The REAL deficit has nothing to do with steel

Daniel Horowitz · March 5, 2018  
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Huge debt anvil
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If President Trump cared about the fiscal deficit as much as he cares about the trade deficit, we’d be on our way to making America great again.

Following Trump’s announcement of a 25 percent tariff on imported steel and a 10 percent tariff on aluminum — more consumer taxes — he tweeted the following:

But a trade deficit is not inherently bad in the same way that a fiscal deficit is damaging to the country. And to the extent that there are problems from a trade deficit, it is due to the fiscal deficit and other domestic socialist policies that make manufacturing uncompetitive. The way to help both consumers and job producers at home is to tackle the fiscal deficit and end crony market distortions in domestic regulatory and subsidy policies. Unfortunately, the president, along with almost every other Republican, doesn’t seem to care about the fiscal deficit.

The difference between a fiscal deficit and a trade deficit

In a fiscal deficit, revenues are good and expenditures are bad. But of a trade deficit, you can’t say that exports are good and imports are bad. Inexpensive imports help consumers save money so they can invest in other aspects of the economy and even expand businesses and create more jobs. Not surprisingly, the trade deficit was at its smallest during the bottom of the Great Recession, when income, investment, and consumption all plummeted. The trade deficit is at its highest now, with a booming economy.

The fiscal deficit, on the other hand, is all bad. The “real” fiscal deficit last year was approximately $1.2 trillion, and that will grow rapidly this year. We have to pay interest on every penny of deficit spending. Until recently, annual interest payments were about $230 billion, but with interest rates rising, that number will grow to $447 billion in 2019 and surpass all defense spending in 2026. And in just one decade, the cost of interest payments on the debt will surpass Medicaid, which is one of the fastest-growing programs of the federal government.

There’s a reason James Madison warned that “public debt is a public curse,” and Alexander Hamilton declared that “nothing can more affect national prosperity than a constant and systematic attention to extinguish the present debt and to avoid as much as possibly the incurring of any new debt.”

The fiscal deficit undermines the engine of our economy, because when interest rates are pushed higher, more private money is used to purchase higher-interest Treasury securities rather than invest in capital goods, such as factories and plants. With less capital investment, in the very industries Trump hopes to grow, jobs will be eliminated and wages will drop. Thus, the deficit and the consequences of financing it crowd out private investment and put a huge drag on the very blue-collar jobs Trump seeks to preserve with his trade policies.

Which brings us back to the trade deficit. To the extent that the trade deficit is harmful, it’s only because it is fueled by the fiscal deficits and other anti-free market interventions by government, such as nanny-state regulations, market-distorting subsidies, and crushing mandates such as ethanol and CAFE standards. Think about it: Instead of investing in more productive aspects of the American economy boosting exports of our services and goods, foreign countries have invested $6.3 trillion to service our debt so that politicians can grow government and create dependency. Rather than investing more in American services, capital goods, and industry supplies, foreign governments purchase treasury securities to service our debt so we can create more dependency, dead weight on the economy, and Democrat votes.

The fiscal deficit with China is a much bigger problem than trade deficit

Trump likes to complain about the trade deficit with China, but what about the fiscal debt and the fact that China owns our dependency? One of the important components of our $20.85 trillion federal debt in the share of debt owned by foreign countries. Our foreign debt stood at $6.31 trillion at the end of 2017, but has likely broken the all-time record ($6.35 trillion) since the debt ceiling was raised unconditionally and the budget caps were blown in February. Talk about “outsourcing jobs;” the policies of debt servicing is outsourcing the indebtedness of our children and grandchildren to foreign countries.

Just the portion of our debt held by foreign countries is now equal to almost one-third of the entire U.S. economy. China owns $1.185 trillion of our debt, the largest share owned by any foreign country, while Japan is the second largest stakeholder at $1.061 trillion.

So, yes, we have a $375 billion trade deficit with China, but that is only a problem to the extent that we have a $1.2 trillion fiscal deficit with China. Why should China buy more of our cars when they can purchase our debt and hang it around our necks? And that deficit will grow exponentially thanks to the budget bill Trump just signed. The way to boost exports without declaring war on imports and hurting consumers and most other domestic producers is to end the crushing debt to foreign countries that indentures our grandchildren.

Ironically and preposterously, Trump touted the steel tax as a way of protecting national security and decreasing dependency on steel coming from enemy nations. Yet China is only responsible for 2.2 percent of our imports, while friendly Canada is responsible for 16 percent. Also, our military and homeland security needs combined only account for three percent of our domestic steel production (2.6 million tons), according to the American Iron and Steel Institute. Our domestic production of steel itself supplies 70 percent of our domestic steel consumption needs. There is no national security concern with trade of steel.

At the same time, China is responsible for a whopping 19 percent of our debt held by foreign counties, which in itself is almost four times the size of our trade deficit with the commies. That is the real national security threat, Mr. President.

Sadly, at every turn, President Trump has signed budget-busting legislation and refuses to make his veto pen great again. He can still save himself by threatening a veto of the omnibus bill in a few weeks unless it contains cuts to non-defense programs. Thus far, he has shown no signs of caring that China owns our debt.

Cut regulations and mandates; don’t raise taxes

President Trump should also end his dogmatic support for socialist domestic policies, such as the ethanol mandate, that hurt the very blue-collar jobs in Pennsylvania he seeks to protect with tariffs on steel. Trump tweeted on Friday, “if you don’t have steel, you don’t have a country” – in all caps. Putting aside the fact that the domestic steel industry produced 90.1 million tons of steel in 2017 (up 4.3 percent from the previous year) without any protective tariffs, Trump must remember that if you don’t have oil, you don’t have a country. Yet his favored ethanol mandate is putting oil refineries out of business. Ironically, his tax on imported steel will drive up the cost of steel pipelines for oil and hurt the pipeline industry Trump is so proud of.

Many other important industries will be hurt by this tax as well, even as he seeks to protect a handful of companies with this policy. As the Wall Street Journal observed, “steel-using industries in the U.S. employ some 6.5 million Americans, while steel makers employ about 140,000” [emphasis added].

If Trump wants to help domestic manufactures of cars and grow exports, he should demand that Congress repeal the Corporate Average Fuel Economy (CAFE) standards. CAFE standards, which were dramatically expanded in 2007, force auto manufacturers to make expensive cars with paper-thin steel in order to comply with the global warming agenda and increase their mileage per gallon (mpg). The average price of new cars rose another 3.9 percent in 2017 to $36,270. According to the Heritage Foundation, “a 1 mpg tightening of the standard would cost consumers $7.81 billion annually.” Given that the 2007 bill increased the standards from 27.5 mpg to 35 mpg, and Obama in 2012 ostensibly raised them to 54.5 mpg by 2025, that is an insane cost to consumers and exporters. Trump should roll back everything he can executively and call for Congress to repeal the underlying standard. That is the true way to level the playing field between domestic and foreign producers.

Overall, the president is right to stand up for American jobs. But the way to do that is by ending regulations and mandates, not by increasing taxes. The way to do so is through fair free market policies for all rather than tendentious favors for a handful of cronies.

He’s also right to be concerned about the national security implications of our economic and trade policies, but the way to bolster exports and protect our national security is to stop the unconscionable profligate spending, not declare war on imports.


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Author: Daniel Horowitz

Daniel Horowitz is a senior editor of Conservative Review. Follow him on Twitter @RMConservative.