REFORMS ARE URGENT NOW

Use this Trump tariff alibi to push forth on all sorts of reforms to make the economy chug faster and inclusive for all sections

- Ajit Ranade

It is not the time to teach basic international macroeconomics to the President of the USA.

Renowned economist Jeffrey Sachs put it very well in a public speech. He said that high trade deficits, which are bothering Donald Trump are not because of trade policies like low tariffs. The high deficit simply means that Americans like to buy beyond their productive or earning capacity. It is like a consumer buying stuff, and going on a buying binge with a credit card. America’s production, earning, investing, saving and buying activity is captured by a basic equation, called an identity in the macroeconomics textbook. The equation says that the trade deficit is equal to the savings investment imbalance. In other words, the excess of imports over export earnings of America is just the mirror image of excess of investment over domestic savings. This basic equation identity is unaltered by any changes in import tariff rates, any sanctions imposed on Russia or China or any military spending or aid given to Israel or Ukraine. It reflects consumer behaviour and investor preferences, It is not an expression of business sentiment such as that expressed by the stock market. We may observe that America’s stock market remains at historic highs, despite the tariff mayhem unleashed by Trump.