By Robert P. Murphy and Mark Spitznagel

About the authors: Robert P. Murphy is chief economist for Infineo. Mark Spitznagel is founder and chief investment officer of Universa Investments.

For decades, a rift over trade policy has been growing in rightwing U.S. politics. As far back as Pat Buchanan's 1992 "Make America First" presidential campaign, populists have been pushing back on the textbook free trade worldview promoted by more libertarian-minded Republicans. President Donald Trump's new tariff regime has brought this fundamental disagreement back into the spotlight.

The MAGA movement intuitively senses that something is lacking in libertarians' blackboard appeals to comparative advantage and efficiency. Nonetheless, its remedy -- an all-out trade war -- is ill-prescribed. Tariffs alone won't fix the problem. To do so, we must understand what's actually driving chronic U.S. trade deficits. We need to look at reckless monetary policy.

Both sides in this debate have asserted that the U.S. dollar's global reserve status means that chronic deficits are an accounting necessity. Partisans often point to the ideas of Harvard economist Robert Triffin, who testified to Congress in 1959 that a trade deficit is needed in order for there to be enough dollars in circulation to meet global demand of the reserve currency. Yet, this is a misreading of the data. Under the postwar Bretton Woods system, which was in effect until President Richard Nixon famously ended it in 1971, foreign governments and central banks could exchange dollars for gold at the rate of $35 per ounce. Although Bretton Woods was a pale shadow of the pre-World War I classical gold standard, it nonetheless limited the Federal Reserve's ability to create more money.

Trade balance statistics tell an unambiguous story: from 1946-1971, the U.S. had a trade surplus in every single year except 1953, when the trade deficit was a mere 0.2% of gross domestic product. Post-Bretton Woods, from 1972-2024, the U.S. had a trade deficit in every single year except 1973 and 1975. From 1976 onwards, the U.S. maintained a string of trade deficits, with annual figures averaging 2.6% of GDP.

These data indicate that our chronic trade deficits of recent decades are not directly attributable to tax policy, trade deals, or abuse of trading rules through subsidies, currency manipulation, or other forms of cheating -- even though there is plenty of skullduggery afoot in those areas. Clearly, something fundamental changed when Nixon divorced the U.S. from the gold standard and thereby unshackled the Fed, allowing it to print dollars with no external restraint. It is no coincidence that the worst peacetime consumer price inflation in U.S. history occurred -- you guessed it -- during the 1970s.

The unfettered Fed gave the U.S. government implicit permission to run much larger budget deficits than would otherwise have been possible (because the Fed always waited in the wings to sop up Treasuries and thus "monetize" Uncle Sam's borrowing). Consider the net international investment position of the U.S. -- a measure that Robert Lighthizer, the U.S. trade representative in Trump's first term, has spoken and written about extensively. Specifically, from 1990- 2024, the NIIP went from negative $150 million to negative $26.2 trillion. This means that during that 34-year stretch, foreign claims on U.S. assets grew $26.2 trillion more than U.S. claims on foreign assets. Yet during that same period, the total public federal debt grew from $3.2 trillion to $35.3 trillion, an increase of $32.1 trillion.

To be clear, it isn't the case that foreign households and institutions added almost the entirety of new Treasury debt to their balance sheets. Rather, Uncle Sam's fiscal profligacy diverted private domestic savings that otherwise could have been invested into the private sector into Treasuries. There was a " giant sucking sound," all right, with capital flowing to Washington, D.C. The flipside of the capital account surplus of the U.S. is a current account deficit elsewhere. In order to "pay for" their net acquisition of tens of trillions of dollars of U.S. assets over the last few decades, foreigners sent us goodies like cars, televisions, and textiles.

What can be done? The most important items are for the Fed to return to a hard-money policy, and for the Treasury to balance the budget. Tariffs can help with that.

Tariffs can be used to reduce income-tax rates. So long as they do so dollar-for-dollar, tariff-driven tax cuts would reduce some of the losses warned about by economist Paul Krugman and others. Tariffs work less like income taxes than consumption taxes, which do more to encourage saving and investment. That said, it would be difficult for tariffs to generate enough revenue to replace income taxes, as President Trump has recently contemplated.

Trump's tariff rates and implementation aren't perfect. Crude mercantilism shouldn't be defended. And the academics are right when they say tariffs don't necessarily help workers. Yet the MAGA movement is also right when its says chronic trade deficits underscore a fundamental problem with the U.S. economy. By realizing the true culprits are the Fed and Treasury, the Trump reformers have a chance at providing a genuine solution.

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