As US President Donald Trump makes trade and the US economy focus points for his administration, economists are unsure how the mix of tax cuts and higher tariffs will play out in the long run.
Two university economists, Carl Zulauf, Department of Agricultural, Environmental and Development Economics at Ohio State University and David Orden, Department of Agricultural and Applied Economics at Virginia Tech University co-wrote an article for Illinois FarmDocDaily examining what they called “America’s Twin Deficits since 1980.”
In the article, they highlighted President Trump’s tariff policy together with the 2017 tax cuts. The upshot was they did not know whether the two together would extend the five-year period of relative stability and similarity in the US trade deficit and the federal budget deficit measured as a percent of Gross Domestic Product.
In part, they said, their lack of opinion on how the President’s policies will play out is because they’ve never been tried in tandem before.
“Whatever your view of US trade and fiscal policy of the last two years, we all should hope the President and, now a divided Congress, can figure out and adopt a policy path that works moving forward,” Zulauf and Orden said.
TRUMP FOCUS POINTS
The President has argued that trade imbalances he feels are unfair must be corrected, leading him to impose administratively determined tariffs at a level and scope unparalleled since before World War II, the economists said. The linking together of US trade and fiscal deficits is a recurring storyline since 1980.
At the same time, recovery from the great recession has strengthened, stimulated in part by the Tax Cuts and Jobs Act of 2017, the economists said. Income growth has picked up, and the US dollar has appreciated, both of which historically have drawn in more imports.
In 1982, the federal fiscal deficit was minus 6% of GDP. Contributing factors were (1) a deep recession, largely attributed to the Federal Reserve’s decision to raise interest rates aggressively to bring down high inflation, and (2) 1981 tax cuts championed by President Ronald Reagan, particularly for the highest personal income tax brackets, the economists said.
Then, in 1992, the fiscal deficit began a steady decline, credited usually to the 1990 tax increase under President George H.W. Bush and the 1993 tax increase and tight fiscal policies under President Bill Clinton.
However, a review of the so-called twin deficits reveals that, while they can move together, the cumulative evidence is of no year-by year statistical relationship, Zulauf and Orden said. The trade and fiscal deficits are characterized by trends that extend over multiple years, with trends in both determined by market events and changes in government policy.
The fiscal deficit fell as the economy grew, but the decline was reversed by the 1986 tax cuts and then the first Iraq war of 1990-91, they said.
CATTLE, BEEF RECAP
Sixty-three head of fed cattle traded on the Fed Cattle Video Exchange Wednesday at $123 per cwt on a live basis.
Cash cattle traded last week at $122 to $123 per cwt on a live basis, down $2 from the previous week and at $197 on a dressed basis, steady to up $1.
The USDA choice cutout Friday was down $0.74 per cwt at $217.01, while select was down $0.11 at $212.03. The choice/select spread narrowed to $4.98 from $5.61 with 65 loads of fabricated product sold into the spot market.
The CME Feeder Cattle index for the seven days ended Thursday, was $143.21 per cwt, up $0.97. This compares with Friday’s Jan settlement of $143.37, down $0.40.