Current account imbalances in the U.S. and China will shrink and maybe even disappear in the next few years, eliminating a threat to international economic stability, a former chairman of President Reagan’s Council of Economic Advisers posits in remarks set for delivery next month.
“Although natural market forces should resolve such imbalances without the need for specific government policies, the government actions in both countries have actually contributed to their persistence and prevented market forces from correcting the problem. That may be about to change,” Martin Feldstein, a Harvard University economics professor, said in an advance copy of remarks set for delivery at the Allied Social Science Associations annual conference.
The Commerce Department earlier this month said the U.S. current account deficit widened 3.2% to $127.2 billion in the third quarter, reflecting rising imports of consumer goods. Most of the current account balance is made up of trade in goods and services, but the broad measure of U.S. international transactions also includes transfer payments and investment income.
The U.S. deficit — and surpluses in China, Germany and other countries — has been a source of friction in international relations and a cause of concern as the U.S. only slowly emerges from a recession.
Feldstein said that while international negotiations have not resulted in any real commitments to shrink current account imbalances, progress will come as Americans save more, the federal budget deficit narrows, the dollar declines in value and China invests more domestically.
Feldstein imagines the U.S. national saving rate rising by 2% of gross domestic product and budget deficits declining to 3% of GDP from 8%, producing a combined saving rise of 7% of GDP....MORE