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I can help out if you send Ghana more cheese

7/13/2010

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The U.S. trade deficit has been trending up over the past year, and the goods deficit is now at the highest level since November 2008.  While a large and persistent trade deficit is not a good thing for the American economy, the recent trend should not itself be particularly alarming: at this point, we are merely retracing declines in the deficit that came as a result of the economic downturn. The recent increases in the deficit can be seen as symptoms of an improving U.S. economy that is consuming more goods and services, and importing more to meet that demand.
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That said, we should consider how we are funding this increase in imports.  The last two expansions in the trade deficit corresponded with asset bubbles: the tech bubble and the housing bubble. U.S. investment outpaced U.S. saving, and foreign investment made up the gap-- and the influx of money enabled the United States to buy more from abroad.  Where are we getting the funds to increase our imports now? Part of the answer may be that households are consuming more and saving less (savings rose during the recession), but another source may be government debt. U.S. Treasuries fared well during the crisis, as investors turned to them in a flight to safety.  If investment in U.S. government debt really is a driving force of the increase in the trade balance, this could be concerning, because, while we certainly don't want investment bubbles in any asset type, we should generally prefer to go into debt in order to increase future growth.  Taking investment from abroad is great if it increases future growth in the tech sector; if it is fueling consumption that won't translate into future growth, it is concerning.

One could argue that the government stimulus policies are indeed an investment in future growth, because they have prevented a potentially devastating depression.  However, as the economy starts to turn around, I think the United States will need to tackle the discrepancy between domestic saving and domestic investment and consumption.

To note, Ghana is doing its part to help the U.S. trade balance: the U.S. is currently running a surplus with Ghana.  Main exports include petroleum products, mining equipment, and cars.  If you all will send some more Parmesan cheese this way, we can do even better!
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    About Liz

    I have worked in economic policy and research in Washington, D.C. and Ghana. My husband and I recently moved to Guyana, where I am working for the Ministry of Finance. I like riding motorcycle, outdoor sports, foreign currencies, capybaras, and having opinions. 

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