Working Papers

The US Net IIP: Non-Hysterical Version

Much of the hysteria surrounding the US current account deficit reflects a basic lack of faith in US institutions and growth prospects.  David Levey and Stuart Brown have a refreshingly different perspective:

While the NIIP will continue to grow for many years to come, future dollar depreciation and market adjustments in interest rates and asset prices will mean that its increase will be far less dramatic than many fear. Moreover, focusing exclusively on the NIIP obscures the United States’ institutional, technological and demographic advantages. The classic doomsayer argument - that growing foreign indebtedness results from too little savings by Americans - neglects the fact that savings and investment are seriously undervalued in U.S. economic accounts. When you include capital gains, 401(k) retirement plans, and home values, U.S. domestic saving is around 20 percent of GDP, the same as in most other developed economies. And when you consider “intangible” investment (like new-product development and design experimentation) as part of total, the supposed increase in consumer
spending as a share of GDP turns out to be a statistical artifact.

Indeed, much of the explanation for chronic current account deficits relates to the U.S. economy’s strong fundamentals, not fatal structural flaws.

The country with the world’s strongest external investment position is Japan, which achieved this dubious distinction by trashing its potential growth rate and the returns on domestic investment through state-sponsored forced saving and the overcapitalistion of its economy. 

(thanks to Jack S. for the pointer)

posted on 20 February 2005 by skirchner in Economics

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Perhaps rumours of the US’s economic decline are exaggerated. Although the present admninistration has bent over backwards to substantiate them.
I am not sure about the authors identification of capital gain with savings. This seems to be an act of faith rather than an accounting identity.

Posted by Jack Strocchi  on  02/20  at  04:49 PM

Decline relative to what?  The remarkable thing about the US is that it keeps pushing out the growth and productivity frontier.  Neo-classical growth theory would predict convergence of the rest of the world on the US level of income, but the rest of the world has in fact been struggling to keep up and even slipped somewhat during the 1990s.  A widening US current account deficit is hardly surprising in this context.

Posted by skirchner  on  02/20  at  05:22 PM

Agreed. There has so far been no US decline to base the rumour on. Perhaps premonition, rather than rumour, would be a better word.
The US - from the mid-nineties to the mid-naughties - has diverged, rather than converged, from the RoW’s default growth path. This is definitely counter-intuitive to neo-classicals.
Moreover the US economy has received a number of massive hits in the past half-decade: the exposure of the dot.com/telcom stock market swindles, the 911 attacks & Iraq-attack. Yet US productivity still seems to be ticking over at super-normal rates.
The sword cuts both ways. It seems that rumours of the USE’s ecnomoic sclerosis are also exaggerated.
My own feeling is that the world is both broadening (PRC & IND) and deepening (info-tech, bio-tech, nano-tech) its economic production platform and that this tendency is well nigh unstoppable. The only flies in the ointment are political statist (beggar thy neighbour raid or trade) and financial capitalist (stock market swindles that get out of control).
The premonition of US decline was abroad after the US won the Cold War. And the same persons are repeating it now as were saying it then.
They would appear to be as wrong then as they are now. So one has to be as skeptical of the Chicken Littles as one is of the Dr Panglosses.

Posted by Jack Strocchi  on  02/20  at  06:27 PM

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