US economy and the deficit predicament

Copyright 2006 The Financial Times Limited (London, England)
Wednesday, May 30, 2006; Financial Times; USA Edition; Letters to the Editor

Sir, Martin Feldstein (“The falling dollar sets a test for Asia and Europe”, May 26) provides a good account of the problems caused by global imbalances [which closely resembles, in its structure, the analysis contained in many reports published by the Levy Institute during the last seven years]. However, his statement that following devaluation in the mid 1980s there was a 40 per cent fall in the trade deficit is very misleading because, when expressed as a proportion of gross domestic product, the fall was only 1.5 per cent.

The US trade deficit peaked at about 3 per cent of GDP in 1986 and fell (by 50 per cent!) to 1.5 per cent at the end of 1989. There was a small further fall after the end of 1989, but this was surely caused by the sharp economic slowdown, and ultimately recession, which occurred in 1990.

A 1.5 per cent improvement in the deficit, which has reached 67 per cent of GDP, would hardly sustain the US economy if there were now the large rise in saving Prof. Feldstein expects. I conclude the strategic predicament, with its disinflationary possibilities for the US and the rest of the world, is more intractable than he suggests. Published by:
The Financial Times