Current account deficit of the US in 2005

[Lawrence of Arabia]

some things which contribute to this current account deficit -

1) deficit spending by US federal government (which pushs up interest rates and the currency and crowds out investment all at once)

2) lower taxes (also reduces national saving)

notice how bush has done both of those. and then people stand around wondering.


WHY DO YOU THINK THAT THE START OF THE CAD STARTED WHEN NATIONAL SAVINGS FELL AND HAS INCREASED FROM 3.7% IN 2000 to 6.4% OF GDP IN 2005 AFTER ALL THOSE TAX CUTS AND DEFICIT SPENDING? (sorry about caps, ignore them)

our dear ronald ronald reagan started this whole mess, and we are still paying for it now.

[Dinner]

Originally posted by KrazyHorse
The fundamental problem is that the US economy is not growing fast enough to meet growth in US demand.

I'd say the fundimental problem is that it is cheaper to produce goods in other countries so companies will naturally want to pay a Chinese peasant $5 per day instead of an American worker $12 per hour to sew a shirt.

Personally, I don't have a problem with this provided the Chinese worker has the same level of protections as the American worker. I.E. he is allowed to unionize if he wants, that the work place must meet the same safety standards, the business must meet the same pollution standards, child labor is not used, nor prision labor or slave labor, etc...

We should be using access to our market to force countries to accept standards to protect human life, health, and the environment. If they do then free trade agreements should be signed but if they don't then they don't get access to markets. That's the deal and they can take it or leave it. At least it would be if I was ruler of the world.

[Lawrence of Arabia]

this is all elemental macroeconomics. we know IN GENERAL what causes the CAD, and how to correct in IN GENERAL (the cad is of course very complex and has many factors that contribute to it) but the first thing to do is the stop the INSANTIY of unbalanced budgets, and to create incentives for people to SAVE money.

[Whoha]

our trade deficit is not caused by the savings shortfall, and people didn't all of the sudden decide to stop saving less. It is a result of 30 years of wages falling, combined with increasing costs of living. And those changes did not happen in a vacuum either.

our budget does need to be reigned in, and tax hikes(combined necessarily with massive spending cuts) are in the cards. But this will not have an effect on our current accounts deficit, other then the indirect one of our economy taking a major hit. In the short to medium term this will not have any other effect then to raise the prices of foreign made goods since we don't make certain of them here anymore(PCBs,capacitors,etc) and because foreign producers of the same will be loathe to give up their US market share, it may not even help in the long term.

[Lawrence of Arabia]

But this will not have an effect on our current accounts deficit, other then the indirect one of our economy taking a major hit.

i disagree, and so does Greg Mankiw

deficit spending and tax cuts have a DIRECT EFFECT on the current account. When I(r) and r* are held constant, and S shifts left, we get a trade deficit. just have a look at the models.

how do we verify? simply look at what happened when ronald ronald reagan was president, and what has happened since 2000. it directly correponds to what the model predicts. therefore, we can say with some certainty, that a budget deficit and tax cuts contribute to the CAD.

[Whoha]

a PCB industry is going to spring out of the ground instantly if we cut the budget deficit? even with Tariffs and government encouragement it would take a few years.

By the way, what does the model say about the WW2 years?

[Lawrence of Arabia]

no. national savings will increase if you cut the budget deficit and/or raise taxes, which means more investment, which means less consumption.

edit: what happens when G expands?

S = Y - C - G

G increases

S decreases

S is now less than I

to finance that, you need to borrow from abroad

NX = S - I

S has decreasesd

NX has thus decreased.

[Lawrence of Arabia]

that model says nothing, since it doesnt taken into account the fact that there is a war, and thus cannot trade with anyone, and financial markets et al are all screwed up. which is why it cannot be applied.

[Whoha]

eliminating excess gov't spending will take more money out of the economy(wrongly put in in the first place), how thats going to translate into higher savings?

and even with less consumption people will still have to buy foreign made goods.

[Lawrence of Arabia]

eliminating excess gov't spending will take more money out of the economy(wrongly put in in the first place), how thats going to translate into higher savings?

S = national saving

S = Y - C - G

when G increases, S decreases

im going to eat, be back later.

[Kidlicious]

I think the huge CAD is telling of the sructure of the world economy. Everyone strives to get into the US market, because it's so huge. That's the only way they can achieve economies of scale necessary to manufacture goods cheaply. That results in dollars flowing outside of the US, which inturn results in investment coming into the US. Thus we have a huge CAD.

Now if the CAD shrinks that's going to be tied to some kind of major change in the world economy. And my guess is going to be that that won't be good. That being said, for now I think everyone is going to remain the course and try to get more into the US market, because they really don't have any other choice. I think we've seen that when the dollar was falling and it really didn't affect the world trade much.

[Kidlicious]

Originally posted by Whoha
eliminating excess gov't spending will take more money out of the economy(wrongly put in in the first place), how thats going to translate into higher savings?

and even with less consumption people will still have to buy foreign made goods.

Forget it. He's still grapling with simple 101 models.

[Last Conformist]

So, near as I can make out, Vel's saying that American consumers will avoid lowering their consumption by buying less. Is it just me, or does that sound a tad odd?

[Whoha]

Originally posted by Lawrence of Arabia


S = national saving

S = Y - C - G

when G increases, S decreases

im going to eat, be back later.

Y has C and G as added statements,according to the all knowing google, so if thats the case how do government spending and consumption effect savings?

[Kidlicious]

What LoA doesn't realize is that when one factor of that model changes the whole dynamics change. The equation was designed for a different argument, and for measurement purposes, not for CAD policy.