NCPA - National Center for Policy Analysis


June 13, 2007

In a recent National Bureau of Economic Research (NBER) working paper, Harvard University economist Martin Feldstein says that the low level of the U.S. saving rate is the primary cause of the high value of the dollar compared to other currencies.  Consequently, we must have a trade deficit to bring in the financial resources to fill the gap, says the Washington Times.

According to Feldstein:

  • It is the low and falling level of household saving that is keeping national saving so low and thereby causing the saving-investment gap, and, in turn, the need for a high dollar to generate an equivalent trade deficit.
  • If America's unsustainable economic imbalances are to be unwound in an orderly way without inflicting major damage upon the United States and global economies, the value of the dollar will have to fall considerably.

Further, Feldstein states that:

  • An increase in domestic saving relative to U.S. investment is a necessary condition for reducing the trade deficit, but it is not a sufficient condition. 
  • A financial incentive is still required to induce foreigners and U.S. households and businesses to spend more on U.S. goods and services and less on the goods and services produced elsewhere in the world.
  • That incentive is a broadly depreciating dollar, which makes American goods relatively cheaper than goods produced elsewhere.

Feldstein does not specify how much the dollar must fall in order to reduce last year's "unprecedented" trade deficit of 5.8 percent of gross domestic product to a sustainable level. However, one fact is worth noting: As the dollar incurred a broad-based, inflation-adjusted) depreciation of 13 percent between 2001 and 2006, the U.S. trade deficit still increased from 3.6 percent of GDP to 5.8 percent.

Source: Editorial, "Call the clock," Washington Times, June 13, 2007.

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