U.S. trade deficits measure the gap between the income generated at home and the amount spent on consumption and investment. Without the U.S. government’s deficits, spending demand would have been lower and, unless the trade deficit fell by the same amount, domestic output and employment would have fallen. As the United States had a structural liquidity trap, either the trade deficit had to fall, unemployment had to rise, or the United States had to run a large persistent budget deficit. Th...
