Responding to the critics, part 1
John Quiggins’ article, “The Unsustainability of U.S.Trade Deficits” ignores the gains from international borrowing and lending and the gains from trading according to comparative advantage.
isn’t very informative, but he mainly argues against the idea of a zero current account deficit. Grennes misses my point fairly comprehensively. Here’s my draft response
Thomas Grennesâ€™ letter â€˜Neither Borrower nor Lender Beâ€™, in response to my article on The Unsustainability of the US Trade Deficit illustrates my observation that â€˜much analysis confuses the current account deficit and the goods and services deficitâ€™. As stated in the summary, â€˜Although substantial current account deficits can be sustained indefinitely, large deficits in goods and services trade cannot be. Even to stabilise the current account deficit, the United States must restore balance in goods and services trade within a decade or so.â€™ Grennes ignores this, and focuses entirely on the current account balance.
Grennes suggests that â€˜a zero current account balance implies neither borrowing nor lending, and a zero balance appears to be what Quiggin advocates.â€™ In fact, I examine the adjustment needed to stabilise the current account at its current (historically high) level of 5 per cent of GDP, and show that this requires a fairly rapid return to balance or surplus on the trade account.
Even in the world of web-based journal publishing, it will probably take a month or two for this to get through the publishing process, so comments and suggested improvements are most welcome.