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Will a Smaller Fiscal Deficit Cause the Trade Deficit to Decline or Unemployment to Rise?

However, accounting identities do not tell us the direction in which causality flows, and so all identity-based arguments must implicitly make assumptions about which of the variables drive the other.

That is the nub of the claim Shultz and Feldstein make. They argue that if we cut the U.S. fiscal deficit, the U.S. trade deficit must automatically decline.

Michael Pettis, The Carnegie Endowment for International Peace 22 May 2017

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