U.S. Records Another Huge Current Account Deficit

Today, the Commerce Department reported the second quarter current account deficit was $183.1 billion. This was caused largely by a $216.3 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 about five percent of GDP, the huge current account deficit indicates Americans continue to consume much more than they produce, borrowing 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 about deficit 90 percent of the deficit on trade in goods.

To finance the current account deficit, Americans are borrowing and selling assets at a pace of $600 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 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 2007 the trade deficit is slicing off $300 to 500 billion off GDP, and longer term, it reduces potential annual GDP growth to 3 percent from 4 percent.

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 $300 billion or more than $2,000 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 3.9 million jobs since 2000. Following the pattern of past economic recoveries, the manufacturing sector should have regained about 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 $10,000 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 Bush Administration and Congress dally and ignore the corrosive consequences of the trade deficit.

Comments

[JasonC:]

The trade deficit is an accounting identity side effect of the savings rate being less than the rate of domestic investment. It has little to do with trade and everything to do with consumption being too large a portion of income - both private consumption and the size of government. Those sectors are not financing the net investment of the business sector out of real savings. Instead the business sector has to fund its net investment with foreign capital borrowed from abroad.

The article contains other distortions. It gives a gross figure for debt service not a net one. Americans hold large assets abroad, and earnings on them are substantially higher than the low returns foreigners earn in US dollar debt assets, mostly very safe treasuries. As a result, the net capital income from abroad nearly matches that paid to foreigners on their investments in the US.

We should certainly fix this. The way to do so is to increase the savings rate gradually. Government can do its part in that by setting incentives for savings, instead of live for now tax funded entitlements with huge price tags. But in the present political atmosphere of populist slander and class war, it is probably too much to expect anything grown-up or responsible out of Washington.

2008 Sep 17 05:17 PM

[Rokjok777:]

Jason your comments are always great. Why not put together a regular column and submit it?
And since you brought up politics...my take is that the knee-jerk "any regulation is bad" governing Republican philosophy, starting with Reagan, "small-enough-to-drown... to it's climax today, needs to be acknowledged to have been a complete and utter disaster.
Washington generally: "don't ascribe evil motives where mere stupidity will suffice..."

2008 Sep 17 05:50 PM

[ObjectiveFu...:]

I second that motion.

2008 Sep 17 06:00 PM

[Reinko:]

To JasonC:

I quote from your comment:

As a result, the net capital income from abroad nearly matches that paid to foreigners on their investments in the US.

But the latest TICS data for July say: Monthly net TIC flows were negative $74.8 billion.

Source link:

www.ustreas.gov/press/...

I do not know about August but the recent developments on the financial markets make it likely not much better.

For the rest: The article is not bad but the writer must dig deeper in order to understand a more complete picture of the financial system and the economy of the USA.

Every body knows the USA lives beyond her means and every body knows obesity rates are climbing year in year out.

Yet, no body sees the easy to understand relation between them and that is not my problem but a problem for the USA citizens to solve...

2008 Sep 17 06:24 PM

[Common_Deno...:]

The main problem is that all of the junk mortgages were sold by banks to Freddie & Fannie. Those two outfits had orders to encourage home ownership by the poor. When government guarantees are available, Fannie & Freddie then sold those mortgages pooled together in tranches as high rated bonds.

This problem is similar to what happened in the Savings & Loan fiasco a few years back. People put money in S&L's since the government backed it up. That led to crooks operating S&L's using saver's money to be lent to their crooked friends.

Moral of the story is....the government should never give cheap guarantees to banks, S&L's, Wall street Bankers or any one else.

2008 Sep 17 06:39 PM

[DougM:]

When you say that Bush and Congress should have acted to fix the current account deficit, what exactly are they supposed to have done? I see one concrete proposal hinted at in your article, which is a sensible energy policy. Beyond that, what?

2008 Sep 17 07:39 PM

[Ray Lopez:]

The below is Post Hoc and wishful thinking logic that armchair economists love to throw about--who can say how productivity will behave if more people move into "export and import-competing industries"? Productivity might even go down as more unqualified people rush into trying to do high-value-added work, with little or no education or marketable skills.

That said, generally spending more than you're making is a bad thing, productivity aside.

RL

"
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 $300 billion or more than $2,000 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.
"

2008 Sep 17 07:55 PM

[Danny Boy:]

#1 got it exactly right. Manufacturing and energy have nothing to do with the trade deficit. You can live next to - and work in - the world's most efficient factory, and strike oil in your back yard.. but if you choose to spend more than you earn you WILL run a current account deficit.

Americans took out trillions of dollars in home equity lines of credit and similar loans, consumer loans, credit card debt in the 2000's. Add to this the soaring federal budget deficit and the current account deficit is not going to be a mystery to anyone.

How can we increase our household savings rate in this country? Beats me. It's cultural. We've become a nation of profligates. Most Americans underutilize their 401(k)'s. What more can the government do? We don't use the numerous tax breaks available for savers as it is.

2008 Sep 17 09:02 PM

[Metzenbaum ...:]

If your dumb-a** leaders insisted the Chinese buy a dollar of US goods for every dollar they sell here, and all their containers were inspected, it would accomplish two things: balanced trade deficit and a whole lot less drugs on US streets.
China needs America; America can get on without China... so why the kowtowing?

2008 Sep 17 09:24 PM

[TheRabble:]

China needs us to consume its products? Why? Their economy is productive enough to both provide goods for its own people and trade surpluses with others. The US industry has deteriorated and we are in crippling debt.

What incentive to people have to save with constant bubbles and inflation distorting the economy and encouraging speculation?

Until the debt bubble collapses completely, and inflation is eliminated people wont save. Unfortunately there is no way of stemming inflation at this point, but once the dollar collapses we can start again under a more sound premise. Perhaps gold will become the reserve currency again, a revolutionary idea in today's imbalanced counterfeiting world.

2008 Sep 17 10:58 PM

[bearfund:]

For the second day in a row I agree with JasonC, which only confirms that this really is the end of the world.

But here's a thought: instead of creating incentives to save by adding more tax loopholes, how about doing the simplest and most obvious thing: raising interest rates? Why would anyone save when they get only 2-3%? Even if you believe in "core inflation" (which no one who works for a living does), that's far too low. The market is doing the first part of the job: cutting off credit. Time for the Fed to do the second part. If interest rates were 10% I would be happy to deploy some of my gold in plain old savings accounts, where it could do a bank and its corporate borrowers some good, and perhaps some corporate bonds as well. Instead it sits in ... well, the places I keep my gold, doing nothing. A damned shame, really, but that's what happens when you debase the currency and eliminate returns.

The third part of this equation rests with Congress. Encouraging savings? You could do no better than eliminating the mortgage interest deduction. A reasonable second choice would be capping it at the amount of interest that would have been paid had the loan been taken out at 70% LTV and the rate available to borrowers with an 850 credit score. No longer would there be an incentive to borrow, nor to have poor credit.

2008 Sep 18 12:14 AM

[Metzenbaum ...:]

Rabble,
China is a polluted prison filled with illiterate peasants trading their miserable agrarian subsistence for a slightly less miserable (but still Dickensian) 'life' on an assembly line on the coast.
PJ O'Rourke paraphrase on Purchasing Power Parity: saying the Chinese quality of life is in any way gaining on ours is like saying you can have a better house in a crime-ridden, crack district. Yes, it's a better house, but most folks would not choose it.

I think you over-estimate internal Chinese demand for 99% of their population. The rich 1% want to buy anything but tainted food, counterfeit brake pads, soy sauce made from hair, etc,

2008 Sep 18 09:26 AM