New York Times, Sunday, March 26, 2000
RECKONINGS / By PAUL KRUGMAN
Deficit Attention Disorder
A long time ago, in an economic universe far, far away, people cared
about the trade balance. When the U.S. trade deficit passed $100
billion for the first time, there was much wailing and gnashing of
teeth. Doomsayers warned of an imminent "hard landing" in which a
crashing dollar would precipitate economic crisis. Even calmer types
regarded the unprecedented red ink as a warning sign.
But a funny thing happened on the way to the 21st century: people lost
interest in the trade balance. In January, the Commerce Department
announced last week, the United States set a new world record: the
biggest monthly trade deficit ever. (Is this a great country, or
what?) Measured as a share of G.D.P., last year's current account
deficit (the broadest measure of the trade gap) was wider than ever
before. But the markets couldn't have cared less. They were more
interested in the accounts of MicroStrategy (a high-flying tech stock
that lost two-thirds of its value in one day when it adopted a new
accounting standard) than in those of the United States.
In some ways this lack of interest is a good thing. Obsession with
trade balances has historically been a source of bad economic
policies. It's probably for the best that state governments don't know
whether their trade with other states is in surplus or deficit; their
ignorance keeps them out of mischief. And not paying attention is
almost as good as not knowing.
Still, perhaps we shouldn't be quite so indifferent.
At the moment the U.S. trade deficit is good, not bad, for our
economy. It doesn't cost us jobs because we already have more than
enough domestic demand. We aren't having any trouble paying for
imports: the inflow of money from investors eager to buy into our
miracle economy has easily matched the outflow to pay not only for all
those Lexuses and BMW's, but for the suddenly more expensive oil they
burn too. And this inflow of capital helps keep stocks high and
interest rates low.
Besides, by any other measure the United States is performing
superlatively compared with every other major economy. We have the
highest growth, the lowest unemployment, the biggest budget surplus.
To focus on the trade deficit, you might argue, would be like
short-selling a rapidly growing company because it doesn't pay
dividends.
But just as even the newest of new economy companies must eventually
justify its existence by returning money to investors, even the most
successful economy must sooner or later export enough to pay for its
imports. Our current position, where we pay for many of our imports by
attracting inflows of capital -- in effect by selling the rest of the
world claims on our future exports -- cannot go on forever. And as the
late economist Herbert Stein declared, "If something cannot go on
forever, it will stop."
The most likely scenario is that the trade deficit will eventually be
reined in by a decline in the foreign-exchange value of the dollar.
The great dollar slide of 1985-87, precipitated by a trade deficit
that was actually smaller compared with G.D.P. than the deficit today,
reduced the value of a dollar by 40 percent in terms of German marks
and Japanese yen. And there is no obvious reason why the same thing
can't happen again.
But if that is the way it will play out, at least some of the money we
are now pulling in is being brought in under false pretenses. Right
now foreign investors are willing to hold 10-year U.S. government
bonds, even though they pay only a slightly higher interest rate than
their European counterparts. Those investors seem to believe, in other
words, that today's strong dollar will persist for another 10 years.
But the size of our trade deficit makes that unlikely. So foreign
investors, and therefore the value of the dollar, are arguably doing a
Wile E. Coyote -- one of these days they will look down, realize that
they have already walked over the edge of the cliff, and plunge. And
when they do it will come as a rude shock not only to them, but also
to American financial markets that have become accustomed to big
inflows of foreign money.
The trouble, you see, is that in economics, as in life, what you don't
pay attention to can hurt you.
Copyright 2000 The New York Times Company