Can Global Imbalances Continue?: Policies for the U.S. Economy

Dimitri Papadimitriou, Gennaro Zezza and Greg Hannsgen

Economics Strategic Analysis Archive from Levy Economics Institute

Abstract: In this new Strategic Analysis, we review what we believe is the most important economic policy issue facing policymakers in the United States and abroad: the prospect of a growth recession in the United States, linked to the imbalances in the U.S. current account, government, and private sector deficits. The current account balance, which is a negative addition to U.S. aggregate demand, is now likely to be above 6.5 percent of GDP and has been rising steadily for some time. The government balance has improved, again giving no stimulus to demand, which has therefore relied entirely on a large and growing private sector deficit. A rapidly cooling housing market is one of the signs showing that this growth path is likely to break down. We focus first on the current account deficit. Our analysis suggests that a necessary and sufficient condition to address this problem, without dire consequences for unemployment and growth, is that net export demand grow by a sufficient amount. For this to happen, three conditions need to be satisfied: foreign saving has to fall, especially in Europe and East Asia; U.S. saving has to rise; and some mechanism, such as a change in relative prices, should be put in place to help the previous two phenomena translate into an improvement in the U.S. balance of trade.

Date: 2006-11
New Economics Papers: this item is included in nep-pke and nep-sea
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