Other issues have fallen by the editorial wayside During the Fitzmas season. This is understandable. I am no fan of this administration in any policy area. Domestically, they have done little to meaningfully grow the economy or unite the country. Internationally they have alienated traditional allies and lowered US credibility in the court of world opinion.
However, other issues continue to develop and deteriorate. One of these is the horrendous US balance of payments deficit which is set to either break the old record (set last) or come very close to doing so. Once again, the US will import far more than it exports. This situation has only gotten worse for the last 4 years. At some point, it will have to correct. When it does, it could be extremely painful.
First, what exactly is the balance of payments? There are two ways to measure international trade. The first is the actual trade of goods. Every month, the Bureau of Economic Analysis publishes the monthly trade report. It compares the goods and services we import with those we export. The second measure is the balance of payments. This measures the actual flow of money into and out of a country. If the number is positive, it means the country exports more than it imports. If the number is negative, the country imports more than it exports.
According to the Bureau of Economic Analysis, the total capital outflows from the US were $389,455 billion in 2001. In 2004 this number was $668,007 billion – a 71% increase. (Remember, these numbers include the money we import through trade.) In 2001, the balance of payments deficit was 3.8% of GDP. By 2004, that the balance of payments deficit was 5.5%.
Why is this so important? Suppose you and your neighbor trade goods and services on a regular basis. For a long continuous time, you buy more from him then you sell. So, over this time, you give more money to your neighbor than you get from him in trade. Where does this money you give to your neighbor as a result of trade come from? (Remember, despite actively trading with your neighbor on a regular basis, your purchases exceed your sales.) First you draw down your savings. But eventually that runs out. Now you have to increase your revenue from other sources to pay for this money going to your neighbor, or you can borrow the money. Eventually, you can no longer afford to buy all of the goods and services you use to get from your neighbor because you have either over-extended your credit, or can no longer boost revenue from other sources to make-up for this capital outflow.
Let’s go back to the macro-level numbers. In 2001, 3.8% of total US GDP went outside the US to pay for goods and services. By 2004, that percentage increased to 5.5%. Despite increasing total economic output, the US is still paying more of its total production to people outside the country. Most economists consider 5% of GDP very bad. 5.5% is obviously beyond that judgment.
The Republicans have spun this as a sign of economic strength. The US is growing faster than other countries and therefore consumes more of the goods the rest of the world produces. In addition, this administration has started to argue for other countries to more towards an economic model that consumers more goods, thereby creating a bigger market for US exports.
Notice something missing from these statements? There is absolutely so discussion of the possibility of the US either lowering its consumption or being in any kind of economic trouble from being financially over-extended. We don’t have to change – they do. They need to become more like us.
By not dealing with the problem, this administration is inviting catastrophe.