As I understand it, the Trump Administration’s basic macroeconomic view may be stated simply. US domestic goods production has fallen, this fall is dangerous and harmful, rising imports are the main cause, and high tariffs are the right policy reaction, which will also have the benefit to reduce large and rising federal deficits. To evaluate these claims and consider alternative explanations and policies, let’s examine Chart 1 below. It shows annually, from 1950 to 2024, the components of national product as shares of GDP—private goods, private and public gross investment, government consumption, private services, and net exports (colored bars, totaling 100 percent, left side axis), as well as federal government budget balances (mainly deficits) (solid line, right side axis).
Chart 1
Goods production, including traditional manufacturing, farming, mining, and energy, has fallen steadily from 39 percent of GDP in 1950 to 21 percent in 2024, although the rate of decline slowed noticeably in the early 1990s. By contrast, private and public investment, which includes plant and equipment, computer hardware and software, and residential construction, has essentially remained flat—23 percent in 1950 and 22 percent in 2024—though the share did decline during recessions (for example, to 18 percent in 2009). Federal, state, and local government consumption, which includes defense and administration but not transfers, has similarly remained steady around 13 percent, although it rose during and just after wars. Meanwhile, private services have steadily increased, from 25 percent in 1950 to 47 percent in 2024. As shown in Chart 1, the growth in health care is a significant part of that increase.
Chart 2 shows the sub-components of services as a share of GDP—health care, recreation, housing, transportation, finance and insurance, non-profits, hospitality, and others. Poor productivity growth is common among most of the sub-components that are notably increasing, including health, housing, recreation, and non-profits. This is in contrast to the large leaps in productivity in the goods producing sectors of the economy, particularly farming and manufacturing, owing to the introduction of technology in these sectors.
Chart 2
Net exports have declined over the long post-war history shown in Chart 1, but in a jagged manner. Starting as small positive shares in the 1950s, they peaked at one percent in 1964. In the late 1970s, they turned consistently negative and bottomed out at -5.7 percent in 2006. Currently, net exports are about -3.0 percent.
The federal government budget deficit was slowly trending downward (negative) in the 1950s and 1960s, but became noticeably worse in the late 1970s and early 1980s at around five percent of GDP. The deficit then turned to a positive surplus owing to budget discipline and a strong economy through the late 1990s, but became consistently negative in the 2000s. After reaching new depths during the Great Recession and pandemic, the budget deficit is now over six percent.
One sees only a rough connection between the decline in goods production and net exports (the correlation coefficient between the change in the goods share and the net export share is -0.22)—the timing of the significant changes is mostly off, and correlation is weak. By contrast, one can see a stronger relationship between net exports and the federal budget balance, where the correlation coefficient is 0.42. Although correlation is not necessarily causation, the latter relationship can be explained as follows. The growing federal deficit supports consumer spending, including on expensive services and, increasingly, imported goods. In addition, the deficit is partially financed by foreign savings, which results from excess goods production and income relative to domestic demand in foreign countries- that is, positive net exports abroad and net imports here in the US.
The deficit increases with the growing share of the inefficient health care sector, as relative prices for health care rise and the federal government takes on more and more of the responsibility for health spending through Medicare, Medicaid, veterans care, and the insurance exchanges. Indeed, the share of federal spending devoted to health care increased from two percent in 1950 to 25 percent in 2024.
So my alternative basic macroeconomic view is that the inefficient health care sector has grown too large over time, is being funded by growing federal deficits, these deficits are driving down net exports (and somewhat, goods production), and the deficits are dangerous and harmful. The correct policy solution therefore is to significantly increase the efficiency of the health care sector by all available means—competition, the introduction of cost-reducing technologies including artificial intelligence, and an increased sensitivity to the cost of low-value services. This does not need to be done all at once, but must be accomplished firmly and with direction. Reduction in the federal government deficit will result, which is particularly important as pressures increase from population aging.
The post Alternative Macroeconomic Views appeared first on American Enterprise Institute – AEI.
