The U.S. current account deficit and public policy

Abstract: The late Herb Stein, Chairman of President Richard Nixon''s Council of Economic Advisers, once famously quipped that “something that''s growing too fast forever will stop”. And so it is with the high and rising U.S. current account deficit relative to GDP. That ratio cannot rise forever, but many possibilities exist for adjustment. Where economists in the academic and policymaking communities can be particularly useful is in defining what our concerns should be about the U.S. current account deficit. This essay focuses on three principal questions. First, from an economic perspective, how should we frame worries about the size of the U.S. current account deficit? Second, understanding economic forces behind the current account deficit, how large is the deficit likely to be before adjustments take place to reduce its size? Third, what guidance does economic analysis offer for U.S. policy? This third question is of particular interest, as present policy discussion 25 contains as much mischief as useful guidance. After reviewing the steps policymakers should not take, I focus on two questions, which should be of particular relevance. To wit: Is there a role for fiscal policy toward U.S. household saving? And, what role might fundamental tax reform play? I conclude with some questions for economic analysis. [Copyright &y& Elsevier]