The United States piled up another massive, all-time record deficit last year in its current account balance, a measure of its international balance of payments.
Yawn! Yawn! Old story - and too technical, you may think.
To some economists, though, the news last week that the current account was $804.9 billion in the red in 2005 should be an alarm bell, not a stale story repeated over many months and many years.
"It's like selling your furniture to pay for your laundry bill," warns Peter Morici, an economist at the University of Maryland in College Park.
He and others want quick action by the government, not merely, as Robert Scott puts it, the Bush administration's "ideological fealty to free markets" and little to remedy the overvaluation of the US dollar. The Economic Policy Institute economist suggests an international gathering of key world financial leaders with the aim of stanching the hemorrhage, which is piling up huge debts to foreigners, hollowing out American industry, costing millions of US jobs, and raising the risk of world financial turmoil.
In September 1985, notes economist Scott, the finance ministers of the Group of Five (the US, West Germany, France, Japan, and Britain) got together at the Plaza Hotel in New York and agreed to devalue the dollar. In the following two years, the dollar plunged 51 percent in value against the Japanese yen and the Deutsche mark. The US trade deficit shrank enormously to a "sustainable level" as imports became more expensive and American exports cheaper.
The need for the US to help launch an internationally cooperative process to deal with today's financial imbalances "is urgent," says Charles McMillion, chief economist of MBG Information Services in Washington, D.C. He suggests something like the Bretton Woods conference of 1944 that established the postwar international monetary and financial system.
As it is, continuous US trade deficits "are weakening the supply chain, the rich infrastructure that has supported our dynamic economy for a long time," warns Mr. McMillion.
Last week, the Manufacturers Alliance/MAPI, a policy-research group in Arlington, Va., noted that the number of factories in the US shrank last year to 336,000, down 10 percent from its 1997 peak. Worse, the creation of new American factories has dropped dramatically.
Another suggestion comes from Dimitri Papadimitriou, president of the Levy Economics Institute of Bard College in Annandale-on-Hudson, N.Y.: Impose a major tariff on all imports, he says, not just those from China, to force the deficit issue to world attention. Article 12 of the World Trade Organization allows nations with huge deficits to do just that, legally.
As of the final quarter of 2005, the deficit in the current account, a measure which includes the trade deficit in goods and services, net investment income, and other transfers (including remittances of immigrants), amounted to 7 percent of gross domestic product.
In relation to GDP, that's twice the level it was at the time of the drastic 1985 Plaza Accord.
What it means is that the US is purchasing about 7 percent more than it's producing. In effect, it needs to import about $2.5 billion in foreign capital every day to finance this deficit. America's net international investment deficit - how much the US owes to other nations - probably reached $3 trillion at the end of last year, estimates Scott. That's one-quarter of the gross domestic product.
Most of the current account deficit is financed by China, Japan, North Korea, and other nations buying US Treasury bonds and other American financial securities - paper assets. But foreigners are also using their dollars to buy American companies or invest in new plants and equipment. Last year those investments reached $128 billion.
The US is rapidly selling off its productive facilities. Foreigners now own 97 percent of sound recording industries, 65 percent of metal ore mining, 63 percent of book publishers, 51 percent of plastic product companies, 48 percent of glass and glass product businesses, 30 percent of chemical manufacturers, and so on through a list of dozens of industries, down to 20 percent of iron, steel mills, and steel products.
In a sense, that's the result of globalization and flourishing multinational firms. Other nations used to complain about US ownership of their businesses. The shoe is now on the other foot.
Congress may step in. There are several bills that would compel action. One would permit domestic firms to seek duties on Chinese imports to offset the "subsidies" China provides its producers by government manipulation of its currency. Mr. Morici reckons that amounts to a 33 percent subsidy.
Elimination of that subsidy would be hard on Wal-Mart and its customers. It might also revive US manufacturing - which has lost 3 million jobs since 2000.