The United States must take the initiative to reverse its trade deficit or else foreign countries will, which could send the American economy reeling, an economist said.
This country's trade deficit is a two-edged sword, said Brigham Young University professor of economics James Kearl. The huge amount of capital inflow from foreign countries has fed the United States' ravenous appetite for goods and debt. But, it can also render us helpless to the whims of foreign investors."The problem with the (trade) deficit is that it allows foreign countries to make decisions" affecting our economy, Kearl told the World Trade Association of Utah Wednesday.
So far, the trade imbalance has not caused a problem. Kearl said reports that equate our country's trade deficit with a third world country's debt are erroneous. He explained that our debt is financed with dollars, which "is a big difference from Mexico," whose debt is also denominated in dollars and not pesos.
But, the days of the trade deficit not affecting the United States' economy can't last forever. He couldn't predict when it would happen, but Kearl explained that when foreign countries decide to stop buying up American assets and fueling our consumption, the U.S. economy will react with a sudden drop in the dollar's value and soaring interest rates.
Reasons for a foreign country not to invest in America exist today as rates of return in Europe and Japan are competitive with those in the United States.
The scenario of outsiders shaking up the U.S. economy can be avoided, however, if the federal government acts now to lower its budget deficit and if Americans slow down consumption and step up savings, Kearl said.
He explained that the U.S. economic pie is made up of public consumption, private consumption, savings and investment. The trade deficit has resulted from public and private consumption outstripping savings and investment, then foreign investment dollars making up the difference to pay for our excessive consumption.
The outcry to reduce public consumption, or the federal budget deficit, is well known and politicians are under pressure to do that.
But private consumption and savings are different animals. Asked how they could be adjusted to avoid a foreign-initiated economic disaster, Kearl suggested changing the tax system to provide an incentive to save.
He said the United States is the only country he knows of that taxes savings. Kearl suggested the tax system be more consumption-based than income-based to provide the savings incentive.