U.S. Records Huge Current Account Deficit

Yesterday, the Commerce Department reported the third quarter current account deficit was $174.1 billion. This was caused largely by a $214.7 billion deficit on trade in goods.

The current account is the broadest measure of the U.S. trade balance. In addition to trade in goods and services, it includes income received from U.S. investments abroad less payments to foreigners on their investments in the United States

At 4.8 percent of GDP, the huge current account deficit indicates Americans continue to consume much more than they produce, borrow too much from the rest of the world

The current account deficit is nearly entirely caused by the huge deficit on trade in goods. In turn, the goods deficit is caused by a combination of an overvalued dollar against the Chinese yuan, a dysfunctional national energy policy that increases U.S. dependence on foreign oil, and the competitive woes of the three domestic automakers. Together, the trade deficit with China and on petroleum and automotive products account for virtually the entire deficit on trade in goods and services.

To finance the current account deficit, Americans are borrowing and selling assets at a pace of about $400 billion a year. U.S. foreign debt exceeds $6.5 trillion, and the debt service comes to about $2,000 a year for every working American.

The trade deficit will make the recession longer and deeper, and lessen the positive benefits of President-elect Obama’s proposed stimulus package. If Obama does not fix the banks and significantly reduce the trade deficit, stimulus spending will not permanently pull the economy out of recession, and the economy could easily slip into a prolonged malaise or depression.

Simply, money spent on Middle East oil, Chinese televisions and coffee markers, Japanese and Korean cars can’t be spent on U.S. made goods and services, unless offset by a comparable amount of exports. Since U.S. imports exceed exports by almost five percent of GDP, the trade deficit creates an enormous drag on demand for U.S.-made goods and services. Along with the credit crisis and resulting slowdown in new housing and commercial construction, the banking crisis and trade deficit could push unemployment above 10 percent.

The current account deficit imposes a significant tax on GDP growth by moving workers from export and import-competing industries to other sectors of the economy. This reduces labor productivity, research and development (R&D) spending, and important investments in human capital. In 2008 the trade deficit is slicing $400 billion to $600 billion off GDP, and longer term, it reduces potential annual GDP growth to 3 percent from 4 percent.

Cutting the trade deficit in half would pull the country out of recession and get the economy on a stable growth path. A fiscal stimulus package, increasing the federal budget deficit by two or three percent of GDP, will make things much better for a period of time; however, successive stimulus spending and permanently larger federal budget deficits will be needed to sustain the GDP and employment gains. Whereas, cutting the trade deficit in half would yield lasting benefits for U.S. GDP and employment growth, far transcending any fiscal stimulus in its permanent effects. Cutting the trade deficit would substantially increase tax revenues and reduce the federal budget deficit.

Each dollar spent on imports that is not matched by a dollar of exports reduces domestic demand and employment, and shifts workers into activities where productivity is lower. Productivity is at least 50 percent higher in industries that export and compete with imports, and reducing the trade deficit and moving workers into these industries would increase GDP.

Were the trade deficit cut in half, the movement of workers and capital into more productive export and import-competing industries would increase by at least $400 billion or about $2500 for every working American. Workers’ wages would not be lagging inflation, and ordinary working Americans would more easily find jobs paying higher wages and offering decent benefits.

Manufacturers are particularly hard hit by this subsidized competition. Through recession and recovery, the manufacturing sector has lost more than 4 million jobs since 2000. Following the pattern of past economic recoveries, the manufacturing sector should have regained at least 2 million of those jobs, especially given the very strong productivity growth accomplished in durable goods and throughout manufacturing.

Longer-term, persistent U.S. trade deficits are a substantial drag on productivity growth. U.S. import-competing and export industries spend three-times the national average on industrial R&D, and encourage more investments in skills and education than other sectors of the economy. By shifting employment away from trade-competing industries, the trade deficit reduces U.S. investments in new methods and products, and skilled labor.

Cutting the trade deficit in half would boost U.S. GDP growth by one percentage point a year, and the trade deficits of the last two decades have reduced U.S. growth by one percentage point a year.

Lost growth is cumulative. Thanks to the record trade deficits accumulated over the last 10 years, the U.S. economy is about $1.5 trillion smaller. This comes to about $10000 per worker.

Had the Administration and the Congress acted responsibly to reduce the deficit, American workers would be much better off, tax revenues would be much larger, and the federal deficit could be eliminated without cutting spending.

The damage grows larger each month, as the Administration and Congress dally and ignore the corrosive consequences of the trade deficit.

Comments

[drl274:]

good common sense article, but what are the exact steps that should be taken to cut the trade deficit in half?

2008 Dec 18 04:49 AM

[DVW:]

Sounds like a weaker dollar will cure what ails ya!

2008 Dec 18 09:11 AM

[Jason Rines...:]

looking forward to the day Mr. Morici when gentlemen like you are part of an economic cabinet. I hope you run for office and rail against the stupidity directly in Washington.

2008 Dec 18 10:26 AM

[k9s-4-k8:]

"Had the Administration and the Congress acted responsibly to reduce the deficit, American workers would be much better off, tax revenues would be much larger, and the federal deficit could be eliminated without cutting spending."

No proposal made here, but one might reason a domestic energy only policy, or trade barriers to the U.S. market for other countries, or even pushing harder for a revaluation of the Yuan.
Taken one at a time, a domestic energy only policy sounds great but environmentalist have blocked this from happening. If we had been building nuclear reactors, and allowed greater access to oil & gas drilling, and even the conversion of coal to natural gas, we might have already reached this goal, but no. Environmentalists might counter now and say they are behind solar and wind which would reduce our dependence on foreign oil, but electric cars are far from a competitive reality and solar and wind are still very inefficient and would require hundreds of billions of new infrastructure to hook to the grid.

Trade barriers applied to foreign companies is really a stupid idea. We raise tariffs or apply maximum quotas, and other countries will only retaliate. This makes for less trade all around and a lower standard of living for all. What we need to do is become far more reliant on technological advances with an eye on becoming even more productive. Unfortunately, our educational system isn't set up to create anything but worker bees. Very few engineers will come from the U.S. system unless we greatly import brain power from other nations. These would be young students that we can offer a top notch university education but who will relocate permanently to live out their working lives in the states. We've already incorporated this strategy by default.

A revaluation of the yuan would affect our trade imbalance with China, but other emerging nations are ready to fill in where China drops off. It may affect our trade imbalance in the short term but longer term it will only move the trade imbalance to other nations.

2008 Dec 18 12:49 PM

[secmaven:]

The trade deficit is recycled into Treasury bonds. Isn't that better than having the Federal Reserve monetize more debt?

2008 Dec 18 07:00 PM

[Steven Hansen:]

Peter,

the current account deficit is contracting slightly based on rising exports.

www.bea.gov/newsreleas...

2008 Dec 18 11:51 PM