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Economists Disagree with Trump’s Fiscal and Trade Deficit Views

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Dec. 4 2020, Updated 10:52 a.m. ET

On fiscal deficit

370 economists signed a statement asking people not to vote for Donald Trump due to the threat that he poses to the US economy. They have also criticized his views on the deficit situation of the country.

In their letter, they state, “He has lowered the seriousness of the national dialogue by suggesting that the elimination of the Environmental Protection Agency or the Department of Education would significantly reduce the fiscal deficit.” In the economists’ opinion, instead of abolishing the aforementioned institutions, an increase in tax revenue is a possible solution, apart from a decrease in spending on “Social Security, Medicare, Medicaid, or Defense.”

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As far as taxes go, Donald Trump has been vociferous about cutting taxes. He intends to reduce the current seven tax brackets to three. Tax cuts are certainly attractive to voters and can help in increasing spending and investment by leaving more money in the hands of the taxpayer. However, until supported by other ways of increasing revenue, these tax cuts will only push the government’s deficit higher.

The economists noted this and stated, “He claims he will eliminate the fiscal deficit, but has proposed a plan that would decrease tax revenue by $2.6 to $5.9 trillion over the next decade according to the non-partisan Tax Foundation.”

On trade deficit

A rising trade deficit is negative for broad market ETFs such as the S&P 500 ETF (SPY), the SPDR Dow Jones Industrial Average ETF (DIA), and the iShares Core S&P 500 (IVV). This is so because, in general, it indicates either slowing exports or increasing imports, and both are bad for an economy.

On the other hand, a falling deficit is negative for ETFs such as the SPDR Gold Shares (GLD) and the Gold Miners Index (GDX). Though there is no linear relationship between the trade deficit and gold prices, a falling trade deficit eases pressure on US currency in the long run, which in turn negatively impacts gold prices.

Donald Trump has been highly critical of trade deals like NAFTA (North American Free Trade Agreement) and the TPP (Trans-Pacific Partnership), making arguments that these deals hurt US interests. At different points in time, he has talked about abolishing trade with some countries and renegotiating existing trade deals to make them more suited to US interests. Though the latter sounds reasonable, the former puts into question his ability to assess global trade dynamics.

Apart from this, the economists noted, “He claims that he will reduce the trade deficit, but has proposed a reduction in public saving that is likely to increase it.”

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