NCPA - National Center for Policy Analysis

DEMOGRAPHICS PUT U.S. FISCAL DEFICIT IN NEW LIGHT

January 17, 2005

The U.S. trade deficit, about 6 percent of national income, is funded by capital inflows from foreign nations. Although some suggest that foreigners may have grown weary of U.S. investments, according to Michael Pitts of Peking University, creditor nations such as Japan and Europe will be forced to save as much as possible -- and accumulate claims on foreign economies -- in the years ahead in order to pay for their own troubled welfare programs.

Rising demands from pensioners, greater expenditures on health and various other costs all must be paid with a rapidly declining workforce:

  • Over the next 40 to 50 years, Europe's population is expected to drop from 380 million to 340 million, while in Japan it will fall from 130 million to 110 million.
  • The median age for these two societies is expected to rise from 36 years today to over 52 years by the middle of the century.

Pitts argues that the U.S. economy will continue to be the best destination for their claims due to its size, vitality, long-term security and financial stability. Seen in this light, the current "unsustainable" global balance of payments is perhaps a necessity, says Pitts.

Source: Michael Pitts, "Deficit Attention Disorder," Wall Street Journal, January 13, 2004.

For WSJ text (subscription required):

http://online.wsj.com/article/0,,SB110557298024824652-search,00.html

 

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