NCPA - National Center for Policy Analysis

Current Account Deficit Unrelated To Budget Surplus

September 20, 1999

During the Reagan years, liberals whined that the budget deficit -- which they claimed was due to the 1981 tax cut -- was causing the U.S. to run a large current account trade deficit. This meant the U.S. was becoming indebted to foreigners, which would ultimately reduce American living standards.

For a time, the data seemed to support the so-called Twin Deficits theory.

  • From 1980 through 1989, the budget deficit moved with the current account deficit -- which includes the trade balance for both goods and services plus remittances on U.S. investments abroad and foreign investments here.
  • However, in the 1990s, the current account and the budget are moving in opposite directions; as the budget has moved out of deficit and into surplus, the trade deficit and the current account deficit have reached record levels.
  • Last year, while the federal government ran a budget surplus of $73 billion, the trade deficit rose to $164 billion and the current account deficit reached $221 billion -- both record levels.

Since the budget is in surplus, these trade balance worry-warts can't use the old Twin Deficits theory any more to push for tax increases. So instead they are now arguing for further Fed tightening to forestall the inflation that the current account deficit supposedly is fostering. In the 1980s these same people claimed budget deficits caused the trade deficit by raising interest rates, which raised the value of the dollar, which makes imports cheaper and exports more expensive. If that is true, then further Fed tightening will only make the current account deficit worse.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, September 20, 1999.


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