To Reduce the Budget Deficit, you've gotta reduce the Trade Deficit.

One of the better innovations of viewing the economic world of the Modern Monetary Theory/Modern Monetary Realists (MMR being the non-political, non-policy branch of the similar school of thought, of which I consider myself closer to in some significant beliefs such as trade deficits) are its view of how the different sectors interact to promote growth. Primarily the government, private sector and foreign sectors, with the private sector sometimes broken down into household and corporate. Check this graph out of the US:

With this information in mind, to continue growing the economy there must be an expansion of one of the three sectors. With a continual rush to savings in 2008, much of the economic slack was blunted by a fiscal deficit and a blip in the trade deficit. What this chart of the last 50 years also shows is that the trade deficit or surplus truly determines what kind of growth the US will achieve and from what sectors. Thus, if you really want to reduce the budget deficit, you must first reduce the trade deficit. We have two major areas of where the trade deficit comes from: Oil, and China. On the first front, it's imperative that we implement smart government policy to reduce consumption, and at least in the short term, to increase production. This process is already under way  along with the price of gasoline at the pump driving people to consume less gasoline and change habits towards buying more fuel-efficient vehicles.

Much more could be done, via increasing the CAFE standards on cars/trucks/SUVs at a quicker date, subsidizing hybrid or electric vehicles even more, promoting another cash-for-clunkers on the onset of the next downturn (as a smart counter-cyclical measure), as well as furthering R&D grants towards things like battery technology and fuel efficient vehicles with ground-breaking technology. Additionally, some studies have found that 25% of gasoline is consumed as a result of congested traffic. It's also important that we further investment into our infrastructure, to reduce cars on the road in the form of mass transit systems (which are notoriously bad in places like in the South), as well as build new roads and expand roads to reduce congestion. This would not only provide a ton of jobs in an economically depressed time of excess capacity, but it would go a long way towards reducing our trade deficit via oil. On the oil production side, it seems pretty likely that the booms in Texas and North Dakota (Bakken Shale) will continue in earnest - perhaps the FHA and FEMA could coordinate adding extra housing and trailers there to those who want and need jobs in those places - I certainly would find it judicious to promote this boom in North Dakota to attract people from all around the country who need jobs. In any event, with extra investment, production and consumption of oil should converge at a certain point, and thus reduce nearly half of our trade persistent trade deficit, and hopefully lower the price at the pump in general!

On the Chinese front, what is important is that we continue pressure on China to continue to appreciate its currency, what seems to be a target of 4% during this year (although there are threats to the contrary). It's also important that we continue to negotiate trade liberalizations so that our exports can reach their market (like, for instance, media importation, as well as piracy). Finally, in general the United States has to start implementing pro-export policies that make it easier for American businesses to export to other countries. It is said that Canada has 3x the trade subsidies.. Can't we at least do what Canada is doing, if not Europe? Trade deficits and surpluses are zero-sum after all, as the experience of Germany and China can tell you, so we should extend loans, information, logistics and other subsidies to other countries including China. I suggest we be on the right side of it for our own sake of sustainable growth and to reduce our budget deficit and satisfy the fiscal hawks once and for all in a sustainable way. It would also lead private-sector cash out on the sidelines (who is currently undergoing a long deleveraging process), further reducing the budget deficit.

So that is what I propose doing on the spending side. Of course, I don't think it's completely necessary that we have to tax to pay for it, as it will pay for itself via a lower trade deficit and expanded growth. But, if you want to appease the fiscal hawks, then I suggest we pay for it by repealing most of the 2003 Bush tax cuts (estate, capital gains, dividends breaks in particular), and maybe the upper bracket (or millionaires, or whatever's necessary) of the '01 brackets. Or cut a little of defense spending. Or better yet, invest in R&D to produce more fuel efficient military technology that consumes less gasoline and thus saves money!

It should seem so obvious..