Opinion Editorial | |
| Monday, December 27, 1999 | |
Trade Deficit Reflects Strength Of U.S. Economy |
On December 16, the Census Bureau reported the largest monthly trade deficit in U.S. history: $25.9 billion in October. So far this year, the U.S. has run a deficit of $218.4 billion, with two months still to go (see figure). So unless there is a miraculous turnaround in November and December, the nation will have its largest trade deficit in history in 1999.
Alarmists seized upon the latest data to warn that failure to reverse the trade hemorrhage will cause the dollar to fall, which may bring down the stock market and trigger a recession. And indeed, the dollar did fall on the news. The Clinton Administration responded that the market's concerns are overblown. Robert Z. Lawrence of the Council of Economic Advisers said that the trade deficit was more a reflection of the strength of the U.S. economy than one of weakness.
Much as I hate to agree with the Clinton Administration about anything, in this case it is right. Two recent articles by Federal Reserve economists explain why the trade deficit is a byproduct of the U.S. economy's strong growth and not a matter for serious concern.
In the latest issue of the Federal Reserve Bank of Dallas's "Southwest Economy," economists W. Michael Cox and Richard Alm explain, "The U.S. economy has grown stronger with big trade deficits because they reflect one of our economy's greatest strengths -- its attractiveness to the world's investors."
The flip side to the trade deficit, Cox and Alm point out, is the large surplus the U.S. runs in its capital account, which measures investment flows in and out of the country. This surplus is an indication that the world's investors find the U.S. economy to be an excellent place to invest their funds. Because the U.S. has a far more attractive business climate than any other major country, investors believe they will earn more on an investment here than in Europe, Canada or Japan.
Writing in the Federal Reserve Bank of St. Louis's economic review, economist Michael Pakko seconds this analysis. Says Pakko, "In the context of the U.S. economy during the 1990s, rising trade and current account deficits are consistent with the notion that strong investment spending is associated with the adoption of new technologies, with the anticipation of rapid economic growth in the future suppressing domestic saving."
The inflow of foreign investment is both a sign of the economy's strength and a contributor to it. The trade deficit is simply a statistical corollary. At least for now, it is nothing to worry about.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, December 27, 1999.
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