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Stiglitz on "Global Imbalances"

Greg Mankiw sensibly questions the wisdom of Joseph Stiglitz’s plan to fix "global imbalances" by making U.S. taxes more progressive.

I have a different problem with Stiglitz’s op-ed: he’s too careless in discussing the current-account deficit and U.S. debt.

Here’s Stiglitz’s opening paragraph:

THE International Monetary Fund meeting in Singapore last month came at
a time of increasing worry about the sustainability of global financial
imbalances: For how long can the global economy endure America’s
enormous trade deficits — the United States borrows close to $3 billion
a day — or China’s growing trade surplus of almost $500 million a day?

Borrowing $3 billion each day means that the U.S. would annually accumulate debt of approximately $1.1 trillion.

While Stiglitz doesn’t give the source of his figure of $3-billion, it’s likely an estimate of the sum of Uncle Sam’s projected budget deficit for this fiscal year ($290 billion) and the projected U.S. current-account deficit ($864 billion).  If so, then Stiglitz’s claim is misleading on two counts.

First, he double-counts.  Whenever a foreigner sells a product to an American and then invests the dollars that he earns from this sale in newly issued U.S. Treasury securities, the U.S. current-account deficit increases as does Uncle Sam’s indebtedness.  But it’s not two debts; it’s one.

Suppose in the extreme that all $290B of the debt that Uncle Sam’s accumulates this year is bought by foreigners.  Insofar as foreigners purchase this debt with new earnings from the sale of goods and services to Americans, these purchases by foreigners of U.S. Treasury securities increase the U.S. current-account deficit.  If all $290B comes from foreigners’ export-earnings in America this year, then the current-account deficit rises by at least $290B.

But does the additional debt Americans accumulate this year equal $580B — the sum of the $290B of additional debt that U.S. taxpayers owe to Uncle Sam’s creditors and the $290B addition to the U.S. current-account deficit?  No.  Americans are in debt by only (!) an additional $290B.

American taxpayers owe an additional $290B to Uncle Sam’s creditors who, in this example, happen this year all to be foreigners who purchased U.S. Treasuries with their current export earnings (a situation that increased America’s current-account deficit by $290B).  The current-account deficit, while in this example truly all debt, is not debt in addition to the U.S. government’s newly accumulated debt.  It’s the same debt.  To add the $290B borrowed by Uncle Sam to the $290B current-account deficit is to double-count.

Of course, not all of Uncle Sam’s debt is owned by foreigners — and not all foreign purchases of Uncle Sam’s debt increase the U.S. current-account deficit.  (For example, if a foreigner buys $100K of U.S. Treasuries with funds he earned by selling $100K of equity in Microsoft, the U.S. current-account deficit doesn’t increase as a result.)

But insofar as foreigners use their earnings from exports to America to buy new issues of U.S. Treasuries, it’s double-counting to add the resulting increase in America’s current-account deficit to the increase in Uncle Sam’s debt.

There’s a second and more fundamental point — one that applies even if Stiglitz’s figure of "close to $3 billion a day" is meant to refer only to the projected U.S. current-account deficit for 2006.  The current-account deficit is not synonymous with debt.  If Mr. Sony uses the $2,000 he receives from selling computers to Americans to buy $2,000 worth of equity in Exxon, the U.S. current-account deficit rises by $2,000 but no real indebtedness is created.  No American owes Mr. Sony anything.

To call "debt" that portion of the U.S. current-account deficit held by foreigners as dollars balances, as shares in American corporations, as ownership of American real-estate, or as direct foreign investment in the United States is highly misleading, if not formally incorrect.