Americans Supply Wealth-Storage Facilities

by Don Boudreaux on July 27, 2006

in Trade

The American Enterprise Institute‘s John Makin offers this nice contribution to the debate over the sustainability of the current U.S. current-account deficit.

In summary, Makin argues that one of the reasons foreigners sell so many goods and services to Americans and then consistently refrain from buying an equivalent amount (in value terms) of goods and services from Americans is that foreigners have a high demand for “wealth-storage” services supplied by dollar-denominated assets.

The fact that global savers accommodate U.S. consumers by keeping U.S. interest rates lower than they otherwise would be and the dollar stronger than it otherwise would be is simply a manifestation of America’s comparative advantage at supplying wealth storage facilities.

In other words, there’s no real imbalance.  If the services supplied by “wealth-storage facilities” were counted in international commercial accounts as “services,” then the U.S. current-account would not be in deficit.

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quadrupole July 27, 2006 at 12:44 pm

I've been arguing for a long time that one of the reasons its better to borrow than to increase many kinds of taxes is that US government borrowing is competing against other 'wealth storage' vehicles, not against 'investment' vehicles. So until US treasury borrowing outstrips the demand for 'wealth storage' it doesn't really crowd out 'investment'.

One of the corrolaries of this is that as long as private return on 'investment' is greater than government cost of borrowing, you are better off borrowing a dollar than taxing a dollar that might have otherwise been 'invested'. For example, you are better off borrowing a dollar in todays climate than raising capital gains taxes, as capital gains have a very high propensity to be invested, and thus as a tax it tends to drain money that would have otherwise been invested.

Or to put it plainly: in general it's better to run deficits than to raise capital gains taxes.

John Dewey July 27, 2006 at 12:57 pm

"In general it's better to run deficits than to raise capital gains taxes."

Perhaps, but isn't it even better to reduce government spending? Taxes and debt are not nearly as evil as government spending – where the public sector gobbles up resources the private sector could use more wisely.

Mike July 27, 2006 at 1:10 pm


I agree. However, one of the concerns I read about lately is that private citizens are buying less and less of these wealth storage instruments and foreign governments are accumulating more and more dollars. That, in and of itself, as you have nicely pointed out, is no big deal. What the big deal is is that some foreign investors appear to be thinking that the US is becoming a less attractive place to invest. I am not worried.

Any thoughts?


happyjuggler0 July 27, 2006 at 1:21 pm

"Perhaps, but isn't it even better to reduce government spending? Taxes and debt are not nearly as evil as government spending – where the public sector gobbles up resources the private sector could use more wisely."

Agreed. To which I would add that taxes on investment are the economically worst tax a country could have. Somebody has to create jobs, and it isn't government that will do it.

For a developed country though that insists on using government spending to *try* to help the poor, then taxes on the working poor are the economically worst tax. Why steal from the poor simply to give it back to them, after the bureaucracy takes its cut?

quadrupole July 27, 2006 at 1:36 pm

Lest I be misundersood, I am strongly in favor of cutting spending rather than running deficits. My only point is that once government has decided to spend $x, it is more efficient and cheaper to raise $x in some ways than others. As long as we don't exhaust the 'wealth storage' supply, borrowing is a more efficient way to raise the money than most of the currently politically acceptable taxes.

quadrupole July 27, 2006 at 1:39 pm


Stop thinking in terms of taxing people and start thinking in terms of taxing dollars. Dollars 'invested' produce more economic growth and more overall wealth. You really don't want to discourage that. Dollars consumed do not increase economic growth. This is why I strongly favor the FairTax. Leave the rich alone as long as they are using their money to grow the economy, tax them when they go to buy their yatch/rolex/porsche.

Don Boudreaux July 27, 2006 at 1:52 pm


Regarding your germane question about the identity of foreigners who are buying dollar-denominated assets, on July 22nd I posted on that very topic. Here's the link:

Randy July 27, 2006 at 1:56 pm

Good point, and good discussion. I'd just like to toss in that some government spending is a form of investment spending. Not all, probably not even most, but some.

quadrupole July 27, 2006 at 2:17 pm


You can actually see how much government spending is investment if you go look at the BEA's nipa tables:

In particular:

basically, they figure the feds in 2006 invested about 118 Billion, consumed $805.7 billion, and made transfer payments of $1.537 trillion for total expenditures of $2.6381 trillion. So you are correct, about 4.4% of our government expenditures are investment expenditures.

Randy July 27, 2006 at 2:49 pm


Of course, some of the transfer payments can also be seen as a form of investment. I'd like to see more emphasis placed on determining whether programs truly add value or not. We've got some folks who think all government spending adds value, and others who think it all goes straight down a rat hole. The truth, of course, is somewhere in between. I'd like to see a "Metrics" committee. How do we know that this really works. Staff it with economists of course.

