May 02, 2005

Shrink the Gap, Shrink the US Trade Deficit?

Robert Samuelson argues that a global glut of savings is behind the US trade deficit. The fiscal imbalance caused by all that money pouring into the US creates a situation where we don't save much ourselves, our currency becomes overvalued, and we import an awful lot while exporting relatively little. What Samuelson doesn't examine is the effect that adding new countries into the mix of decent homes for FDI. The US would get less FDI as more opportunities for investment became profitable in India, the PRC, Angola, or Libya. We would sink into a Red Queen economy where we had to work harder, export more, just to tread in place as a destination for FDI.

In other words, gradually improving our security picture gradually undoes the investment imbalance. There are both opportunities and perils in that. There are also important lessons to learn for our allies and adversaries. Because military action ties back into a pretty ticklish economic situation for the US domestically, we are likely to neither go "faster please" in bringing the Gap to an end, nor are we likely to give up the project entirely.

We'll work moderately to shrink the Gap but not so fast that we suffer a domestic economic crisis as the new investment opportunities we have created suck up the capital necessary to make a smooth adjustment out of our unsustainable economic course. In other words, the use of geopolitical dynamite that characterized the Iraq big bang is not likely to be repeated, or at least repeated quickly.

Posted by TMLutas at May 2, 2005 03:56 PM