Should We Be Concerned about the Current Account?
By the time this article hits your desk, you will have seen headlines announcing that the U.S. current account deficit (the amount by which national investment exceeds national savings) has widened to a new record annual level. During 1999, it took just nine months to equal the previous record annual level of $221 billion set in 1998. Record nominal trade and income deficits in the fourth quarter raised the 1999 current account deficit to $339 billion. The magnitude of these recent increases has prompted policymakers and the press to express concern about the economic consequences of sustaining large current account deficits and to propose restrictive trade policies to reduce them. Congress has gone so far as to establish a bipartisan commission, the U.S. Trade Deficit Review Commission (USTDRC), to look into the perceived current account problem. This Chicago Fed Letter examines the merits of this debate by analyzing the data to see if recent changes in the current account balance were a temporary response to a short-lived economic event, the Asian financial crisis or the persistent byproduct of recent U.S. trade agreements.