Sunday, May 13, 2007

The US Current Account Deficit

. Sunday, May 13, 2007

Monday's New York Times carries a story headlined "Rising Exports Putting Dent in Trade Gap." It essentially mis-represents the most recent Census Bureau report on the US current account. The Times is optimistic...

"As a result, it now looks as if the huge trade deficit, which swelled to a record $765.3 billion last year, could gradually decrease. The trade gap widened in March, mostly because of higher prices for imported oil, but the vast disparity between what Americans import and export is expected to narrow, which would allow trade to contribute to economic growth in the United States for the first time in more than a decade."

Hold on, the trade deficit grew? Doesn't the headline say that the trade gap is dented? Apparently, rising exports would have dented the gap were it not for the even faster growth of imports. Fortunately, however, the Times assures us, March is just a temporary aberration that reflects the fact that the goods we import and can't do without (oil) rose in price in February. So, I guess as long as we can reduce the world oil price, we should be okay moving forward and we can expect rising exports to dent our trade gap pretty soon.

The bigger problem is that the story mistakes a micro effect, that a weaker dollar helps US exporters and import-competing producers, for a macro effect--that the weaker dollar will reduce imports and increase exports enough to balance the current account. The story cites the most optimistic economist on this question--C. Fred Bergsten--to the effect that a 1 percent depreciation of the dollar improves the current account by $20 billion.

And Bergsten is very optimistic about the sensitivity of the trade balance to the exchange rate. According to the most recent IMF World Economic Outlook, "typical estimates from the standard econometric models of the U.S. economy suggest that narrowing the ratio of current account deficit to GDP by a percentage point would require a real depreciation ranging from 10 percent to 20 percent." The re-analysis the IMF reports cuts this range by half (5 to 1o percent). Bergsten's guess is essentially the IMF's 5 percent estimate--the lowest boundary of a single study. One might more reasonably pick a point somewhere in the middle of the more numerous studies (15 percent) or even at the point where the new and the typical studies agree (10 percent devaluation for each 1 percent desired correction). In short, Bergsten is an extreme exchange rate optimistic unrepresentative of the broader research community.

Sadly, stories such as this are a big part of why we are incapable of informed public discussion about our current trade position. If our most important paper of record can't report responsibly and accurately, how can we expect an informed public debate? Instead, we imagine that we can find simple solutions; we look for villains (China, Japan, ...) and think that higher tariffs will somehow solve the problem. All the while, we fail to talk about the real cause of the imbalance: we don't save.


The US Current Account Deficit
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