<p>No, your logic doesn't make a ton of sense. That doesn't mean that the Trump tax cuts are a good thing.</p>

<p>Foreign debt isn't the same as a country removing money from the economy. The way the U.S primarily finances debt is through the sale of treasury bonds (T-bills). Essentially an agreement with a private individual (sometimes foreign) that over the course of X time period the debt will be paid back with interest. </p>

<p>This is the same as making a loan with your local bank. They give you money, in this case <code>$5 trillion</code> and after a period of time you pay off the principal loan plus interest payments. The assumption that Trump (and all American presidents since Bill Clinton when we last had a current account surplus) is making is that in the period between making the loan and paying it off the economic stimulus from the tax cuts will outweigh the loan and its payment. The U.S gets extremely favorable terms on its loans with virtually 0 interest rates meaning that the 5 trillion stimulus in decreased taxes may very will increase tax revenue through increased economic activity by more than 5 trillion dollars which is the argument that Trump is making.</p>

<p>Whether or not this occurs depends on where we are on the <a href="http://www.investopedia.com/terms/l/laffercurve.asp" rel="nofollow noreferrer">Laffer Curve</a> which essentially states that at a certain tax rate decreasing taxes will actually increase government revenue by stimulating businesses. Personally I, and many contemporary economists believe that we are not at that point on the Laffer curve and a tax decrease would in the medium run lower output, however clearly Trump disagrees and there is no true consensus among economists as to where we currently fall on the Laffer Curve.</p>

