Record Foreign Investment and the Reagan-Bush Tax Cuts
Let’s discuss two recent interpretations of the large current account deficits. First up is a good article from Reuters with the news that the current account ran a deficit equal to $144.9 billion over the past 90 days.
WASHINGTON (Reuters) – The U.S. current account deficit widened more than expected in the first three months of 2004 to a new record, pushed by the growing gap between imports and exports, government data showed Friday. The gap in the current account balance, the broadest measure of the nation’s trade with the rest of the world, increased to $144.9 billion in the first quarter from a revised $127 billion in the last three months of 2003, the Commerce Department said. Economists polled by Reuters had expected the funding gap to widen to $141.0 billion in the first quarter. Fourth quarter 2003 was initially reported at $127.5 billion. The current account deficit has been blamed for weakening the dollar against other currencies, as Americans import more than they export and borrow from the rest of the world to make up for the shortfall in their domestic savings. Much of this gap has been filled by official foreign purchases of U.S. government bonds, as countries like China and Japan snapped up dollar-denominated assets during massive intervention campaigns to weaken their currencies against the U.S. currency.
The key here is “make up for the shortfall in their domestic savings” as we contrast this to Create Jobs: Bring Capital Home by Stephen Moore published on June 18 in Human Events Online (which seems to be another rightwing outlet for opeds that do not meet Rich Lowry’s high standards):
A brief glance at the Bureau of Labor Statistics data indicates that over that 18-year boom period, U.S. employers hired 36 million new workers–a level of new job creation unprecedented in world history. Where did the jobs come from? The Reagan tax cuts. It turns out that one of the unappreciated impacts of the reduction in personal, corporate, and capital gains tax rates in 1981, was that the United States overnight became a mighty attractive place to invest. From 1982-2000 the U.S. imported about $1.5 trillion more in capital than Americans exported. This in-migration of capital led to a boom in new factories, plant expansions, technology centers, and industrial output…The Bush tax cuts, especially the cuts in capital gains and dividend taxes, have created a mini-boom in investment spending.
This was the old excuse for the Reagan current account deficits – they were allegedly foreigners financing a rise in U.S. investment. Only problem was that the Reagan fiscal stimulus crowded-out investment but lowered national savings even more. For this most recent quarter, gross savings per annum defined as GNP minus consumption minus government purchases was only $1343 billion as compared to $1115 billion in depreciation (private) leaving net savings of only $228 billion or a mere 2% of GNP. So with a current account deficit equal to 5% of GNP, net private investment is only 7% of GNP which is below the levels we enjoyed before the Reagan tax cuts and below the levels we enjoyed in the late 1990’s. Yes – the Bush fiscal stimulus is similar to the Reagan fiscal stimulus: it has lowered national savings reducing U.S. investment and increasing the current account deficit. I’m sure Mr. Moore knows this – so why could not been more honest with his readers?
Additional note: Asian central banks have been purchasing a substantial amount of U.S. government debt. Tyler Cowen offers several explanations including good old fashion mercantilism. See his discussion, which links to several others.