And Why Politicians Keep Promising It Will

by George Campbell mtwx.ca

The latest economic data landed last week with all the surprise of a tax bill in April. U.S. GDP growth hit 3.8% in Q2 2025, driven by stronger consumer spending and a drop in imports, while the current account deficit (narrowed sharply from Q1, but still large) at $251.3 billion. Americans kept spending money on everything from smartphones to sofas, much of it made elsewhere, which apparently came as shocking news to people who’ve never been inside a Walmart.

Politicians from both parties immediately promised to fix this terrible problem through better trade deals, tougher negotiations, or bringing manufacturing home. The laws of arithmetic were unavailable for comment.

This is the same arithmetic that explains why you can’t simultaneously drain your bathtub, fill your swimming pool, and keep your water bill the same. But politicians treat economic identities like suggestions from a moderately interested consultant, which explains why economic promises have roughly the same track record as weather forecasts extended out to next Christmas.

Every economy lives in a house with exactly three water tanks for financial balances connected by pipes. Tank one holds private sector money—households and businesses. Tank two holds government money—everyone who can tax and spend public funds. Tank three holds foreign money—everyone outside your borders wondering why your currency keeps doing inexplicable things. The fundamental accounting identity is simple: Private balance + Government balance + Foreign balance = 0. This isn’t a model or theory—it’s arithmetic.

Here’s the part that makes political promises mathematically hilarious: when water flows into one tank, it must flow out of another. The total amount of water doesn’t change just because you’d prefer a different distribution. You can’t fill all three tanks simultaneously (private surplus, public surplus, and external surplus) unless you’re importing water from outside the system, but in economics there is no “outside the system.” Politicians routinely promise to fill all three tanks anyway, apparently believing that passionate speeches can suspend the laws of hydraulics.

The recent U.S. numbers illustrate this beautifully. Strong consumer spending and reduced imports drove GDP growth while government deficits provided the arithmetic balance that makes the whole system work. Change any one of these flows, and the others adjust automatically whether politicians vote for the adjustment or not. But suggesting that politicians understand this connection is like suggesting that weather forecasters control the weather. They can describe what’s happening, badly, but they can’t actually change it.

Not all trade deficits are created equal, though politicians discuss them as if importing granite countertops and importing precision manufacturing equipment represent identical economic phenomena. This is roughly equivalent to treating both a fire hose and a garden sprinkler as “water distribution systems” and wondering why they produce different results.

When a local cabinet shop imports a $180,000 CNC machine from Italy, that shows up as a worsening trade deficit in the monthly statistics. Six months later, when that machine lets them compete for contracts they couldn’t handle before, the original import looks like what it actually was: an investment in future earning capacity. When homeowners import granite countertops and flat-screen TVs for their kitchen renovations, that also shows up as a worsening current account deficit (current account = trade in goods & services + income flows). But granite countertops don’t generate future cash flows. They generate satisfaction for homeowners and profits for granite dealers, which are perfectly reasonable outcomes, but they’re not the same economic phenomenon as importing productive equipment.

The trade statistics treat both scenarios identically because accountants are more honest than politicians about recording what actually happened. A dollar spent on imports is a dollar spent on imports, regardless of whether that dollar builds future earning capacity or just makes your kitchen look better. Politicians prefer to ignore this distinction because it complicates their narrative about trade deficits representing economic failure. Much easier to blame foreigners for “taking our jobs” than to explain why Americans with good incomes choose to spend money on a mix of domestic and foreign goods.

The current U.S. trade deficit won’t disappear through presidential rhetoric, trade negotiations, or strongly worded tweets about currency manipulation. It will persist as long as Americans prefer spending to saving and the government runs deficits that accommodate that preference. This creates uncomfortable implications for political promises. You can’t eliminate trade deficits without changing the underlying behavior that creates them. You can’t force all three tanks into surplus simultaneously when the plumbing requires that surpluses in some places create deficits in other places.

Politicians who promise to fix trade deficits while encouraging private saving and balancing government budgets are essentially promising to solve a math problem by ignoring the math. This approach has a success rate comparable to losing weight by buying a more flattering scale. The arithmetic doesn’t negotiate with campaign promises. It doesn’t care about approval ratings or election schedules. It just records what actually happened when money crossed borders, then adds up the totals with the relentless honesty of a tax accountant.

Perhaps the most uncomfortable truth about trade deficits is that they often indicate economic strength rather than weakness. Countries with trade deficits typically have currencies that foreigners want to hold, economies that foreigners want to invest in, and consumers with enough money to buy things. The U.S. benefits from reserve-currency demand and investment opportunities that draw foreign capital. This is why politicians’ promises to eliminate trade deficits might represent promises to make the economy less attractive to foreign investors and domestic consumers less prosperous. But “Vote for me and I’ll make foreign investors less interested in our economy” doesn’t focus-group as well as “I’ll bring manufacturing home.”

The trade deficit will adjust when Americans decide to save more, when the government decides to borrow less, or when foreigners decide they’d rather not accumulate dollars. Until then, it will persist regardless of how many trade wars politicians declare or how many manufacturing summits they organize.

So it goes.