” of a woman (former violin player) working seven days a week to remove the rubble left in Dresden after WWII. Anyone contemplating war should examine what was left after previous wars before starting a new one. After the war, Dresden was occupied by the USSR. Interestingly the Russians set up theaters and concert halls to display the richness of Russian culture.

In the US our cultural events are largely financed by the private sector. The Kennedy Center is a federal building and the only U.S. national cultural center. The federal government covers facility operations, maintenance, security, and capital improvements, as the Center is a federal building and national memorial. About 20% of its annual operating budget is paid by the government. The government is not allowed to fund any of its performance activities and costs. Though he has never set foot in the Kennedy Center, Trump replaced its board with his friends and made himself chairman. ???

I strongly opposed Trump’s shut down of USAID, for example. https://wcoats.blog/?s=usaid. I worked for USAID in Iraq and with it in Afghanistan and other post-conflict counties. Their role was vital. The closing of USAID harms American interest.

Let me add one more example of a USAID activity. Its support of the G-17 in Serbia provides one of many examples. In the late 1990s an IMF collogue from Serbia (former Yugoslavia) pulled me aside to explain the group of center-right, free-market economists from Serbia that he was part of—they called themselves the G-17. He explained that the National Endowment for Democracy and USAID helped organize and fund seminars at which G-17 members could discuss the policies they wanted to support and how to achieve them.

“During the NATO bombing of Yugoslavia in 1999, [Yugoslavia’s President Slobodan] Milošević was charged by the International Criminal Tribunal for the former Yugoslavia (ICTY) for war crimes connected to the Bosnian War, Croatian War of Independence and Kosovo War. After resigning from the Yugoslav presidency in 2000 amidst demonstrations against the disputed presidential election, Milošević was arrested by Yugoslav federal authorities in March 2001 on suspicion of corruption, abuse of power, and embezzlement.] The initial investigation faltered, and he was extradited to the ICTY to stand trial for war crimes.” https://en.wikipedia.org/wiki/Slobodan_Milo%C5%A1evi%C4%87.

In the turmoil following Milošević’s replacement, Jimmy Barton (Chief National Bank Examiner of the United States, Retired) and I entered Belgrade on 9/10/2001 (I think—I am no longer sure of the date) to singing and dancing in the streets. As we met with the new government officials, they often gave us their G-17 card with the apology that they had not had time to get new official cards. Thank you EFD and USAID.

Trump also claimed to shut down the Millenium Challenge Corporation, the best foreign aid program we have ever had. He has withdrawn from several international organizations and agreements, and angered our friends and allies, further isolating the US. These are not in American interests.

During his 2024 presidential campaign, Trump promised no more wars. In his first 100 days in office, he threatened to invade Panama and Greenland and to annex Canada. He has started bombing Yemen without Congressional authorization. He continues to support and help finance Israel’s wars in Gaza, West Bank, Lebanon, and Syria. He has withdrawn the US from many international organizations and agreements. We are increasingly isolated with fewer and fewer friends. The US voice in the world no longer carries its earlier weight—all of which has made China stronger and more influential.

To repeat, the longer-run outcome of all this may well be good for us all. There is no knowing that at this point. But the real question is whether good results achieved in this way are better than if achieved via public debate and normal diplomacy?

The courts are increasingly challenging Trump’s disregard for law and due process. What I want to emphasis is that Trump’s autocratic actions via executive orders is very different from our usual public debate over policy seeking as much public understanding and common ground as possible. Such public debate is important for what a policy (or goal of an agency) should be. The internal efficiency with which that policy is implemented is a separate issue and something that a DOGE might well help achieve.

In a letter to U of Chicago alumni, its President Paul Alivisatos stated “As the broader higher education compact is reordered, we should not fear change for its own sake. There is reform to be had—and great opportunity to improve and to achieve more. Yet, how a period of reform unfolds can also cause enormous damage; federal and political overreach and intervention without regard to due process produces profound damage…. We have important interests at stake at this moment, as well as a set of obligations that we must and will honor.”

Trump’s executive order dictates are not an appropriate approach to reforming the scope of government.