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2017-05-05T17:58:08.017Z
You completely miss my point.  The government borrows money, and about a third of that debt is sold to overseas lenders. The money the overseas lenders pay for the debt is money that therefore cannot be used to buy US goods and services in international trade.  If Trump borrows \$1.7B from overseas sources that's \$1.7B that cannot be spent for goods and services.  It makes no difference what the interest rate is, and this effect is present regardless of any supposed "stimulus" due to the tax cut.  In fact, it's the one effect of his tax cut that can be predicted with reasonable certainty.
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2017-05-05T18:09:15.087Z
Debt =/= Money. Debt is simply the promise to repay money in the future. In the short term we haven't lost any money and only lose money years from now when we've repayed the debt. Assuming that 100% of the tax cut is payed for in debt (it's not) then the money only flows out of the economy in the future. Trump is betting that the tax cut will benefit the economy by more than the 5 trillion before the money has to be repayed.
TheSaint321
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2017-05-05T18:12:03.263Z
Your point is valid in an economy with a balanced budget where 1 dollar lost in tax revenue is 1 dollar lost in government spending. That isn't the case here, and if that was the case then the effect would depend on where we stand in the Laffer Curve as I mentioned. If the tax break is funded through debt then it will only have positive impacts in the short run and potentially negative impacts in the medium run. There is no scenario where a tax cut without a cut in government spending hurts the economy in the short run.
TheSaint321
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2017-05-05T18:31:54.207Z
To buy T-bills you need money.  I don't think the Treasury is going to give them away.  Real money (to the extent that any money in the banking sector is "real") changes hands.  Yes, the money may *eventually* be repaid, and "real" money may then flow the other direction.  But that won't happen for decades, at least.  The money flows out much more quickly (on the safe assumption that Trump does no better than any Republican since Reagan at balancing the budget).  At most I can see an argument that "float" will somewhat offset the effect.
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2017-05-05T18:33:06.233Z
The treasury SELLS T-Bills for real money. Money is flowing INTO the economy not out of the economy. The T-Bills are then later repaid for real money.
TheSaint321
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2017-05-05T18:35:50.037Z
Think of it like this: If you take out a loan from the bank for 1000 dollars you haven't lost money. You've gained 1000 dollars and now have 1000 dollars in debt. You can now make your life better off with that 1000 dollars. In no scenario in the short run does the possession of 1000 new dollars hurt you. Only in the long run when the debt collectors come knocking does the debt impact you negatively, ideally in the meantime you've invested that 1000 dollars and in doing so can repay it and made a healthy profit. This is the equivalence of foreign debt.
TheSaint321
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2017-05-05T18:40:38.877Z
Re the Laffer curve and associated concepts, that only works if the tax cuts are recycled into the economy, vs going to wealth-building for individuals, and the effect (to the extent that it exists at all) is mainly seen when the economy is in recession.  But tax rates (especially for business and investment) are already at historic lows, and tax laws already strongly favor true investment, so it's hard to see how the proposed cuts can provide much in the way of "stimulus".  (But as I said earlier, I'm not here to debate the merits of "stimulus", but to understand the effect of debt on trade.)
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2017-05-05T18:42:00.047Z
When Treasury sells T-bill money flows into the US, but money isn't trade.  That's the important point to understand here.
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2017-05-05T18:44:15.320Z
Like I originally said. I don't support the Trump tax cuts and those are valid criticisms of the tax cuts. I'm just explaining the rationale behind them and how given a certain set of assumptions (which I personally don't hold to be true) they make sense. This is the first time you've mentioned trade? Foreign owned debt and trade are completely unrelated. If you have a question related to foreign debt and international trade I'd be happy to answer it if you post another question.
TheSaint321
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2017-05-05T18:47:07.217Z
At this point I'm getting the feeling that you don't actually have a question and just want to trash the tax cuts. The question, as I read it was whether or not your argument about the tax cuts is correct or not. The answer is No, it is not because your argument stemmed from a fundamental misunderstanding of how foreign debt works. Nowhere in your question or in my answer was anything said about trade and I'm confused how it got brought up.
TheSaint321
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2017-05-05T18:49:58.207Z
You're an overseas loan shark with a stack of US currency.  You loan the Treasury \$1M.  But then you decide that you'd like to buy \$1M of fancy Vermont marble to finish off your palace.  Oops!  You spent all your dollars on the T-bills, and all you have left is rubles, so you buy Russian marble instead.  Yeah, that's a little contrived (you could always trade rubles for dollars, at a cost), but that's how it works.
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2017-05-05T18:52:02.610Z
"This is the first time you've mentioned trade?"  You apparently didn't read my question: *thus removing the ability of that much US currency to purchase goods and services from the US (or benefiting from that much US currency being paid out of the US to buy foreign goods and services).*
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2017-05-05T18:53:28.503Z
Ahh I think I understand better what you are saying. The argument is still wrong but makes more sense. You are assuming that whatever money is now caught up in US debt would have otherwise been spent in U.S trade. This is a faulty assumption. Currency can be converted and it is entirely possible to buy U.S products using foreign currency. Using the Forex market its quite easy to buy goods internationally using any currency you want. The argument that there is a 1:1 correlation between foreign held USD and U.S exports is empirically false.
TheSaint321
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2017-05-05T18:59:49.787Z
I'm not arguing about currency conversion (though it's certainly a relevant topic).  I'm effectively saying that if money is spent buying US debt it eventually affects conversion rates such that the money is taken away from trade.  When I very crudely worked my way through the effects of conversion it appeared that it was a "wash", other than to introduce "noise" and time delay, so it seems reasonable to "ignore" it.
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2017-05-05T19:03:20.450Z
What you are saying is that if a foreign individual spends 1 dollar on U.S debt that is 1 dollar less spent on U.S exports. This is empirically false. Maybe I'm misunderstanding but quite frankly the explanation of your argument is quite confusing. Maybe if you went through and rephrased everything to be more comprehensive I could understand.
TheSaint321
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2017-05-05T19:04:38.073Z
"Empirically false"?  Have you tried it?
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2017-05-05T19:06:37.853Z
At this point I feel that you are just being argumentative and hope that you educate yourself further on this topic. I really just can't explain why you're wrong any further.
TheSaint321
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2017-05-05T19:11:10.630Z
I'm afraid that you're the one who is arguing without explaining things.
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2017-05-05T16:12:25.717Z
2017-05-05T16:12:25.717Z
TheSaint321
<p>Understand that I'm a total novice with regard to economics.  Also, while I ultimately have an axe to grind (doesn't everyone?) I'm not trying to do that honing here, I'm simply looking for a sanity check on my "logic" (such as it is).  I don't propose to discuss political implications here.</p>

