Posted on July 31, 2018
Does trump understand how money works?
There’s no denying that Donald Trump is a very successful businessman, but does he truly understand money?
At a breakfast with the NATO secretary general in Brussels, Trump called out our allies for not living up to their defense spending commitments. “Many countries owe us a tremendous amount of money for many years back, where they’re delinquent, as far as I’m concerned, because the United States has had to pay for them.”
All NATO member states have agreed to spend at least two percent of their GDP on national defense, but few of them have done so. That’s money they’ve agreed to spend internally, however, on their own defense budgets. They do not owe it to us, nor does NATO manage a common fund to which its members contribute. Still, the president has made variations of this claim several times before. In March, he tweeted that “Germany owes vast sums of money to NATO & the United States must be paid more for the powerful, and very expensive, defense it provides to Germany.”
The United States spends on our defense whatever our elected representatives decide we do. Germany doesn’t owe us a cent for that. Yet there’s our Commander-in-Chief, sounding like Johnny Friendly from On the Waterfront, demanding that each of the supposedly delinquent nations pay up.
Meanwhile, Trump is saying the U.S. is overspending on our military, but are we? He didn’t seem to think so in his State of the Union Address, when he said, “We know that weakness is the surest path to conflict, and unmatched power is the surest means of our defense. For this reason, I’m asking Congress to end the dangerous defense sequester and fully fund our great military.” Those don’t sound like the words of somebody who thinks our defense spending ought to be commensurate with that of Germany.
Then again, maybe they do. For no sooner did he secure this funding than he sought to divert it elsewhere, daffily declaring that “our Military is rich again,” and could therefore spare the funds to build a border wall. Of course, that expenditure would only be temporary, because Mexico is going to reimburse us for the wall. “They can pay for it indirectly through NAFTA,” Trump sort-of explained to The Wall Street Journal. “We make a good deal on NAFTA, and say, I’m going to take a small percentage of that money and it’s going toward the wall. Guess what? Mexico’s paying!”
There is no possible renegotiation of NAFTA that might result in a payment by the Mexican government to the U.S. Treasury, so what money is he talking about? The answer lies in Trump’s generally distorted view of trade, by which a nation with which we have a trade deficit owes us an amount of money equal to that deficit. “Our trade deficit ballooned to $817 billion,” Trump said, while overstating the deficit by $249 billion during a faux-campaign event in Illinois. “Think of that. We lost $817 billion a year over the last number of years in trade.”
Likewise, he believes our trade deficit with Mexico represents money “we lost” to that country. Therefore, if a new NAFTA lowers the deficit between the two nations, that represents a payment from Mexico to build the wall. The absence of actual money is unimportant.
“Trade deficit” is a misnomer. When two parties freely engage in an economic transaction, they set the value of that which is traded. If you pay Walmart $700 for a TV, then you receive a $700 TV in return. There is no deficit. Walmart owes you nothing.
Americans, being the most prosperous people in the world, are bound to buy more in imported goods than anyone else. If all tariffs and other trade barriers were removed, we would inevitably maintain a significant trade deficit. Would that be a bad thing? The president seems to think so.
If, on the other hand, his trade war suppresses trade so that American exports and imports are both cut in half, our trade deficit would be halved also. Would that be a good thing? The president seems to think so.
Now, Trump has struck an agreement with the European Union, which he says might lead to a mutual elimination of tariffs on industrial goods, but why? If he stops imposing high tariffs on Europe, there will be no mechanism to lower our trade deficit with the EU by minimizing our commerce with it. How, then, could Germany ever repay us for its NATO commitments?
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