May 6, 2025
Macrofinancial Outlook for the Day
Summary
This is a bit of an abnormal report. Because of the importance of Yared’s role in the administration, the fact the he authored a paper essentially arguing for the Trump administration to blow up the deficit seemed worth focusing on. Furthermore, the paper is written in an extremely academic style that was difficult for me, and I have spent the past few years doing nothing but academic economics. Therefore it seemed like I would add the most value by spending my time translating its key points into something more easily parsed.
Releases
Trade Deficit
March 2025: The Trade Deficit Surged To A Record High. According to the Wall Street Journal, “The U.S. trade deficit ballooned 14% to a record $140.5 billion in March, as businesses stockpiled goods to get ahead of sweeping tariffs that President Trump imposed the following month. The value of imported goods totaled $346.8 billion, according to Census Bureau data, continuing a sharp increase that began in January.” [the Wall Street Journal, 2025-05-06]
Q1 2024 - Q1 2025: The Trade Deficit In Goods Rose From $279 Billion To $466 Billion. According to the Wall Street Journal, “The March report capped off a quarter that saw the U.S. import $1 trillion in goods, up from $796 billion during the same period last year. Meanwhile, exports of U.S. goods have only risen modestly, reaching $539 billion in the first quarter. That imbalance pushed the goods deficit to $466 billion for the quarter, up from $279 billion a year ago.” [the Wall Street Journal, 2025-05-06]
What is clear from today’s data is that, in response to assumptions made about the Trump administration’s trade policies, Americans imported much more than they have at any time in American history. Furthermore, with better data on imports, the record setting trade balance as reported in the Q1 GDP data will likely be revised even higher. While the new value will probably not be as negative as the blue line in the bottom figure, as part of that reflects gold movement, the data does not suggest that cutting out gold will make up for the roughly 1.06 percent of GDP difference.
Importantly, imports, despite having a negative coefficient in the GDP equation do not subtract from GDP. Rather, they cancel out the portions of consumption of imported goods and inventory accumulation of imported goods that do not accrue as profits to domestic entities. Still, it is worrying that imports increased this sharply, and yet the GDP data on inventory accumulation and consumption were not higher, so they may also be revised higher.
Trump’s Fiscal Policy
February 2025: Pierre Yared Assumed A Position As Vice Chairman On Trump’s Council Of Economic Advisors. [LinkedIn–Pierre Yared, accessed 2025-05-06]
May 2025: Marina Halac And Pierre Yared Published “A Theory Of Fiscal Responsibility And Irresponsibility” In The Journal Of Political Economy. [University of Chicago Press, 2025-05-03]
Halac And Yared’s Paper Asssumed Governments Have A Bias Towards Current Welfare Over Future Welfare, Resulting In A Bias Towards Fiscal Irresponsibility. According to Halac and Yared, “Governments are deficit biased: for any given shock, the government overvalues current spending relative to future welfare compared with society. This bias captures the fact that governments in power can obtain private benefits from spending, for example, by diverting resources toward their preferred spending categories or constituencies (e.g., Aguiar and Amador 2011).” [Halac and Yared 1576, 2025-05-03]
This Bias Has Been Exacerbated By “An Increasingly Older Population, Rising Political Polarization, And Rising Electoral Uncertainty.” According to Halac and Yared, “There is a large literature dating back to Persson and Svensson (1989) and Alesina and Tabellini (1990) that provides political microfoundations for the deficit bias. See Alesina and Passalacqua (2016) and Yared (2019) for surveys. Yared (2019) argues that an increasingly older population, rising political polarization, and rising electoral uncertainty have led to increased political biases across advanced economies.” [Halac and Yared 1579, 2025-05-03]
Halac and Yared define this bias by the parameter \(\alpha\) which is greater than 1 (1582). Then, they set a threshold, \(\tilde{\alpha}\) under which the government’s bias is too small to motivate it to choose a level of short term borrowing greater than the amount that maximizes long-run social welfare (1597). When the bias exceeds this threshold:
As \(\alpha\) increases above \(\tilde{\alpha}\), two things happen. First, welfare moves away from first best, so concavity implies that a given difference in continuation values can be achieved with smaller differences in spending. Second, governments are more willing to spend above the first-best level, as they are more severely biased toward the present. (1598)
What Halac and Yared mean when they say “first-best” level is the amount of borrowing that maximizes the present value of future welfare. While they outline a theory of how a government can transition from fiscal irresponsibility to fiscal responsibility, it is predicated on assumptions that do not apply to the United States.
Thus, we arrive at a situation where an influential policy voice in the government is of the opinion that current circumstances (an aging population, political polarization, and uncertain election results) have increased the political value of extreme deficit spending, while the president is focused on reducing revenue dramatically.
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└ @ FredData ~/.julia/packages/FredData/5M7x4/src/get_data.jl:77While tax revenue is already on a downward trajectory, the Trump administration’s tax cuts are likely to accelerate this trend.