<p>President Trump is proposing a "tax reform" package that is roughly estimated (based on two separate sources I found) at about $5T over 10 years.  Let's assume that the cost of this package is not significantly offset by spending cuts (at least not cuts that would exceed proposed spending increases in other programs).  So it's reasonable to assume that basically the entire amount would be borrowed, through Treasury securities and similar instruments.</p>

<p>Here it gets a little shaky.  Several sources tell me that <a href="http://money.cnn.com/2016/05/10/news/economy/us-debt-ownership/" rel="nofollow noreferrer">foreign sources own about 1/3rd of the US government debt</a>.  While it's obviously difficult to predict how much of the new debt would be purchased by whom, it's a reasonable spitball estimate to assume that about a third would be sold overseas, assuming interest rates remain at least as high as they are currently, and barring any significant change in overseas perceptions of the soundness of US securities, or of the US economy in general.</p>

<p>This means that foreign sources must come up with about $1.7T in US currency over ten years, thus removing the ability of that much US currency to purchase goods and services from the US (or benefiting from that much US currency being paid out of the US to buy foreign goods and services).</p>

<p>(The objection will be made that money is, uh, fungible, and so currencies other than US currency can be used to purchase US goods.  But if I spend my US dollars on T-bills then I will have to convert my rubles to dollars if I want to spend more dollars on US goods and services, and that conversion drives up the "cost" of the dollar, making US goods and services less "attractive".  When it balances out the net-net is to have removed that much US money from the pool of cash available to fund US exports.)</p>

<p>The cost to "create" a job in the US seems to be variously estimated at between \$40K and \$100K a year.  (I couldn't find any sources that were clear and explicit enough to be worth referencing, alas.)  (Most such estimates appear to be orientated towards tech sector jobs, and presumably manufacturing jobs would be "cheaper".)  But let's say that a job "costs" $50K/year -- we are "spitballing", after all.</p>

<p>So, dividing the \$1.7B by \$50K times ten years, I come up with 3.4 million jobs lost for a period of ten years, due to the proposed tax cuts.</p>

<p>Where is my "logic" here weakest?  Is my spitball aim terribly off anywhere?  Are there fatal flaws, or is it simply too fuzzy and "out there" to assess without losing your lunch?</p>

<p><strong>Note:</strong> I'm trying to understand the above (presumed) effect in a vacuum of sorts, without considering any of the counterbalancing benefits of deficit spending and related issues.  Basically, I'm only looking for criticisms of my "math", and a "but you forgot about ..." answer is only relevant if it somehow modifies or negates that "math".  Yes, deficit spending has supposed benefits, but I'm not asking about that.</p>

<labor-economics><international-trade><government-debt>
Understanding the effects of government deficit on international trade
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# Understanding the effects of government deficit on international trade

(Asked by: username_0 on 2017-05-02)

Understand that I'm a total novice with regard to economics. Also, while I ultimately have an axe to grind (doesn't everyone?) I'm not trying to do that honing here, I'm simply looking for a sanity check on my "logic" (such as it is). I don't propose to discuss political implications here.

President Trump is proposing a "tax reform" package that is roughly estimated (based on two separate sources I found) at about $5T over 10 years. Let's assume that the cost of this package is not significantly offset by spending cuts (at least not cuts that would exceed proposed spending increases in other programs). So it's reasonable to assume that basically the entire amount would be borrowed, through Treasury securities and similar instruments.

Here it gets a little shaky. Several sources tell me that [foreign sources own about 1/3rd of the US government debt](http://money.cnn.com/2016/05/10/news/economy/us-debt-ownership/). While it's obviously difficult to predict how much of the new debt would be purchased by whom, it's a reasonable spitball estimate to assume that about a third would be sold overseas, assuming interest rates remain at least as high as they are currently, and barring any significant change in overseas perceptions of the soundness of US securities, or of the US economy in general.

This means that foreign sources must come up with about $1.7T in US currency over ten years, thus removing the ability of that much US currency to purchase goods and services from the US (or benefiting from that much US currency being paid out of the US to buy foreign goods and services).

(The objection will be made that money is, uh, fungible, and so currencies other than US currency can be used to purchase US goods. But if I spend my US dollars on T-bills then I will have to convert my rubles to dollars if I want to spend more dollars on US goods and services, and that conversion drives up the "cost" of the dollar, making US goods and services less "attractive". When it balances out the net-net is to have removed that much US money from the pool of cash available to fund US exports.)

