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The deficit in the broadest measure of foreign trade, after setting an all-time high at the end of 2005, narrowed by an unexpectedly large amount in the first three months of this year.
The Commerce Department reported Friday that America's current account trade deficit fell to $208.7 billion in the January-March quarter, down 6.5 percent from a record $223.1 billion deficit set in the final three months of last year.
The improvement exceeded expectations althought it still left the quarterly deficit at the second highest level on record. Analysts cautioned that rising oil prices will likely make the improvement short-lived. They forecast that 2006 will be a fifth straight record year for the trade deficit.
"Even with the modest improvement at the start of the year, reducing the U.S. current account deficit will be an exceptionally show process," said Douglass Porter, an economist at BMO Nesbitt Burns, a Toronto investment bank.
The biggest change in the first quarter came in a drop in the amount of money that America sends overseas in the form of foreign aid and payments that families provide to relatives in foreign countries. American investment earnings also shifted back into positive territory and the deficit on goods declined a bit.
The deficit in the current account is considered the best measure of America's international standing because it covers not only trade in goods and services but also investment flows and foreign aid.
The deficit must be financed by the willingness of foreigners to hold an increasing amount of U.S. assets. So far, that has not been a problem because foreigners have been more than willing to sell their cars, televisions and computers to Americans and hold dollars in return. That money is invested in stocks, Treasury bonds and other U.S. assets.
However, the concern is that the current account deficit could grow so high that foreigners will become less willing to hold U.S. assets. If they began dumping their U.S. holdings it could depress stock prices, send U.S. interest rates higher and cause the dollar's value to fall sharply.
Even with the improvement, the deficit in the first three months of this year was the second highest on record, putting the country on track to set another record for the entire year.
The current account deficit in 2005 jumped 19 percent to $791.5 billion, up from $665.3 billion in 2004.
For the first quarter, the deficit in goods and services narrowed by $4 billion to $190.7 billion.
Americans earned $1.9 billion more on their overseas investments than foreigners earned on their U.S. holdings, returning this figure to positive territory after it had slipped to a negative $2.2 billion in the fourth quarter. Economists warn that with the growing holdings of foreigners in this country, the investment category will soon slip into negative territory on a permanent basis.
The category that includes foreign aid and private remittances by people living in this country to their families overseas narrowed to $19.9 billion, $6.3 billion below the outflow in the fourth quarter.
Critics of the Bush administration contend that the soaring deficits show that the administration has left Americans exposed to unfair foreign competition, contributing to the loss of nearly 3 million manufacturing jobs since Bush took office.
The administration points to the relatively low civilian unemployment rate and strong job growth to argue that in spite of the trade deficits, the U.S. economy is performing well.
Surging
By The Editors
More than two years ago, when President Bush announced his aim to cut the federal budget deficit in half by 2009, many critics guffawed. They called the goal an impossibility, a naïve and futile effort that would be undermined by the fat-cat Republican tax cuts. A Boston Globe headline declared, Bushs plan to halve federal deficit seen as unlikely; Higher spending, lower taxes dont mix, analysts say. An Associated Press story went out on the wire with the headline, Bush goal of halving federal deficits draws skepticism, derision.
In that AP article, Sen. Kent Conrad, the top Democrat on the Senate Budget Committee, was quoted deriding Bushs plan: Its like so much with this administration in respect to fiscal matters, its all spin, all the time. Former Congressional Budget Office director Robert Reischauer called the proposal fanciful. To Democrats, the AP reported, Bushs goal was simply laughable.
But the critics are no longer laughing. Driven by a surging national economy, tax revenues are increasing and the deficit is rapidly shrinking. The presidents deficit-reduction plan looks like it will not only succeed, but will do so years ahead of schedule.
The country was facing the largest projected deficit in history when Bush promised to halve it as a percentage of GDP by 2009. Due to high wartime spending and the residual effects of the 200001 recession, the White House expected the 2004 deficit to reach $521 billion, or 4.5 percent of GDP. Bushs goal was to reduce this to 2.25 percent by 2009.
After all the beans were finally counted, the 2004 deficit came in at $413 billionroughly 3.5 percent of GDP. The economy had begun expanding, partly in response to Bushs tax cuts, creating jobs and boosting revenue. This trend continued into the next year, pushing the deficit down to $319 billion in 2005.
This year, the projections look even better. Through the first eight months of this budget year, the deficit is $227 billion16.7 percent lower than this time last year. Thats largely because government revenues in these eight months have reached $1.545 trillion, up 12.9 percent from last year.
This huge revenue boost means that the deficit is going down even as an out-of-control Congress continues its spending profligacy. Federal spending has already swelled by $130 billion so far this fiscal yeara 7.9 percent increase compared with the same period last year. Such increases cant be blamed entirely on the demands of the War on Terror, either, as Defense and Homeland Security together account for only 30 percent of Congresss total spending increases since 2001.
Despite the strong updraft of federal spending, the deficit is on track in the next few years to continue falling until it approaches 2 percent of GDP. This is below the 2.5 percent that has been the national average since 1970, demonstrating that the presidents critics were simply wrong when they claimed that the Bush tax cuts would lead the country into economic ruin.
There is a lesson here, and it is vindicatory of the central claim of supply-side theory: Easing the national tax burden spurs economic growth, significantly mitigating the revenue loss that results from tax cuts. The national economy is a dynamic system, and it responds to the incentives and disincentives imposed on it by government policies. When businesses and individuals are allowed to keep more of what they produce, they produce more. And when investors are allowed to keep higher returns, they invest in more productive endeavors. This boosts GDP, which in turn boosts tax revenues.
We cannot grow our way out of our long-term fiscal woes. Pro-growth tax policies must be supplemented by serious entitlement reform to curtail the huge unfunded liabilities created by Social Security, Medicare, and Medicaid. And spending cuts on other domestic programs would be worthwhile as a way to reduce Washingtons influence to its proper size, quite apart from their effect on budget balances. Surging revenues are a reason to stick with the tax cuts. They are no reason to quit trying to bring spending under control.
both are good for the country, but good to see you leave your religion obsession even if only momentarily.rtwngAvngr said:The budget deficit is different than the trade deficit. I'm pretty sure.:teeth:
