Volume 1, Issue 3

Government deficits are accelerating deindustrialization in the United States. Should we care? Absolutely. One reason is that manufacturing and associated learning-by-doing are powerful sources of external benefits that accelerate economy-wide productivity growth. A second is that the loss of manufacturing jobs is a powerful source of anger against free trade. The U.S. federal government needs to run surpluses to eliminate the savings deficiency of the American economy.

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. If this adjustment is to be achieved without a crisis, a range of policy adjustments will be needed. Options include a managed devaluation of the US dollar, substantial increases in public and household saving and initiatives to reduce reliance on imported oil and gas.

The U.S. economy is now on a sound footing for sustained expansion. This is a remarkable state of affairs in light of the powerful contractionary forces that have been at work since early 2000 — the bursting of the high-tech bubble of the 1990s, corporate scandals, slow growth among our major trading partners, and of course terrorist attacks. But it is important not to take the economic expansion for granted. President Bush has set out an ambitious agenda to ensure a continued and expanding prosperity. At the top of his economic agenda are tax reform, the reduction of the fiscal deficit, and social security reform.