The U.S. Current Account: The Other Deficit

Abstract

Considerable attention has been focused recently on the size and persistence of the U.S. budget deficit. Somewhat lost in the headlines is growing concern among many economists and policymakers over \\"the other deficit\\"--the U.S. current account deficit. Before 1982, U.S. current account deficits were small and temporary, as imports of goods and services rarely exceeded exports for an extended period. Since 1982, however, this deficit has increased significantly and many analysts expect the deficit to remain high well into the next century.> Large current account deficits pose both a short-term risk and a long-term problem for the United States. At present, the United States depends on a commensurately large flow of foreign capital into U.S. markets to finance the current account deficit. If market sentiment were to shift against the United States, higher interest rates and a lower exchange value of the dollar might be necessary to continue to attract foreign capital. In the long term, because financing a chronic deficit requires the United States to borrow from abroad, future interest payments on this debt could lower the standard of living in the United States.> Hakkio examines the current account deficit and its implications. First, he discusses why the current account deficit became large and persistent in the early 1980s. Second, he analyzes the short-term risk that current account deficits pose for the U.S. economy. Finally, he analyzes the long-term problem associated with a chronic current account deficit.

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