EMBRACE THE DEFICIT
December 21, 2006
Though widely criticized as an economic imbalance, the U.S. trade deficit reflects growth, not weakness, says David Malpass, chief economist at Bear Stearns.
- Since the 2001 recession, the United States economy has created 9.3 million new jobs, compared with 360,000 in Japan and 1.1 million in the euro zone (excluding Spain), despite our trade deficit and their trade surpluses.
- Like the United States, Spain (3.6 million new jobs) and the United Kingdom (1.3 million new jobs) ran trade deficits and created jobs rapidly in this five-year period.
In truth, says Malpass, the deficit should be evaluated in terms of U.S. demographics, low unemployment rate, attractiveness to foreign investment and rising household savings.
- U.S. 10-year government bonds yield 4.6 percent per year versus 1.6 percent in Japan, and government debt is 38 percent of gross domestic product (GDP) versus 86 percent in Japan.
- While the net foreign debt of the United States is growing, household net worth is growing faster -- international capital provides $2.7 trillion compared to U.S. household financial savings of $27 trillion as of Sept. 30.
- The under-60 U.S. population is expected to grow for at least 50 years -- driving the need for new capital -- while the under-60 populations in Japan and Europe are already declining and in China will turn down within a decade.
Despite the growth, some have advocated a weaker dollar, or protectionism as ways to reduce the deficit. But that would only lead to inflation risk from dollar weakness or growth risk from protectionism, says Malpass. Policy makers and the Federal Reserve should fight inflation, strengthening the dollar, and leaving the trade deficit dependent on
U.S. growth and demographics -- right where it should be.
Source: David Malpass, "Embrace the Deficit," Wall Street Journal, December 21, 2006.
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