Revised
4/16/2010
Rebalancing the U.S. Economy in a Post-Crisis World
Barry Bosworth and Susan Collins
Paper prepared for the “Trans-Pacific Rebalancing” Conference jointly organized by Asian Development
Bank Institute and The Brookings Institution, March 3-4, ADBI, Tokyo
Abstract
The objective of this paper is to explore how the external balance of the United States might evolve in
future years as the economy emerges from the recession. We examine the issue both from the
domestic perspective of the saving and investment balance and from the external side in terms of the
basic determinants of exports and imports and the role of the real exchange rate. Using these two
respective perspectives, we highlight (1) causes and consequences of low private and public saving
in the US, and (2) sensitivity of trade to variations in the real exchange rate. We highlight the need
for sustained depreciation of the dollar to improve the competitiveness of U.S. exports and argue that
the current exchange rate is consistent with a significant reduction in the size of the trade deficit.
However, the favorable external outlook is very inconsistent with a projected domestic situation of
low rates of private saving and a very large public sector budget deficit matched by a cyclically
depressed rate of investment. Changes in US corporate tax structure, reconsideration of capital
controls, and perhaps some further decline in the level of real exchange rates could help soften the
impact of a potentially very hard post-recession landing for the United States.
JEL Codes: F32, F41, F42
The United States has had a substantial current account deficit ever since the mid-
1990s.For most of that period, the deficit has increased steadily, reaching a peak of $800
billion or 6.7 percent of national income in 2006.There has been widespread agreement
that deficits of that magnitude could not be sustained; thus, there exists a pervasive fear
that the economy might be heading toward a hard landing–with an abrupt collapse of the
dollar and severe economic disruptions both domestically and globally.
In the fully-employed economy of the mid-decade, the rebalancing of the U.S.
economy was viewed as a relatively straight-forward, though politically difficult two-
pronged task.It would require: (1) changing the composition of domestic demand away
from an over-emphasis on domestic consumption in order to free up resources for
increased production in the tradable-goods sector, and (2) expenditure-switching aimed at
directing those resources into increased exports.The first goal was often described as a
need to increase national saving, and the second as a change in the relative price of U.S.-
produced products to make them more competitive in world markets.
For a brief period prior to the financial crisis, it appeared that a relatively benign
adjustment might be underway.A real depreciation of the U.S. dollar improved the
competitiveness of American products and the current account deficit gradually began to
recede during 2007 and the first three quarters of 2008.The improvement would have
been even more marked were it not for the sharp increase in the price of petroleum
imports.Export volumes grew by 18 percent between the 2nd quarter of 2006 and the 2nd
quarter of 2008, while import volumes were flat.The U.S. seemed to have begun a soft
landing.
However, there was little evidence of adjustment on the domestic side. The
national saving rate continued to decline, turning negative in early 2008 due largely to
sharply higher federal budget deficits.It was falling rates of investment, not increases in
saving that freed up domestic resources. The government responded to a weakening of
residential investment with a temporary tax cut aimed at stimulating consumption, further
widening the budget deficit and reducing saving.
All of this changed in the fall of 2008 with the onset of a global financial crisis
centered on the United States.There has been a severe contraction of domestic demand
and employment, and concerns about the composition of aggregate demand have largely
vanished in the midst of extreme countercyclical policies aimed at stabilizing the
economy.The external economy experienced an even larger collapse as global trade
declined 25 percent below trend in the first half of 2009.U.S. exports fell 20 percent
below year earlier levels, with imports falling an even larger 28 percent.In 2009, the U.S.
current account deficit is estimated to have been only 3.5 percent of national income–half
its value in the peak year of 2006.Perversely, the U.S. real exchange rate also soared at
the onset of the crisis– temporarily reversing about half of the prior decline from its peak
as investors sought a safe haven in U.S. treasury securities.By the end of 2009, the
dollar had reversed about half of the prior rise and the real exchange rate had returned to
its average of the early 1990s.
What will be the future of external rebalancing, and should it still be a major
policy concernThe recession is ending, but most forecasts for the United States suggest
a weak recovery with high levels of unemployment continuing for several years.
Furthermore, distortions in the domestic saving and investment balance are far worse
than before the crisis: the fiscal deficit has pushed the national saving rate highly negative
and the rate of net investment is a third that of the pre-crisis years.In the financial crises
of other countries, recovery was largely driven by improvements in the trade balance
(export-led growth). However, such a scenario may be difficult in a global recession
where most countries will see increased exports as a solution to their problems. Will the
recovery of trade flows leave the United States with an imbalance comparable to that of
the pre-crisis years
The objective of this paper is to explore how the U.S. economy and its external
balance might progress in future years.In the next section, we review the evolution of
the external imbalance over the past quarter century -- both fromthe domestic
perspective of the saving and investment balance and from the external side as reflected
in the U.S. current account imbalance and international investment position. The bulk of
the paper then focuses on future challenges to external rebalancing from both the
domestic and external perspectives.We examine the causes of low private saving in the
United States and how it might evolve in the future.Second, we highlight the challenges
faced by the public sector as the result of the aging of the population and continued rapid
growth of health care costs. On the external side, we summarize the recent research on。。。以上简介无排版格式，详细内容请下载查看