Mr. Chairman and Members of the Committee:
I think it is both useful and timely to develop further Congressional focus on our country’s current account deficit. Thus I think this hearing is a very good idea. Moreover, recent events in Genoa and elsewhere suggest that the full range of issues around globalization merit great focus by this body.
The current account deficit is basically the trade deficit plus the deficit in net payments, including interest, dividends and the like, but public discussion of our deficit has, I think, become a symbol for concern about the whole area of trade related matters. I will try to very briefly express my views on these matters, and related policy issues, and hopefully that will be responsive to the four questions in the Chairman’s letter outlining this hearing, as well as very summarily suggesting an approach to the broader issues around globalization.
To begin, the U.S. has had remarkably good economic conditions over the past 8 years, with far stronger growth and far greater productivity increases than Europe or Japan, and far lower unemployment than Europe. At the same time, our markets have been more open to imports than Europe or Japan, our currency has been strong, our capital markets have been open, and our trade and current account imbalances have grown substantially.
I have no doubt that our economy has benefited enormously from both sides of trade, not only exports, but, even though it is not popular to say this, also very powerfully from imports. Imports lower prices to consumers and producers, dampen inflation (and thereby lower interest rates), provide a critical role in allocating our resources to the areas where our competitive advantage is greatest, and, maybe most importantly, create competitive pressure for productivity improvement. All this has contributed greatly of the very low unemployment and rising incomes at all levels.
The imbalance between exports and imports has occurred because of vast net capital inflows from around the world into the United States, motivated by the relative attractiveness of the United States for investment and as a repository for capital. That vast net inflow has allowed our consumption plus our investment to exceed what we produce. The consequence has been a lower cost of capital in our country and greater investment, which helped increase the rate of productivity growth.
Another consequence of the net capital inflows has been a strong dollar, which has lowered costs to consumers and producers for what we buy abroad, and more favorable terms of exchange between what we sell and buy abroad. The result is lower inflation, lower interest rates, higher standards of living, and greater productivity. The strong dollar has also helped attract capital from abroad.
The next question is, even if our open markets, imports and a strong dollar are beneficial, is the imbalance itself a problem.
While a current account deficit reduces aggregate demand, in recent years we have had fully adequate demand, and, in any case, monetary and fiscal policy (such as the current tax rebate) are far preferable means of generating demand, if this is desired.
The claims against future output from the vast net capital inflows is like any other borrowing or raising of equity capital: if the funds are well used for investment, then the future contributions to growth will exceed the cost of repayment or other forms of return to foreign investors.
The remaining concern is that, in various ways, the current account deficit could contribute to future instability, as, for example, by adversely affecting confidence in the dollar or making us more vulnerable to a change in perception abroad about our economic prospects or the soundness of our policy regime (which, parenthetically, is another reason why maintaining fiscal discipline is so critically important for our economic well-being). While we should be able to sustain this deficit for an extended period because of the relative size and strength of our economy, it would be desirable over time to greatly reduce this imbalance.
There are some policy measures that could promote this purpose and would be beneficial in other ways as well, and there are some policy measures that are more frequently advocated, which might help reduce the current account deficit but could have other severe adverse economic effects and on balance would be most unwise.
Doing whatever we can to promote structural reform and trade liberalization in Europe and Japan would contribute to greater growth with more attractive investment opportunities in those areas, thus increasing our exports and increasing investment flows to Europe and Japan. This is good for us in many ways, including reduction of our current account deficit, and exemplifies why strongly engaging in international economic issues is greatly in our interest.
At home, increasing savings over the full business cycle would reduce imports and reduce the inflow of capital and would be the most constructive approach to reducing the current account deficit. While our low personal savings rate seems to be a cultural phenomenon – and there is a real question about how much net effect some savings tax credits have -- I do think carefully crafted tax credits for subsidizing saving is a useful approach to explore if Congress at some point revisits the recently enacted 10 year tax, which is itself a significant diminution of future national savings and, in my view was most unwise.
Two frequently mentioned correctives for the current account deficit that might have some impact but on balance would be highly detrimental to our economic well-being are increased trade barriers and modifying our country’s strong dollar policy.
Increased trade barriers would increase prices, lessen the comparative advantage effects, and reduce competitive pressures for productivity. Also, history suggests that protectionist measures here could lead to retaliatory trade measures in other countries.
Modifying our strong dollar policy could adversely affect inflation, interest rates and capital inflows and would lessen the favorability of our terms of exchange with the rest of the world.
Having said all this, as our administration made clear over the past decade, trade liberalization, though highly beneficial on balance for industrial and developing countries, can create dislocations – just as technology does to a far greater degree – and there are critically important matters, in our country and around the globe, such as poverty and the environment, that won’t be adequately addressed by the policy regime that I have been discussing. The demonstrators this past week were sometimes strident – and we must condemn violence – but there are underlying concerns about globalization that are serious and need to be addressed. Thus, in our country and abroad, there should be a parallel agenda to promote productivity and equip people to deal with change, including education, effective re-training, programs to equip the poor to join the economic mainstream, environmental protection and much else. And the industrial nations, in their own self-interest, should greatly increase assistance to developing nations.
Mr. Chairman, let me conclude where I started. The current account deficit is a complex issue that immediately leads to the whole range of trade-related issues, and I think that this committee performs a great public service by this hearing and whatever other processes it employs to provide serious public examination of these issues.
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