Solid growth, big deficits and a strong dollar stir memories of past crises Greg Ip trade deficit


This year, the U.S. will account for 26.3% of the global gross domestic product

A caveat: These figures are based on current prices and exchange rates. Using purchasing power parity, which adjusts for different price levels across countries, the U.S. share of world GDP would be lower and that of big emerging markets—such as China and India—much higher.

But you don’t pay for oil, iPhones or artillery shells at purchasing-power parity. Current prices and exchange rates better capture a country’s relative economic power. 

U.S. wages (adjusted for inflation) are roughly level with just before the pandemic, whereas they are lower in other advanced economies, the IMF found.

The second, more worrisome, reason for stronger U.S. growth is government borrowing—including former President Donald Trump’s 2018 tax cut, bipartisan Covid-19 relief in 2020 and President Biden’s 2021 stimulus.

In fact, Washington continues to inject stimulus, albeit not with that label: hundreds of billions of dollars for veterans’ benefits, infrastructure, semiconductor manufacturing and renewable energy.

U.S. deficits have run roughly 2% of GDP higher than the IMF expected back in late 2022. They will be the highest, by far, among major advanced economies for the foreseeable future.

Deficits were justified when unemployment was high, private demand moribund and inflation and interest rates low. None of that is true now.

Of the $95 billion in aid to Ukraine, Taiwan and Israel just approved by Congress, $57 billion will flow back to U.S. producers in the form of more weapons purchases.

That, along with the flood of Treasury debt to finance the deficit, is pushing up long-term bond yields.

Textbooks predict that a combination of tight monetary and loose fiscal policy will suck in capital from overseas and drive up the dollar. 

That has often precipitated financial crises in emerging markets as exchange rates are devalued, governments default and banks fail.

1985 Higher U.S. interest rates and budget deficits had driven up the dollar and trade deficit. At New York’s Plaza Hotel that September, the Reagan administration persuaded Japanese and European officials to boost their currencies against the dollar. 

The Biden administration badly wants to boost American manufacturing, in particular of electric vehicles, and is watching with dismay as China, aided by a weaker yuan, floods the world with cheap exports. 

The U.S. trade deficit, after shrinking through most of last year, is growing again.

The result will almost certainly be more protectionist pressure. Biden is already planning higher tariffs on China. 

Greg Ip Wall Street Journal 24 April 2024


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