Washington File Listing
Report Finds U.S. Likely To Continue To Attract Foreign Capital
But White House economic council urges reduction of current account imbalances
By Andrzej Zwaniecki
Washington File Staff Writer
Washington -- The United States is likely to continue to attract more foreign capital than it sends abroad for a long time, even though the magnitude of future U.S. net capital flows is likely to decrease, a new White House report says.
The 2006 Economic Report of the President, published February 13, said the size and persistence of U.S. net capital flows reflect the strengths of the U.S. economy, such as solid growth, high productivity and favorable business climate, as well as its shortcomings, such as a low and declining levels of domestic saving (mirrored by a rise in personal consumption spending).
The annual report by the President's Council of Economic Advisers reflects the administration's thinking on key economic and trade issues affecting the United States.
The 2006 report concluded that the United States could continue to receive net capital inflows (and run current account deficits) indefinitely if it uses foreign capital in ways that promote future U.S. growth and help the country remain an attractive destination for foreign investment.
The United States runs a huge current account deficit -- a large part of it with China -- that is financed by foreign governments and private investors who buy U.S.-dollar denominated assets such as stocks and Treasury bonds. These purchases minus U.S. purchases of foreign assets constitute U.S. net capital inflows.
The current account, which consists mostly of trade balance, is part of the balance of payment, the broadest measure of one country's economic transactions with the rest of the world. Another part is the capital and financial account, which records U.S. net sales or purchases of assets, such as stocks, bonds, foreign direct investment and reserves.
Some private economists believe that the U.S. current account deficit, which probably exceeded 6 percent of gross domestic product (GDP) in 2005, is close to becoming unsustainable because it drives U.S. net foreign debt up to an "excessive" level.
But the report said that it is not clear what constitutes an "excessive" level. And it said that another measure -- U.S. net foreign income -- does not support the view that the U.S. net capital inflows have become unsustainable because the United States has continued to earn net foreign income despite its rising level of net foreign debt.
Nevertheless, the report projected that U.S. net capital inflows will drop in the future. Whether that drop will happen abruptly, with negative consequences for the U.S. and global economies, or in a more orderly way, which would assure a "soft economic landing," will depend to some degree on policy action by the United States and its key trading partners.
The report said that action by the United States alone would not be enough to reduce current account imbalances around the world because capital flows reflected in these imbalances are a result of different conditions in many countries.
And, if the United States moved unilaterally by curbing demand and raising domestic savings, the rest of the world might not like this action, U.S. Treasury Under Secretary Tim Adams said repeatedly in recent weeks.
He said that such an action would reduce U.S. gross domestic products (GDP) by 6 percent and cause a deep recession in the United States and, most likely, in the rest of the world as well.
U.S. Treasury Secretary John Snow said February 11 that the United States is committed to halving its budget deficit by the end of 2008. But he also said that, in addition to the United States, "the countries of Europe, Japan, developing Asia and even the oil exporters bear responsibility to help effect global adjustment" in current account imbalances.
For information on U.S. trade policy, see Trade and Economics.
The 2006 Economic Report of the President (PDF, 401 pages) can be accessed at the Government Printing Office Web site.