America's Current Account Deficit

As some people may know from even the scant economic and financial data they might get from major news channels America has been running a substantial current account deficit for some time. The current account is the sum of government spending minus taxes plus investments minus savings. So, if we're in a surplus it means that taxes and savings are jointly outweighing what is being spend by government and by investors. In our situation, current account deficit, investments and government spending is more than national savings and taxes. Hopefully you're asking how we spend the money we don't have saved or that isn't being collected by taxes. We borrow that money from foreign investors who either see America as a safe currency holding or are seeking the best real return on their investment. I also don't need to point out that many manufacturing jobs are relocating to other countries where labor is cheaper. ("Secretly", I feel this is best because it allows the market to behave most efficiently; firms are behaving in their interests to be cost effective)

However, the shift from a manufacturing based economy to a service based economy is difficult. Services can be hard to export; massages are difficult to ship overseas - they are probably most needed because of all the back breaking manufacturing happening across seas.

Some argue that in order to increase our exports and create a current account surplus we should devalue our currency against other major currencies, specifically those countries like China who routinely devalue their currency against ours. This would hurt imports- chinese goods would no longer be cheap- but would help exports because foreigners would be able to buy more American goods. There are problems with this. For one, the yuan is pegged to the dollar meaning that any attempt on our part to devalue the currency will be matched by an even greater attempt by the Chinese government to buy up those dollars with more of their freshly printed money, and let's be honest, Americans complain about Chinese goods being so cheap but they love to love how cheaply the Chinese offer to buy our bonds. Two, the devaluation is likely not to be enough to close the gap for export prices. One estimate by Goldberg and Dillan in Current Account Issues in Economics and Finance in 2007 says that for the export sector to close the gap we would need to see a 52 percent increase. That's a hefty bit to pull off.

My swiss suggestion would be to do the following: It is natural for labour-intensive jobs to go to low-cost countries. Higher-cost countries can make things onlu if they innovate, focus on high-end products and ensure they are the "best in class" worldwide. But if firms are not competitve they should not survive. "Nobody is helped by having people employed in companies that aren't viable" (ok, no longer a secret) - "Charlemagne: Those Exceptional Swedes" The Economist, July 4th-10th 2009