Monday, the Commerce Departmentreported the 2007 current account deficit was $738.6 billion, down from $811.5billion in 2006. The deficit exceeded 5.3 percent of GDP. The fourthquarter deficit was $172.9 billion.
The current account is the broadest measure of the
In the 2007, the
The huge deficit on trade in goods is mostly caused by a combination of anovervalued dollar against the Chinese yuan, a dysfunctional national energypolicy that increases
To finance the current account deficit, Americans are borrowing and sellingassets at a pace of $600 billion a year.
The current account deficit imposes a significant tax on GDP growth by movingworkers from export and import-competing industries to other sectors of theeconomy. This reduces labor productivity, research and development spending,and important investments in human capital. In 2007 the trade deficit isslicing about $250 billion off GDP, and longer term, it reduces potentialannual GDP growth to about 3 percent from about 4 percent.
Financing the Deficit
The current account deficit must be financed by a capital account surplus,either by foreigners investing in the
Foreign governments loaned Americans $412.7 billion or 3 percent of GDP. TheChinese and other governments are essentially bankrolling
The cumulative effects of this borrowing are frightening. The total externaldebt now is about $6.5 trillion. The debt service at 5 percent interest,amounts to $2000 for each working American.
The Chinese government alone holds enough
Consequences for Economic Growth
High and rising trade deficits tax economic growth. Specifically, each dollarspent on imports that is not matched by a dollar of exports reduces domesticdemand and employment, and shifts workers into activities where productivity islower.
Productivity is at least 50 percent higher in industries that export andcompete with imports, and reducing the trade deficit and moving workers intothese industries would increase GDP.
Were the trade deficit cut in half, GDP would increase by about $250 billion ormore than $1700 for every working American. Workers’ wages would not belagging inflation, and ordinary working Americans would more easily find jobspaying higher wages and offering decent benefits.
Manufacturers are particularly hard hit by this subsidized competition. Throughrecession and recovery, the manufacturing sector has lost 3.6 million jobssince 2000. Following the pattern of past economic recoveries, themanufacturing sector should have regained at least 2 million of those jobs,especially given the very strong productivity growth accomplished in durablegoods and throughout manufacturing.
Longer-term, persistent
Cutting the trade deficit in half would boost U.S. GDP growth by one percentagepoint a year, and the trade deficits of the last two decades have reduced U.S.growth by one percentage point a year.
Lost growth is cumulative. Thanks to the record trade deficits accumulated overthe last 10 years, the
Had the Administration and the Congress acted responsibly to reduce thedeficit, American workers would be much better off, tax revenues would be muchlarger, and the federal deficit could be eliminated without cutting spending.
The damage grows larger each month, as the Bush administration dallies andignores the corrosive consequences of the trade deficit.
Peter Morici is a professor at the