Introduction
NEW YORK – President Donald Trump’s aggressive tariff policy has sparked significant debates about rebalancing the US economy both domestically and within the global economic order. In his speech at the New York Economic Club on March 6, US Treasury Secretary Scott Bessent presented the Trump administration’s strategy for “rebalancing” and reprivatizing the US economy. Bessent also noted, like Trump, that a “detoxification period” as the economy reduces its reliance on federal spending may require short-term “sacrifices” for long-term benefits.
Unclear Rebalancing Targets
It’s unclear what exactly needs rebalancing. The fiscal and regulatory policies under consideration by the administration offer avenues for increasing investment in the US by both domestic and foreign companies. However, the resulting effects on the dollar’s exchange rate and the current account do not align well with the administration’s goal of reducing the US trade deficit.
Arbitrary Tariffs and Their Limited Impact
While US financial markets and the national industry suffer from intermittent tariffs, it’s worth questioning whether the rebalancing goal is aided by Trump prioritizing trade policy. The short answer is no. For instance, it’s unlikely that tariffs on aluminum and steel, crucial intermediate inputs in manufacturing, will rebalance the US economy towards increased manufacturing production. A better approach would emphasize long-overdue fiscal policy changes, despite the political challenges.
Global Economic Rebalancing: A Mixed Bag
The Trump administration’s “America First” agenda envisions a global rebalancing of economic activity and production. Beyond US tariffs, policymakers both within and outside the government have extensively debated rebalancing abroad. In Europe, the prospect of a German “rearmament” and increased domestic spending would reduce Germany’s chronic current account surplus.
In Asia, China stands out for its pursuit of surpluses, often predatory trade behavior (injecting excess industrial output into global markets), and intellectual property theft. It’s easy to argue that, for its own economic well-being, China should increase domestic spending—especially consumption—rather than rely on export-driven growth. Recently, China has announced plans to boost domestic consumption in response to US tariffs. If China avoids this adjustment, its WTO membership should be questioned.
The US Needs to Increase National Saving
However, achieving a global economic realignment comes with an important trade-off. While some economies, like China and Germany, need to increase domestic spending, the US must boost national saving. Although national saving comprises private (household and business) savings and public (government) savings, it’s the latter that requires adjustment. In short, the US should reduce budgetary deficits and stabilize or even decrease the federal debt-to-GDP ratio.
Fiscal Policy: The Unavoidable Path
Bessent has emphasized deficit reduction as a desirable goal in itself. Moreover, reducing the deficit offers benefits in terms of the administration’s rebalancing economic objectives.
- Lower Real Interest Rates: In equal conditions, increased national saving resulting from deficit reduction puts downward pressure on real interest rates in global capital markets and on the long-term term premium of US public debt.
- Decreased Current Account Deficit: Under equal conditions, the US current account deficit would decrease. Achieving fiscal consolidation through reduced federal spending could lead to rebalancing towards a private economy.
Tax Policy Considerations
The Trump administration should exercise caution to avoid significant further tax cuts that increase the budgetary deficit and reduce public saving. As the Congressional Budget Office’s annual Long-Term Budget Outlook clarifies, long-term public saving increases require reducing federal spending growth.
Targeted Fiscal Adjustments
Pursuing a fiscal path towards rebalancing requires well-known, albeit politically challenging, measures. While the administration’s Department of Efficiency Government (DOGE) focuses on reducing federal employment, long-term spending reductions should concentrate on slowing the growth rate of Social Security and Medicare.
- Social Security: Combining a higher minimum benefit with changes in benefit indexing can achieve gradual spending growth reduction.
- Medicare: Publicly-funded premium support for basic coverage can offer a robust safety net with lower cost growth.
Conclusion: Prioritize Long-Term Economic Benefits
If the Trump administration takes economic rebalancing seriously, it should leverage the President’s control over both Congressional chambers to push for significant long-term economic benefits, despite short-term political challenges. That’s truly putting America first. It’s unlikely that tariff-focused rebalancing debates will transform Trump’s “Make America Great Again” slogan into more than just words on a baseball cap.
About the Author
Glenn Hubbard, a professor of Economics and Finance at Columbia University and former Chairman of the Council of Economic Advisors under President George W. Bush, wrote this article.
Copyright: Project Syndicate, 1995 – 2025
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