Getting off topic here, sorry. Back to wealth storage…

quadrupole July 27, 2006 at 3:18 pm


Which transfer payments result in capital stock which increases economic productivity? My guess would be very nearly 100% of transfer payments are consumed in the year they are transfered.

Randy July 27, 2006 at 3:33 pm


In some cases, if we don't provide transfer payments, the alternative will be to pay for added law enforcement and/or extra jail cells. The added value is the difference between the cost of the transfer payment and the alternative cost.

FDR was right to say that desperate people are the stuff of which dictatorships are made. Personally, I think he went a bit overboard – but he wasn't wrong. There is value in social stability – even if it comes at some cost.

quadrupole July 27, 2006 at 3:41 pm

Ah yes… the 'we have to pay people so they don't riot' argument. I suspect that while imprisoning a particular person is more expensive than providing them with transfer payments that providing transfer payments in bulk is more expensive than substituting law enforcement.

Or to put it differently, law enforcement has a deterent effect. Some of the folks you are providing transfer payments to right now will commit crimes, but more will simply make the hard choices necessary to get by (working longer hours, spending less money on luxuries, moving somewhere with a lower cost of living etc).

Isocrates July 27, 2006 at 3:48 pm

"There is value in social stability – even if it comes at some cost."

The French tried to buy themselves social stability with large transfer payments to those in the banlieues. It hasn't worked out so well.

Randy July 27, 2006 at 4:03 pm

Honestly folks, I'm usually on the other side of this argument, but what the hell. The thing is, it works. Our current social order works – transfer payments and all.

We don't live in a frontier society anymore. There's nowhere for the lazy and incompetent to go. And our moral sensitivity doesn't allow us to do away with them. So they must be absorbed. They must be maintained. And there will be more and more of them with every passing year. It isn't just a theory that desperate people do desperate things – its a fact. I would have to say that transfer payments to avoid the existance of desperation is one of the very best "investments" that a society can make. Which is not to say that there shouldn't be limits. That's the real argument – where to set the limits. To find the line between ensuring that the lazy and incompetent do not become desperate, and rewarding them.

quadrupole July 27, 2006 at 4:07 pm

The welfare reform act of 1996 showed pretty conclusively what happens when you stop subsidizing people. Desperate people get jobs.

Kent July 27, 2006 at 4:07 pm

Would a current accounts surplus be bad?

quadrupole July 27, 2006 at 4:09 pm

Yes. A current accounts surplus means that American's find it more profitable to invest abroad than in the US.

Randy July 27, 2006 at 4:19 pm


Well, like I said above, I think FDR went overboard – and I think we are still going overboard. I don't use the word "desperate" lightly. We have created a situation where people can be better off by choosing not to work. Transfer payments to these are most certainly not an investment.

quadrupole July 27, 2006 at 4:33 pm


Given our current economy, I find it very hard to believe that there are many able bodied people who are at risk to become 'desperate'. Everywhere I turn there are places hiring unskilled labor at $7-9 dollars an hour. $7-9 dollars an hour full time is $14-$18k a year. That's well over the poverty line for a single person. Two unskilled workers working such jobs is $28-36k a year, which is above the poverty line for a family of four.

Even fulltime minimum wage work lifts a single person out of poverty, and two full time minimum wage jobs lifts a family of four out of poverty.

Randy July 27, 2006 at 4:56 pm


You're right. And this is a difficult position to defend :)

Truth is, we'll probably be better off when the next depression comes if we invest in teaching people to be self reliant, rather than teaching them to be dependant on programs that will probably fail anyway.

Cyberike July 27, 2006 at 5:19 pm

Guys: Why are you talking about welfare payments as if they a significant sum in terms of the overall federal budget? They are not.

The biggest sums, as we all know, are social security, medicare, and medicaid – these make up the transfer payments that are so large. These are not going away, they are not going to get smaller, the only significant debate is how to limit their growth rate.

When you say we need to reduce the size of government, those are the program that need to be reduced – they are the programs that bust the budget. Even in this forum, these programs are not questioned. When I start seeing people say "lets eliminate social security to reduce government spending" thats when we know people are serious.

Lets get back to the point. When you combine the "potential" obligation to make good on the investments in "wealth storage", which will happen when other investments appear more attractive, with the very real and significant future costs of our transfer payments in the form of social security and medicare, you are going to have economic collapse. We should have a current account surplus as an investment mechanism to be able to pay our future obligation. Right now we have debt on top of debt: Not a very reassuring combination.

quadrupole July 27, 2006 at 5:28 pm

Agreed, Social Security/Medicare are the bank breakers. I favor transitioning to a privitized plan for both (please note, I'm part of the generation that necessarily get's screwed by this).

Running a current account surplus now does nothing to help us solve this problem. The only *possible* hope is to grow the economy faster, and that means increased investment in capital here, which means current account deficits are good.

Bruce Hall July 27, 2006 at 6:01 pm

My wife totally agrees with the current account deficit theory of sound fiscal management.

Keep spending as much as possible with the hope of never-ending credit.