The cost to "create" a job in the US seems to be variously estimated at between \$40K and \$100K a year. (I couldn't find any sources that were clear and explicit enough to be worth referencing, alas.) (Most such estimates appear to be orientated towards tech sector jobs, and presumably manufacturing jobs would be "cheaper".) But let's say that a job "costs" $50K/year -- we are "spitballing", after all.

So, dividing the \$1.7B by \$50K times ten years, I come up with 3.4 million jobs lost for a period of ten years, due to the proposed tax cuts.

Where is my "logic" here weakest? Is my spitball aim terribly off anywhere? Are there fatal flaws, or is it simply too fuzzy and "out there" to assess without losing your lunch?

**Note:** I'm trying to understand the above (presumed) effect in a vacuum of sorts, without considering any of the counterbalancing benefits of deficit spending and related issues. Basically, I'm only looking for criticisms of my "math", and a "but you forgot about ..." answer is only relevant if it somehow modifies or negates that "math". Yes, deficit spending has supposed benefits, but I'm not asking about that.

**Tags:** labor-economics, international-trade, government-debt


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## 1 answers

### Answer by username_1 on 2017-05-05. Score: 1

No, your logic doesn't make a ton of sense. That doesn't mean that the Trump tax cuts are a good thing.

Foreign debt isn't the same as a country removing money from the economy. The way the U.S primarily finances debt is through the sale of treasury bonds (T-bills). Essentially an agreement with a private individual (sometimes foreign) that over the course of X time period the debt will be paid back with interest.

This is the same as making a loan with your local bank. They give you money, in this case `$5 trillion` and after a period of time you pay off the principal loan plus interest payments. The assumption that Trump (and all American presidents since Bill Clinton when we last had a current account surplus) is making is that in the period between making the loan and paying it off the economic stimulus from the tax cuts will outweigh the loan and its payment. The U.S gets extremely favorable terms on its loans with virtually 0 interest rates meaning that the 5 trillion stimulus in decreased taxes may very will increase tax revenue through increased economic activity by more than 5 trillion dollars which is the argument that Trump is making.

Whether or not this occurs depends on where we are on the [Laffer Curve](http://www.investopedia.com/terms/l/laffercurve.asp) which essentially states that at a certain tax rate decreasing taxes will actually increase government revenue by stimulating businesses. Personally I, and many contemporary economists believe that we are not at that point on the Laffer curve and a tax decrease would in the medium run lower output, however clearly Trump disagrees and there is no true consensus among economists as to where we currently fall on the Laffer Curve.

