The Net Income From Abroad Puzzle

Via Mark Thoma comes a very nice discussion of the current account and capital flows from Martin Feldstein. This jumped out at me:

This unprecedented level is equal to 6.4 per cent of US gross domestic product. Experts estimate that the real trade-weighted value of the dollar must fall by at least 30 per cent just to shrink the trade deficit to a more sustainable level of 3 per cent of GDP.

The fact that the trade deficit is more than 6% of GDP does not come as a surprise to anyone who has read Nouriel Roubini and Brad Setser. But anyone familiar with the 1981 Unpleasant Monetarist Arithmetic of Thomas Sargent and Neil Wallace (or basic finance) has to wonder how a debtor nation avoids an ever widening debt/income ratio unless the present value of its expected future trade surpluses matches it current debt. Roubini and Setser note, however, that the U.S. has had a persistently positive net income from abroad position despite its net indebtednesses. We have mentioned this issue here and here.

It turns out that the CBO has addressed this puzzle here and here. The analysts consider a variety of explanations including the possibility that some of this puzzle is attributable to transfer pricing manipulation.