Thursday, September 29, 2016


Regular readers of this blog know that I often disagree with Paul Krugman.  But I come here today to agree with a recent post of his on the analysis put out by two Trump economic advisers.  The Trump advisers' analysis is truly disappointing (though perhaps not surprisingly so, given what the candidate has said over the course of the campaign).

Their analysis of trade deficits, starting on page 18, boils down to the following: We know that GDP=C+I+G+NX.  NX is negative (the trade deficit).  Therefore, if we somehow renegotiate trade deals and make NX rise to zero, GDP goes up!  They calculate this will bring in $1.74 trillion in tax revenue over a decade.

But of course you can't model an economy just using the national income accounts identity. Even a freshman at the end of ec 10 knows that trade deficits go hand in hand with capital inflows.  So an end to the trade deficit means an end to the capital inflow, which would affect interest rates, which in turn influence consumption and investment.

I suppose that their calculations might make sense in the simplest Keynesian Cross model, in which investment is exogenously fixed  and consumption only depends on income.  But that is surely not the right model for analyzing the impact of trade policy over the course of a decade.