> **Comments:**
> **username_0**: You completely miss my point.  The government borrows money, and about a third of that debt is sold to overseas lenders. The money the overseas lenders pay for the debt is money that therefore cannot be used to buy US goods and services in international trade.  If Trump borrows \$1.7B from overseas sources that's \$1.7B that cannot be spent for goods and services.  It makes no difference what the interest rate is, and this effect is present regardless of any supposed "stimulus" due to the tax cut.  In fact, it's the one effect of his tax cut that can be predicted with reasonable certainty.  
> **username_1**: Debt =/= Money. Debt is simply the promise to repay money in the future. In the short term we haven't lost any money and only lose money years from now when we've repayed the debt. Assuming that 100% of the tax cut is payed for in debt (it's not) then the money only flows out of the economy in the future. Trump is betting that the tax cut will benefit the economy by more than the 5 trillion before the money has to be repayed.  
> **username_1**: Your point is valid in an economy with a balanced budget where 1 dollar lost in tax revenue is 1 dollar lost in government spending. That isn't the case here, and if that was the case then the effect would depend on where we stand in the Laffer Curve as I mentioned. If the tax break is funded through debt then it will only have positive impacts in the short run and potentially negative impacts in the medium run. There is no scenario where a tax cut without a cut in government spending hurts the economy in the short run.  
> **username_0**: To buy T-bills you need money.  I don't think the Treasury is going to give them away.  Real money (to the extent that any money in the banking sector is "real") changes hands.  Yes, the money may *eventually* be repaid, and "real" money may then flow the other direction.  But that won't happen for decades, at least.  The money flows out much more quickly (on the safe assumption that Trump does no better than any Republican since Reagan at balancing the budget).  At most I can see an argument that "float" will somewhat offset the effect.  
> **username_1**: The treasury SELLS T-Bills for real money. Money is flowing INTO the economy not out of the economy. The T-Bills are then later repaid for real money.  
> **username_1**: Think of it like this: If you take out a loan from the bank for 1000 dollars you haven't lost money. You've gained 1000 dollars and now have 1000 dollars in debt. You can now make your life better off with that 1000 dollars. In no scenario in the short run does the possession of 1000 new dollars hurt you. Only in the long run when the debt collectors come knocking does the debt impact you negatively, ideally in the meantime you've invested that 1000 dollars and in doing so can repay it and made a healthy profit. This is the equivalence of foreign debt.  
> **username_0**: Re the Laffer curve and associated concepts, that only works if the tax cuts are recycled into the economy, vs going to wealth-building for individuals, and the effect (to the extent that it exists at all) is mainly seen when the economy is in recession.  But tax rates (especially for business and investment) are already at historic lows, and tax laws already strongly favor true investment, so it's hard to see how the proposed cuts can provide much in the way of "stimulus".  (But as I said earlier, I'm not here to debate the merits of "stimulus", but to understand the effect of debt on trade.)  
> **username_0**: When Treasury sells T-bill money flows into the US, but money isn't trade.  That's the important point to understand here.  
> **username_1**: Like I originally said. I don't support the Trump tax cuts and those are valid criticisms of the tax cuts. I'm just explaining the rationale behind them and how given a certain set of assumptions (which I personally don't hold to be true) they make sense. This is the first time you've mentioned trade? Foreign owned debt and trade are completely unrelated. If you have a question related to foreign debt and international trade I'd be happy to answer it if you post another question.  
> **username_1**: At this point I'm getting the feeling that you don't actually have a question and just want to trash the tax cuts. The question, as I read it was whether or not your argument about the tax cuts is correct or not. The answer is No, it is not because your argument stemmed from a fundamental misunderstanding of how foreign debt works. Nowhere in your question or in my answer was anything said about trade and I'm confused how it got brought up.  
> **username_0**: You're an overseas loan shark with a stack of US currency.  You loan the Treasury \$1M.  But then you decide that you'd like to buy \$1M of fancy Vermont marble to finish off your palace.  Oops!  You spent all your dollars on the T-bills, and all you have left is rubles, so you buy Russian marble instead.  Yeah, that's a little contrived (you could always trade rubles for dollars, at a cost), but that's how it works.  
> **username_0**: "This is the first time you've mentioned trade?"  You apparently didn't read my question: *thus removing the ability of that much US currency to purchase goods and services from the US (or benefiting from that much US currency being paid out of the US to buy foreign goods and services).*  
> **username_1**: Ahh I think I understand better what you are saying. The argument is still wrong but makes more sense. You are assuming that whatever money is now caught up in US debt would have otherwise been spent in U.S trade. This is a faulty assumption. Currency can be converted and it is entirely possible to buy U.S products using foreign currency. Using the Forex market its quite easy to buy goods internationally using any currency you want. The argument that there is a 1:1 correlation between foreign held USD and U.S exports is empirically false.  
> **username_0**: I'm not arguing about currency conversion (though it's certainly a relevant topic).  I'm effectively saying that if money is spent buying US debt it eventually affects conversion rates such that the money is taken away from trade.  When I very crudely worked my way through the effects of conversion it appeared that it was a "wash", other than to introduce "noise" and time delay, so it seems reasonable to "ignore" it.  
> **username_1**: What you are saying is that if a foreign individual spends 1 dollar on U.S debt that is 1 dollar less spent on U.S exports. This is empirically false. Maybe I'm misunderstanding but quite frankly the explanation of your argument is quite confusing. Maybe if you went through and rephrased everything to be more comprehensive I could understand.  
> **username_0**: "Empirically false"?  Have you tried it?  
> **username_1**: At this point I feel that you are just being argumentative and hope that you educate yourself further on this topic. I really just can't explain why you're wrong any further.  
> **username_0**: I'm afraid that you're the one who is arguing without explaining things.  

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