Smith Faculty Opinion Article -
September 16, 2005
Second Quarter 2005
Deficit $195 Billion, Choking Growth
By Dr. Peter Morici,
Professor of International Business
Today, the Commerce Department reported the U.S. current account deficit in the second quarter was $195.7 billion and for the first half $394 billion. At this rate, the 2005 deficit, will be $788 billion, and overwhelm the $668 billion record established in 2004.
The current account is dominated
by the trade deficit for goods and
services, which was $173.3 billion
in the second quarter. At this pace,
the trade deficit is headed for a
new record in 2005, $693 billion, or
5.5 percent of GDP. In 2004, the
goods and service deficit was
The current account reduces the
demand for U.S.-made goods and
services, much like a tax increase
or government spending cut of
Cutting the trade deficit in half
would increase economic growth from
3.5 percent in 2005 to 4.5 percent
by the beginning of 2007, and reduce
unemployment to below 4.5 percent.
The ballooning trade deficit is
the most significant factor slowing
U.S. growth. Over the last year, GDP
growth has slowed from 4.5 percent
to 3.5 percent. Federal Reserve
interest rate increases, by failing
to affect mortgage interest rates
and other long bond rates, have had
little impact. Whereas the current
account deficit has taken a lion's
bite out of growth.
Manufacturing is particularly
hard hit. Lowering the trade deficit
would create nearly 2 million more
manufacturing jobs over three years.
An effective policy to lower the
trade deficit would particularly
benefit highly competitive U.S.
durable goods' manufacturers such as
machine tools, industrial and
construction machinery, auto parts,
and electronic equipment. It would
substantially lift nonresidential
construction by accelerating new
investments in industrial
Foreign government currency
manipulation is the root cause of
the U.S. trade deficit. These
actions overwhelm the effects of
large U.S. budget deficits, and by
lowering GDP and U.S. tax
collections, and make U.S. budget
Although the dollar has fallen
against the euro and other major
currencies, it continues strong
currencies--such as the Chinese yuan.
In the second quarter, foreign
government purchases of U.S. dollars
were $83 billion.
Governments in Asian developing
countries intervene in foreign
exchange markets to artificially
lower exchange rates for their
currencies against the dollar, and
keep their goods cheap in stores
Since January 2002, the dollar is
down an average of 15 percent
against all currencies. The dollar
fell an average of 25 percent
against the euro and other
industrialized country currencies,
but it is up an average of about 1
percent against the Chinese yuan and
other developing country currencies.
The Chinese 2.1 percent revaluation
announced June 21 was too small to
significantly affect the value of
the dollar or have a measurable
effect on trade.
Were foreign governments to stop
manipulating their currencies, the
U.S. trade deficit would be cut by
half, U.S. growth would accelerate
to 4.5 percent and unemployment
would fall below 4.5 percent by the
beginning of 2007.
Without more forceful efforts
from the Bush Administration to
persuade China and other Asian
exporters to stop manipulating
currency markets and subsidizing
their exports to the United States,
U.S. workers will continue to face a
tough job market and wages adjusted
for inflation will continue to
stagnate and fall.
import-competing and export
industries spend at least 50 percent
more on R&D and encourage more
investments in skills and education
than other sectors of the economy.
By shifting employment away from
these trade-competing industries,
the trade deficit is reducing U.S.
investments in knowledge-based
industries and skills, and slashing
more than one percentage point off
economic growth each year.
The trade deficit remains the
single most important tax on U.S.
growth and burden on American