Anyone interested in buying a bridge located in Brooklyn?

Don Boudreaux July 27, 2006 at 6:14 pm

Bruce Hall,

In this case, analogizing the nation to the family is misleading.

Americans ran a current-account deficit for nearly every year from 1607 until WWI — and then for nearly year since Jimmy Carter moved into the White House. Surely if a current-account deficit were debt, American economic growth over the past three centuries would not have been as spectacular as it was.

Kent July 27, 2006 at 6:28 pm

Does China have a current account surplus and a capital account surplus? Is that impossible? Their economy is growing faster than the American economy is their captital account balance the reason?

Thanks, Kent

Bruce Hall July 27, 2006 at 6:28 pm


I recognize that. One of the concerns that is unspoken by those who decry the growing current account deficit is simply a matter of strategic leverage that can ultimately be exerted on U.S. political (and economic?) decisions once the reliance on this foreign storage of their wealth reaches a great enough mass.

Perhaps the Chinese may never be able to make a politician think twice simply by saying "this year we will not invest in the U.S. economy". Maybe it isn't in their best economic interest to do so. But, then again, it isn't always economic interest that drives the Chinese to do what they do or support who they support, is it?

But mixing politics and economics has never been scintillating reading or discussion.

quadrupole July 27, 2006 at 7:00 pm


A better analogy would be this. Our current GDP is about $12 trillion dollars. Our current account deficit is about $500 billion dollars. So we are effectively borrowing around 4% of our GDP from the rest of the world. We invest about 16% of our GDP every year. So to map this into a normal family, it would look like this:

You make $50,000 a year. Your wife charges about $2000 a year for which you pay 5% interest. You save about $8000 a year, on which you make about 10% interest. Does it make sense to forgo $2000 a year in savings to stop borrowing? Most financial planners would say no, because you make more on your savings than you pay for your borrowing. Now imagine you trim your spending by $2000. What should you do with that extra $2000? Eliminate your deficit, or save and invest more?

The problem with the family analogy is that almost everyone who makes it has this mental picture of a family making $50k, borrowing $2k at 5%, and saving $0. That is unsustainable, I agree, but that's not where we are economically.

quadrupole July 27, 2006 at 7:12 pm


China runs about a current account surplus of about $160 billion against of GDP of 2.2 trillion (about 7% of GDP). The reason they are experiencing such strong economic growth is that they invest about 44% of GDP. For this they get about a 9% GDP growth rate.

Compare this to the US in the US of around 3.5%. So they invest about 2.75 times more of their GDP than we do and grow at about 2.57 times as fast. Makes sense. There is no mystery to where China's growth comes from: it comes from investment, not current account surpluses.

quadrupole July 27, 2006 at 7:39 pm

A slight extension to my family analogy above. The US fixed assets currently are about $38 trillion dollars, or about 316% of GDP. Our foreign debt is about $8 trillion dollars, or about 66% of GDP.

Translating this to our hypothentical family with the $50k income, that would be like having $158k in assets, and $16k in total debt.

Does that sound like a family on the brink of insolvency to you?

Bruce Hall July 27, 2006 at 7:42 pm

US current account deficit 'unsustainable' – NY Fed chief
By Christopher Swann in Washington
Published: January 23 2006 19:29 | Last updated: January 23 2006 19:29

Timothy Geithner, president of the New York Federal Reserve, on Monday dismissed the view that the US current account deficit was sustainable, suggesting the risk of a sudden fall in the dollar would grow the longer the trade gap widened.


I guess opinions differ.

But, then, I don't think the Fed should be manipulating the economy either.

JohnDewey July 27, 2006 at 8:25 pm

cyberike: "The biggest sums, as we all know, are social security, medicare, and medicaid – these make up the transfer payments that are so large. ….. those are the program that need to be reduced – they are the programs that bust the budget."

Well, those programs are not yet busting the budget. Social security is projected to run a $1 trillion surplus from 2006 through 2010. According to its trustees, Medicare's Hospital Insurance trust fund will be in deficit for the first time in FY2006 – but only slightly so. So we cannot say that those two programs are busting the budget.

I am convinced that both Social Security and Medicare are not sustainable as currently structured. But there is no reason to reduce those expenditures right now. Better that today's retirees make the decisions about where to spend those funds than have even more money available to Washington.

Ann July 28, 2006 at 10:21 am

Kent and Quadrupole –

The other secret to fast growth in the Chinese economy is Mao's brilliant strategy of wrecking the economy and setting back the clock technologically (melting down all the plows and doorknobs, for example, to increase steel production). By the time Deng got control, China was so far behind that it could grow at a huge rate simply by adopting technology only a couple decades behind.

Hong Kong utilities in the early 1990s gave much of their old, outdated equipment to companies in China, which for them was a great leap forward (not in the Mao sense).

Catching up is easier than leading. But for the US to follow this strategy for fast growth, we'd have to go through a rather painful transition first.

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