Mr. Chairman and members of the Subcommittee:
I welcome your timely initiative in arranging this hearing focusing on the U. S. Balance of Payments.
Others are better equipped than I to discuss the specifics of current developments and their significance for particular sectors of the economy. In this short statement, I want to emphasize the broad nature of the challenge before us as our current account deficit reaches magnitudes with little historic precedent.
The past decade has been characterized by a strong dollar and a large and growing net inflow of capital. The counterpart has been a greatly enlarged trade and current account deficit. What has been little appreciated is the extent to which those developments have supported the relatively strong and well-sustained performance of the United States economy.
For most of that time, the other main economic centers - Japan and the continent of Europe - were mired in some combination of slow growth, high unemployment, and excess capacity. In sharp contrast, the U.S. economy was, until recently, accelerating. There was good growth in investment and profits and a sustained high level of consumption. In fact, by the end of the decade, personal savings, as the staticians measure those savings, had practically disappeared.
In those circumstances, labor markets tightened, tightened to an extent that in the past had been associated with strong and accelerating inflationary pressures. Yet, prices, particularly of goods, have moved relatively little at either the wholesale or retail level. How could those contrasting developments be reconciled?
An important part of that explanation is that foreign capital (in effect, the savings of other less affluent countries) moved strongly toward the United States, attracted by perceptions of strong growth and productivity and the powerful attraction of the booming stock market. Along with the rising Federal surplus, it was that foreign capital that in the absence of personal savings, in effect financed much of our investment. The capital inflow also tended to strengthen the dollar despite the growing trade and current account deficits. That strong dollar, combined with the ready availability of manufactured goods from countries functioning far below their economic potential, contributed importantly to containing inflationary pressures.
It has seemed, for the time being, a benign process: for the United States, a current account deficit without tears; for other countries, the American market has provided a sustaining source of demand in an otherwise economically sluggish environment.
What is in question is sustainability. Our trade and current account deficits are now trending toward $500 billion a year, or close to 5 per cent of our GDP. Those are very large amounts by any past standard for the United States. Given our weight in the world economy, we are absorbing a significant portion of other countries savings. With the low level of our personal savings, and now the prospect of diminishing Federal surpluses, this means we are dependent upon maintaining a strong inflow of foreign funds. We have also become accustomed to a ready supply of cheap goods from abroad. Both factors point to continuing large trade and current account deficits.
For the time being, growth in most of the rest of the world is so slow that there is no near term prospect that world markets will tighten, limiting the availability of imports at attractive prices. Moreover, the latest indications are that the strong flow of foreign funds into the United States is being maintained, even in the face of our economic slowdown and stock market correction. But looking further ahead, the risks are apparent.
We cannot assume that Japan and Europe will not at some point resume stronger growth, and that they will then want to employ more of their savings at home. We would certainly like to see stronger growth in the emerging world, which in turn would attract more capital from the United States. Here at home we have become less dependent on traditional "old economy" manufacturing industry, but there are limits to how far we can or should countenance further erosion in our manufacturing base.
All this suggests that, over time, we must look toward a narrowing of the trade and current account deficit. That will require a revival of personal savings and maintenance of a strong fiscal position. It may require, too, some strengthening of the Euro and the yen relative to the dollar.
In concept, adjustments of that sort can be made over a period of years consistent with continuing expansion in the United States and stronger growth in the rest of the world. But, as developments in the "high tech" world and in the stock market have again demonstrated, sentiment in financial markets can change abruptly and bring in its wake strong pressures on economic activity. The timing and degree of those changes simply cannot be predicted with any confidence. It seems to me evident, however, that as our trade and financial position becomes more extended, the risk of such abrupt and potentially destabilizing pressures increases.
The United States is already a large net debtor internationally, and for some time ahead will remain dependent on foreign capital if our economy is to resume growth. We should and we do export capital as our businesses and our investors seek out prospects for the highest returns. To finance both our current account deficit and our own export of capital, we must import close to $3 billion of capital every working day to balance our accounts. That is simply too large an amount to count on maintaining year after year, much less enlarging.
One way - an entirely unsatisfactory way - to approach the need for adjustment would be to fall into extended recession or a prolonged period of slow growth. Given that the world economy as a whole is operating well below par, the dangers of such a development would only be amplified.
Conversely I don't thing we should count on extending the experience of the 1990's. That would imply further depleting our personal savings, ever-larger external deficits and adding even more rapidly to our international indebtedness.
For the time being, confidence in the prospects of the United States economy, its financial markets, and its currency has remained strong, little shaken if at all by the generally unexpected current slowing of growth. Our leadership in innovation, the sense of increasing productivity and efficient management, and the stability of our political institutions help underlie that confidence.
Those are precious assets.
But, in my judgment, they are no cause for complacency. The huge and growing external deficits are a real cause for concern. They are symptoms of imbalances in the national economy and the world economy that cannot be sustained.
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