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94 IRET Congressional Advisory 1 (2000)

handle is hein.taxfoundation/iretcgadv0091 and id is 1 raw text is: Jt,,+ January 3, 2000 No. 94 WHEN TRADE DEFICITS ARE NOT A DANGER SIGNAL The Commerce Department reports that the U.S. current account deficit hit a record $89.9 billion in the third quarter. That is up $9 billion from the second quarter and $26 billion above the third quarter a year ago. Critics of free-trade If current ac policies, emboldened by their obs nations success is disrupting the World 's'hould ae Trade Organization (WTO) and hav ii meeting in Seattle, have seized and ihes, on these figures as evidence U e s that America should restrict its and current a, trade policies. James Hoffa, has a jobless i President of the Teamsters lowest in 30 Union, declared, A trade the U.S. deficit like that threatens jobs registering a in the U.S. (Wall Street deficit in ever Journal, Dec. 15, 1999.) g t International comparisons, Jobs. however, contradict this scare scenario. If current account deficits cost jobs, nations with large deficits should have meager job creation and high unemployment, while nations with big surpluses should have rising employment and low unemployment rates. Yet, the United States, with its record trade and current account deficits, now has a jobless rate of only 4.1%, its lowest in 30 years. Since 1982, the U.S. economy, while registering a current account deficit in every year but one, has generated over 30 million added jobs. On the other hand, France and Italy had current account surpluses in 1997 of $39.5 billion and $33.4 billion, respectively, but jobless rates of 12.4% and 12.1%. In recent years, the nation with the largest trade surpluses has been Japan. In 1997, its current account surplus was $94.4 billion. Nonetheless, Japan has been mired in a slump for most of the 1990s, and, in the latest quarter, its GDP was contracting. Japan's difficulty is not its trade surplus, which, by itself, is neither good nor bad, but a series of unwise economic policies it has embraced, including 1988 and 1990 tax reforms that increased tax biases against saving and investing, bloated public works outlays, and rejection of market and regulatory reforms that would have facilitated more efficient use of resources. Last coutnt deficits cost with lar-ge deficits nieager job cr-eation ~iployment... Yet, the with its r-ecor-d tr-ade ccoutnt deficits, now 'ate of on ly 4. 1%c-, its 'ear-s. Since 1982, economy, while curr~ient accoutnt y year- butt one, has r- 30 million added surplus was durin years's tax changes may lead to some improvement, but over- spending remains a problem. Countries can have current account deficits for a variety of reasons. One reason is a strong economy, such as that of the United States. A country's current account often moves towards deficit when the country is growing faster than its trading partners because its growth raises demand for imports. Conversely, the current account often moves towards surplus during downturns when demand for imports weakens. The last U.S. current account g the recession year of 1991, and before that, in the recession year of 1981. A recession would improve the U.S. current account, but would hurt U.S. employment. Another reason for the current account deficit of the United States is capital inflows. The United States attracts capital from abroad because it offers good investment opportunities. It is politically stable and has a relatively benign tax and regulatory Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 e Fax 202-463-6199 0 Internet www. ret.org

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