U.S. "Must Shrink Its Fiscal Deficit," Say Economists

The U.S. must reduce its fiscal deficit if it wants to address its trade imbalance, economists argue.

Both the US' budget and trade deficits ballooning.

Increased government spending, when it leads to a larger federal budget deficit, reduces the national savings rate and exacerbates the trade deficit, Bloomberg News reported.

Robin Brooks of the Brookings Institution noted that the U.S. trade deficit “is wider than ever—even wider than its previous peak in early 2022, when post-COVID recovery fueled a surge in goods imports.”

He added, “If the U.S. really wants to get this under control, the first step is to shrink the fiscal deficit.”

As recently as September 2023, Brookings economist Louise Sheiner stated that there was no urgent need to worry about U.S. debt. However, with both budget and trade deficits ballooning, mainstream economists are now rethinking their stance.

Ryan Bourne of the Cato Institute pointed out that in 2018, Nobel Prize-winning economist Paul Krugman dismissed concerns about U.S. debt as “absolutely trivial” due to low interest rates.

Similarly, in a Foreign Affairs article published in January 2019, former Treasury Secretary Larry Summers and former Chair of President Obama’s Council of Economic Advisers Jason Furman predicted that historically low interest rates would keep debt financing costs manageable.

The following year, Olivier Blanchard, former chief economist of the International Monetary Fund (IMF), echoed this view, arguing that rising debt might have limited negative effects on economic welfare.

Now, with growing fiscal pressures, economists are reconsidering these earlier assessments.