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Since protectionism will raise prices, real income for  most American earners will fall.
Since protectionism will raise prices, real income for  most American earners will fall.

Protectionism Worsening US’ Fiscal Balance, Savings

Protectionism Worsening US’ Fiscal Balance, Savings

Opponents of protectionism have identified many reasons why such policies could lower living standards, including the dangers of mutual retaliation, poor resource allocation, and higher inflation.
However, another even more fundamental reason has been largely ignored: The impact on already-low American savings. Unless America saves more, other countries cannot save less and thus trade imbalances cannot fall—at least not at the current level of world economic output, Nikkei reported.
In contrast, without a redistribution of savings, trade barriers would only disrupt supply chains, raise prices, and make everyone poorer. The issue is particularly important in Asia, where finely tuned supply chains are a cornerstone of prosperity.
The arguments about savings may sound technical. But they are highly relevant at a time when both the US and China have announced plans to impose large tariffs on each other.
Savings may not be as visible as autos or smartphones, but they are crucially important. There is a fundamental identity in every economy: The current account balance must equal the sum of the fiscal balance (taxes minus spending) and net private savings (savings minus investment).
A key goal of US policy is to improve the US current balance. However, this can happen only if the sum of the fiscal balance and the net private saving improves. In other words, either the US government needs to borrow less or the average American must save more, or both.

  Inflation
How will protectionism impact the US fiscal balance? Protectionism will raise inflation; inflation will raise prices that the government pays for goods and services. So protectionism will raise spending. Protectionism will also raise tariff revenue; but the quantity of imports will fall, dampening the impact.
Moreover, the contractionary impact of higher inflation, along with the contractionary impact of foreign retaliation, will lower real output, and lower tax receipts. Thus, spending will rise, but tax revenue will likely be flat at best. The net result of protectionism is likely to be a worsened fiscal balance—even before the recent US tax cuts.
How will protectionism impact net private savings? On gross savings: In protected industries, companies could make bigger profits and so increase their savings, but, overall, the losers are likely to outnumber the winners.
Moreover, since protectionism will raise prices, real income for most American earners will fall. In addition, the losers will likely cut spending quickly, while the winners raise spending slowly. As families strain to maintain living standards, household savings rates will fall.

  Investment
There could be increases by some protected industries, but investment in loser industries (which face higher costs) will fall. Moreover, cost inflation could crimp the profitability of new projects. So, protectionism would likely lower both savings and investment. A priori, it is hard to know which would fall more. If net savings were to improve, however, this would only be due to a sharper fall of investment—which would harm US productivity growth.
Of course, apart from protectionism, there are many other factors that impact the fiscal balance and net savings. However, few of these are working toward improving either.
In fiscal policy, the US has just enacted a very large tax cut and a very large spending hike. Market forecasts of the impact of these measures on the economy imply very large increases of fiscal deficits; for example, the March 2018 survey of primary dealers by the Federal Reserve Bank of New York showed the median fiscal deficit projection rising from 3.9% in 2018 to 5.2% in 2020.
The tax cut has targeted increases of investment; there is already evidence that lower corporate tax rates are spurring more investment. Raising investment is a laudable goal, since higher productivity growth is the only sustainable road to higher wages.
However, higher investment means that the net private savings will worsen—unless the US adopts powerful policies to raise the household savings rate.

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