Wednesday, July 13, 2005

The Trade Deficit

The U.S. trade deficit receded, somewhat surprisingly, in May from a record in April.

In the blogosphere, I am always intrigued by what Brad Setser has to say on global macro issues. He's got an interesting post today arguing that the trade deficit has not peaked, despite this latest dip. I think he's on safe ground there--the trade deficit has been increasing at a pretty rapid annual clip for about 6 years. But Brad tends to be more alarmist in his rhetoric than I would be. My views are closer to what James Hamilton wrote recently, after doing a hypothetical calculation of what the current account deficit would have been if personal saving had not gone down, oil imports had not gone up, and nothing else had changed since 1999. His calculations suggest that the current account deficit would be about the same as it was in 1998.

I think the personal saving rate in the United States is low--in large part--simply because it can be. We are a country that doesn't put up too many formal or informal barriers to consumption. And interest rates remain low while the dollar remains surprisingly strong. Eventually, those key macro prices will move against consumption, as foreign investors become sated with their holdings of US-based assets, and domestic savings will rise. I will be interested to see how long it takes for that day to arrive.

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2 comments:

IRawk said...

The trade deficit is the result of insufficient savings at home and a widening budget deficit. This will only get worse over time due to the underlying structural imbalance that we call the "U.S. economy".

In structural terms, the U.S. trade deficit shows that the productive capacity of the U.S. economy is too small relative to spending, mostly due to the policy of constant, simmering inflation and the subsequent malinvestment. (I'll ignore for the moment, the more recent structural damage from the housing bubble).

Foreign financing allows the FedGov to spend and spend and spend without over-burdering too the taxpayer (for now anyway--intergenerational wealth transfer, I believe is the word. Hey, we owe it to ourselves. Or we did. ).

This way funds are free for private consumption in such useful toys as non-productive, depreciating, consumer durable goods (houses).

I think alarmism is in order, but not due to the trade deficit. It is simply a symptom, not the disease. It is inflation and government interventionism that has destroyed the structural intergrity of the economy, and this manifests itself in the trade deficit.

Robert Schwartz said...

Andrew Samwick wrote: "We are a country that doesn't put up too many formal or informal barriers to consumption."

AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS;
BY ADAM SMITH, LL.D. AND F.R.S. OF LONDON AND EDINBURGH:
FORMERLY PROFESSOR OF MORAL PHILOSOPHY IN THE UNIVERSITY OF GLASGOW;
EDINBURGH: 1776


BOOK II. OF THE NATURE, ACCUMULATION, AND EMPLOYMENT OF STOCK.

CHAPTER III. OF THE ACCUMULATION OF CAPITAL, OR OF PRODUCTIVE AND UNPRODUCTIVE LABOUR.

But though the profusion of government must, undoubtedly, have retarded the natural progress of England towards wealth and improvement, it has not been able to stop it. The annual produce of its land and labour is, undoubtedly, much greater at present than it was either at the Restoration or at the Revolution. The capital, therefore, annually employed in cultivating this land, and in maintaining this labour, must likewise be much greater. In the midst of all the exactions of government, this capital has been silently and gradually accumulated by the private frugality and good conduct of individuals, by their universal, continual, and uninterrupted effort to better their own condition. It is this effort, protected by law and allowed by liberty to exert itself in the manner that is most advantageous, which has maintained the progress of England towards opulence and improvement in almost all former times, and which, it is to be hoped, will do so in all future times. England, however, as it has never been blessed with a very parsimonious government, so parsimony has at no time been the characteristical virtue of its inhabitants. It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.