Title: The U.S. Current Account: The Other Deficit
Abstract: Considerable attention has been focused recently on size and persistence of U.S. deficit. Somewhat lost in headlines is growing concern among many economists and policymakers over the other deficit--the U.S. current account deficit. Before 1982, U.S. current account deficits were small and temporary, as imports of goods and services rarely exceeded exports for an extended period. Since 1982, however, this deficit has increased significantly and many analysts expect deficit to remain high well into next century. Large current account deficits pose both a short-term risk and a long-term problem for United States. At present, United States depends on a commensurately large flow of foreign capital into U.S. markets to finance current account deficit. If market sentiment were to shift against United States, higher interest rates and a lower exchange value of dollar might be necessary to continue to attract foreign capital. A few years ago, this short-run risk was minimal. Today, with increasingly volatile short-term capital flows, such fears cannot be dismissed so easily. Current account deficits also pose a long-term problem for U.S. economy. Because financing a chronic deficit requires United States to borrow from abroad, future interest payments on this debt could lower standard of living in United States. Unfortunately, like budget deficit, there is not an easy solution to current account deficit. In fact, two deficits are interrelated and reducing current account deficit requires significant actions to reduce budget deficit and to stimulate private saving in United States. This article examines current account deficit and its implications. The first section discusses why current account deficit became large and persistent in early 1980s. The second section analyzes short-term risk that current account deficits pose for U.S. economy. The third section analyzes long-term problem associated with a chronic current account deficit. THE U.S. CURRENT ACCOUNT DEFICIT Before 1982, U.S. current account deficits were small and temporary. Deficits in some years were typically offset by surpluses in other years. Since 1982, though, United States has experienced large and chronic current account deficits. Insight into their causes can be gained by studying net inflows of foreign capital used to finance current account. Analysis of these capital flows suggests that low private saving and large government budget deficits in United States are key factors behind large current account deficit. The U.S. current account deficit: large and persistent The current account is broadest measure of a country's trade with rest of world. The current account has four major components. The most familiar component is merchandise balance of trade. A balance of trade deficit occurs when more goods are imported from abroad than are exported. A second component is service account balance, which includes net sale of insurance, real estate, shipping, and similar tradable services. A third component is investment income balance, which equals interest payments to foreign investors minus interest receipts of domestic residents on foreign investments. The last component is unilateral transfers, which equal value of gifts, foreign aid, and nonmilitary economic development grants. The sum of these four balances equals current account balance. The current account deficit changed in two ways starting in 1982. First, size of deficit increased significantly. Chart 1 shows current account deficit from 1960 to 1994. (Chart 1 omitted) In top panel, dotted line shows that current account surplus averaged $1.7 billion per year from 1960 to 1981. This small current account surplus turned into a large current account deficit beginning in 1981, averaging $96. …
Publication Year: 1995
Publication Date: 1995-07-01
Language: en
Type: article
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Cited By Count: 22
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