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Economic Trends
Good Buy, America
by Steve Booren (Write for us!)
(Click on the links within the article to get definition of that word)

Warnings abound about America's record current account deficit, which for 2005 topped $700 billion. But is it really such a bad thing that the world wants to invest in the U.S. economy?

The Economist, for example, in its "Danger Time for America" cover story, quoted Ludwig von Mises in warning that our growing trade gap made us like the man who decided to "heat the stove with his furniture."

But students of the great Austrian economist will recall he also spoke of there being "no nobler task than to shatter false beliefs." And when it comes to beliefs, the one that equates a current account deficit - the broadest measure of a country's trade with the world - with a weak economy is one of the most specious.

Countries currently enjoying economic expansions - like Australia after years of conservative economic policies - also tend to "suffer" from importing a lot more goods and services than they export.

Australia's current account deficit is higher as a proportion of GDP than ours. Britain and Spain are also enjoying strong growth while experiencing trade shortfalls.

Meanwhile, the economies of Japan and Germany, each of which boasts a current account surplus, have economies that leave a lot to be desired. As the just-issued report of the president's Council of Economic Advisers (CEA) points out: "Countries with higher rates of growth have tended to run current account deficits (and received net capital inflows), while countries with lower growth rates have tended to run current account surpluses . . ."

In recent years, net capital inflows increased for the U.S. and these other growing economies. From 2001 to 2004, Australia's rose by 4.1% of GDP to reach a total of 6.4% of its growth rate. Spain's rose by 1.4% over the same period, reaching 5.3% of GDP. In the U.S., net capital inflows have surged from 1.5% of GDP in 1995 to about 6%.

Despite The Economist's contention that a sizable share of American prosperity is illusory, the CEA report notes that nations with large trade gaps tend also to have high productivity rates: "OECD data comparing multi-factor productivity across countries for the period 1995-2003 indicate that the United States and Australia had relatively high rates of productivity growth, Canada, Great Britain, and Germany had more modest rates of growth, while Japan had a low rate of productivity growth."

Trade-deficit alarmists like former CEA Chairman Martin Feldstein complain that unlike in the late 1990s, the current account deficit we have now is not driven by stock-market investments, but by countries - like China and Japan - piling up trade surpluses and using the cash to buy U.S. Treasuries.

But the new CEA report finds the character of our trade gap encouraging. It notes that, even as the U.S. racks up huge current account deficits, it's earning more on its own foreign investments. From 1995 to 2004, the report said, the U.S. earned "over $200 billion in net foreign income despite current account deficits that totaled more than $3 trillion during this period."

Also, would it be impolite to note that our current account deficit was pretty much nonexistent during the era of super-high interest rates at the beginning of the 1980s?

The CEA contends - and many economists agree - that current account deficits could go on indefinitely, so long as our economy keeps growing and remains an attractive place to invest. "The key issue concerning U.S. foreign capital inflows is not their absolute level," it says, "but the efficiency with which they are used."

So instead of complaining about foreigners investing in the U.S., trade-deficit Chicken Littles should be fighting to keep the Bush tax cuts permanent and reduce federal spending - so that America can continue to be a great destination for global investment for many years to come.