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Analysis/Comment Last Updated: Dec 19th, 2007 - 13:17:15

Second Quarter 2005 US current account deficit $195 billion, choking growth - - Dr. Peter Morici
By Professor Peter Morici, Robert H. Smith School of Business, University of Maryland
Sep 16, 2005, 14:10

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Professor Peter Morici is a recognized expert on international economic policy, the World Trade Organization, and international commercial agreements. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission.
Today, the Commerce Department reported the US current account deficit in the second quarter was $195.7 billion and for the first half $394 billion. At this rate, the 2005 deficit, will be $788 billion, and overwhelm the $668 billion record established in 2004.

The current account is dominated by the trade deficit for goods and services, which was $173.3 billion in the second quarter. At this pace, the trade deficit is headed for a new record in 2005, $693 billion, or 5.5 percent of GDP. In 2004, the goods and service deficit was $617.6.

The current account reduces the demand for U.S.-made goods and services, much like a tax increase or government spending cut of comparable size.  

Cutting the trade deficit in half would increase economic growth from 3.5 percent in 2005 to 4.5 percent by the beginning of 2007, and reduce unemployment to below 4.5 percent.

The ballooning trade deficit is the most significant factor slowing U.S. growth. Over the last year, GDP growth has slowed from 4.5 percent to 3.5 percent. Federal Reserve interest rate increases, by failing to affect mortgage interest rates and other long bond rates, have had little impact. Whereas the current account deficit has taken a lion's bite out of growth.

Manufacturing is particularly hard hit. Lowering the trade deficit would create nearly 2 million more manufacturing jobs over three years. An effective policy to lower the trade deficit would particularly benefit highly competitive U.S. durable goods' manufacturers such as machine tools, industrial and construction machinery, auto parts, and electronic equipment.  It would substantially lift nonresidential construction by accelerating new investments in industrial facilities.

Foreign government currency manipulation is the root cause of the U.S. trade deficit. These actions overwhelm the effects of large U.S. budget deficits, and by lowering GDP and U.S. tax collections, and make U.S. budget woes worse.

Although the dollar has fallen against the euro and other major industrialized countries' currencies, it continues strong against developing-country currencies--such as the Chinese yuan. In the second quarter, foreign government purchases of U.S. dollars were $83 billion.
Governments in Asian developing countries intervene in foreign exchange markets to artificially lower exchange rates for their currencies against the dollar, and keep their goods cheap in stores like Wal-Mart.

Since January 2002, the dollar is down an average of 15 percent against all currencies. The dollar fell an average of 25 percent against the euro and other industrialized country currencies, but it is up an average of about 1 percent against the Chinese yuan and other developing country currencies.  The Chinese 2.1 percent revaluation announced June 21 was too small to significantly affect the value of the dollar or have a measurable effect on trade.

Were foreign governments to stop manipulating their currencies, the U.S. trade deficit would be cut by half, U.S. growth would accelerate to 4.5 percent and unemployment would fall below 4.5 percent by the beginning of 2007.

Without more forceful efforts from the Bush Administration to persuade China and other Asian exporters to stop manipulating currency markets and subsidizing their exports to the United States, U.S. workers will continue to face a tough job market and wages adjusted for inflation will continue to stagnate and fall.

Longer-term, U.S. import-competing and export industries spend at least 50 percent more on R&D and encourage more investments in skills and education than other sectors of the economy. By shifting employment away from these trade-competing industries, the trade deficit is reducing U.S. investments in knowledge-based industries and skills, and slashing more than one percentage point off economic growth each year.

The trade deficit remains the single most important tax on U.S. growth and burden on American workers.

Peter Morici
Robert H. Smith School of Business
University of Maryland
College Park, MD 20742-1815
703 549 4338
cell 703 618 4338


© Copyright 2007 by Finfacts.com

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