Question

Why does the United States pursue deficit strategy? How would that benefit its economy and cause the surplus of China?

Answer 1

President Ronald Reagan's budget director David Stockman coined the phrase "strategic deficit" to describe the usefulness of creating long-term budgetary shortfalls to undercut political support for governmental spending. Economic orthodoxy that ruled for decades held that fiscal responsibility was inherently good and the national debt a leviathan to fear. Now the intellectual and political currents are flowing — gushing, really — in the opposite direction. The need for detailed deficit recovery strategies in the industrialized economies has become a pressing one. Increasing concerns in financial markets about debt sustainability, the risks to growth from high debt and deficits, and the need to prepare for future spending commitments, all point to the need for action. The idea that deficit spending can help to bring an economy out of recession is an old one. It was a key point in Keynes’s “The General Theory of Employment, Interest, and Money.” The national debt in the U.S. has increased more than 10% since President Trump took office in January of 2017 with the debt-to-GDP ratio approaching 110% in 2019. The national debt of the United States is the total debt, or unpaid borrowed funds, carried by the federal government of the United States, which is measured as the face value of the currently outstanding Treasury securities that have been issued by the Treasury and other federal government agencies. The terms "national deficit" and "national surplus" usually refer to the federal government budget balance from year to year, not the cumulative amount of debt. A deficit year increases the debt, while a surplus year decreases the debt as more money is received than spent. Deficit reduction in the United States refers to taxation, spending, and economic policy debates and proposals designed to reduce the Federal budget deficit. Government agencies including the Government Accountability Office (GAO), Congressional Budget Office (CBO), the Office of Management and Budget (OMB), and the U.S. Treasury Department have reported that the federal government is facing a series of important long-run financing challenges, mainly driven by an aging population, rising healthcare costs per person, and rising interest payments on the national debt.

Strategies for addressing the deficit problem may include policy choices regarding taxation and spending, along with policies designed to increase economic growth and reduce unemployment. These policy decisions may be evaluated in the context of a framework:

• Promote economic growth and employment: A fast-growing economy offers the win-win outcome of a larger proverbial economic pie to divide, with higher employment and tax revenues, lower safety net spending and a lower debt-to-GDP ratio.
• Make equitable trade-offs: Many budget choices have win-lose outcomes, reflecting how government revenues are divided, with some benefiting and others incurring costs. For example, taking away benefits from those in or near retirement may be considered inequitable, while phasing out retirement benefits for younger workers may be considered less so.
• Keep short- and long-term issues in perspective: Healthcare cost inflation and an aging population are the primary long-term deficit drivers. Unemployment and various tax and spending policy choices are the primary short-term deficit drivers. Measures to encourage economic growth today can be implemented along with other measures to reduce future deficits.
• Limit or avoid future spending increases: Policy choices may focus on preventing future increases via freezes or reducing annual rates of increase. Annual growth rates since 2001 in the top three expenditure categories (Healthcare, Social Security, and Defense) are far above the economic growth rate. In the long-run, expenditures related to healthcare programs such as Medicare and Medicaid are projected to grow faster than the economy overall as the population matures.
• Invest productively: Some spending can be categorized as investments that lower future deficits. For example, if infrastructure, education or R&D investments could make U.S. workers and products more competitive or generate a revenue stream, these could reduce future deficits. Examples might include installing windows that reduce energy costs, toll roads, and bridges, or power plants.
• Avoid uncertainty and unnecessary regulation: Complex legislation may create uncertainty regarding future costs of doing business, which affects investment decisions made by businesses and households.^[30]
• Implement budget process reforms: Budget rules could be implemented that require new legislation or programs to be funded by either cutting other spending or raising taxes.

China is the third-largest export partner (the first and second being Canada and Mexico, respectively) of the United States, with export goods and services. The economies of the United States and China are intricately linked, due to the two nations sharing the second-largest trading partnership of goods and services. China is also the United State's largest import partner. Thus, the trade balance of the U.S. with China was negative, and this deficit is financed partly by capital flows from China. China was also the largest creditor of the United States and held the largest part of the U.S. Treasury securities with an amount of $1.18 trillion as of 2018. According to April 2018 figures from the U.S. Treasury, this was just over 21% of U.S. overseas debt. China’s surplus on its U.S. goods trade in the first 10 months of this year was $294.5 billion and amounted to 40% of America’s total trade gap. China’s rapid economic growth and emergence as a major economic power have given China’s leadership increased confidence in its economic model. Many believe the key challenges for the United States are to convince China that (1) it has a stake in maintaining the international trading system, which is largely responsible for its economic rise, and should take a more active leadership role in maintaining that system; and (2) further economic and trade reforms are the surest way for China to grow and modernize its economy. Lowering trade and investment barriers would boost competition in China, lower costs for consumers, increase economic efficiency, and spur innovation. However, many U.S. stakeholders are concerned that China’s efforts to boost the development of indigenous innovation and technology could result in greater intervention by the state (such as subsidies, trade, and investment barriers, and discriminatory policies), which could negatively affect U.S. IP-intensive firms.