NCPA - National Center for Policy Analysis

Trade Deficit Reflects Strength of U.S. Economy

December 28, 1999

On December 16, the Census Bureau reported the largest monthly trade deficit in U.S. history: $25.9 billion in October. For the first 10 months of 1999, the U.S. ran a deficit of $218.4 billion. So unless there is a miraculous turnaround in the numbers for November and December, the nation will have its largest annual trade deficit in history in 1999.

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. Two recent articles by Federal Reserve economists explain why.

W. Michael Cox and Richard Alm of the Federal Reserve Bank of Dallas 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 is the large surplus the U.S. runs in its capital account, which measures investment flows in and out of the country. This surplus indicates the world's investors find the U.S. has a far more attractive business climate than any other major country; thus they 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 says, "...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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