Per Jacobsson lecture: Summers urges addressing U.S. current account deficit in global context

• Pages: 306-307

Page 306

Summers called for increased national saving in the United States and for further adjustment of the exchange rate against the dollar-particularly through greater flexibility of the exchange rates of key Asian currencies-to reduce the sizable and growing U.S. current account deficit. Addressing a large gathering of policymakers, economists, academics, development experts, journalists, and members of the general public, he said increased national saving and further exchange rate adjustment will work as a remedy when taken together, but not individually.

Placing the U.S. current account deficit within the context of the "very substantial increase in the pattern of global imbalances in general," Summers emphasized both the scale of the problem and the need to address it in the near, not distant, future. The U.S. current account deficit, he noted, was currently running well in excess of $600 billion at an annual rate, or in the range of 5.5 percent of GDP, and was "without precedent in the American experience." It represents about 1.25 percent of global GNP, he added-which means that it is larger, relative to the global economy, than any previously recorded national deficit.

Summers attributed the widening current account deficit-which is the difference between national saving and national investment-to "reduced saving and increased consumption rather than to increased investment." U.S. net national savings, which have declined sharply in the past five years, were between 1 and 2 percent in 2003. Meanwhile, he said, a number of Asian emerging market economies had substantially increased their reserves and were effectively financing the U.S. current account deficit through central bank intervention. Their objectives were to maintain "competitiveness and a strong traded goods sector, and an exchange rate that does not fluctuate significantly against the dollar."

A rapidly growing U.S. current account deficit, financed with reliance on the official sector, poses two risks, Summers said. First, it generates incipient protectionist pressures, such as the recent concern in the United States over outsourcing. Second, dependency on "international vendor finance," especially from countries whose governments intervene to maintain fixed exchange rates to create an "illusory sense of stability," can lead to vulnerability over the medium term. Though at present this arrangement has its benefits-finance at a low cost for the United States when its...