DEI—a nuanced assessment

DEI — “diversity, equity and inclusion” programs or policies are efforts to promote fairness and full participation of people who have been historically underrepresented or subjected to discrimination. The normal standard of fairness when employing workers is that they are hired (or admitted to college) on the basis of merit—who best satisfied to the requirements for the job. This is what taxpayers who want the best results from their tax dollars, want as well.

Many universities set aside the admission of the best qualified students to reflect the fact that may blacks who might have greater potential than their past performance test score indicated because of racial discrimination should be given preferential treatment. But these “affirmative action” programs where struct down by the Supreme Courts 2023 ruling in Students for Fair Admissions v. Harvard and its companion case against the University of North Carolina, which effectively ended race-based affirmative action in college admissions.

To make room for more blacks, Harvard had raised the bar and thus discriminated against Asian applicants with higher scores. It is appropriate that the standards of equal treatment and merit should be observed for government jobs and public universities.

But private firms and colleges should be able to hire or admit whoever they want. Both firms and colleges may well want the social benefits from greater diversity. Not only can it make the workplace more interesting but the broadened understanding of different racial and religious groups generates greater social harmony as well.

I don’t know what DEI programs generally did or aimed for and am quite willing to believe that they wasted human resources. However, that is quite different from the desirability of properly educating our children about different races and cultures and the history of slavery and harms of racial discrimination. Along with civics, such instruction belongs in elementary school curriculums. Just as the enlightened treatment of gays, blacks, Muslims and other groups in movies and TV shows has led the way toward better understanding, exposure and education are important for building a better and more accepting society.

The government should not interfere in the choices of private firms and university about the composition of their work forces and student bodies.

Econ 101: On-Shoring

What would be the consequences of on-shoring the production of all of our military needs? We would gain supply resilience in exchange for being poorer.

If the US makes everything it needs at home rather than buying it at lower cost abroad, it will reduce the risk of supply interruptions. The risks of domestic interruptions from natural disasters or labor strife are much smaller than the risk of foreign suppliers cutting us off for one reason or another.

But like insurance more generally this increase in resilience does not come free. Moving the capital and labor from what it was producing before to produce what we used to buy abroad means it moves from more productive to less productive activities. Our overall income will be lower.

This is the basic story of specialization in the production of our comparative advantage and trade for the rest versus self-sufficiency I have written about so many times before. Both are valuable—resilience and income. The US and the rest of the world have grown wealthier at a dramatic pace over the last several centuries because of the growth in trade from neighbors to the rest of the world following millennia of no growth. Where do you want to be in this trade off and who do you want to make that decision for you?

US Crypto Reserve

The establishment by the Federal government of a fund to invest in crypto assets is a terrible idea. First the US has no surpluses to invest. It would need to borrow the money to invest. While the fund might be stocked to some extend with confiscated bitcoin and other digital assets “The use of seized cryptocurrencies, however, could run into roadblocks as these assets often go back to the victims of financial crimes”  “The Hill”   Second it is a terrible precedent for the government to support and manipulate the private market for private assets. Third crypto assets yield no benefit to the American economy. They do not represent or fund investments in productive capital in our economy. They are simply a toy for those who like to gamble.

Crypto assets should not be confused with technical improvements in payment technology (improvements in the speed, efficiency, and/or cost of making payments with “real” money). Such improvements are welcomed.

Trump posted to Truth Social that: “A U.S. Crypto Reserve will elevate this critical industry after years of corrupt attacks by the Biden Administration, which is why my Executive Order on Digital Assets directed the Presidential Working Group to move forward on a Crypto Strategic Reserve that includes XRP, SOL, and ADA.” Trump had previously dismissed crypto as a scam. “The Hill–Trump announces US crypto reserve”

English

Until now, the US has not had an official language, though over 30 states have made English their official language. Yesterday Trump sighed an executive order that changed that. In many ways this seems a strange issue. Of course English is our language. It is what we speak to strangers and friends (unless you are Mexican or Polish or something). It is what street and highway signs use. It is what newspapers and magazines use (except for the Spanish, French, etc. papers).

It makes sense for it to be the official language in which laws and other official documents are stated. But I have always had somewhat mixed feelings about the issue. While of course it’s English, I always thought it was rather nice and in keeping with our individualist leanings that it was the common language because it is what people chose to use rather than because it was officially proclaimed. But no big deal.