US recovery provides a summer of content for trading neighbors
The United States has been a good neighbor during this strong economic recovery. And in all likelihood it will continue to be a good neighbor in the year stretching ahead.
As I told an audience of visiting Europeans recently, the locomotive that has been dragging the American economy forward has also been exerting a strong upward pull on the world economy.
It is not that we Americans have suddenly become altruists. Nor has the Reagan administration had on its agenda the special goal of helping the developing countries and our NATO allies.
The fact that the dollar is overvalued because of strength on the capital account entails that each dollar of extra spending generated at home in these first two years of strong recovery tends in part to go for imports from abroad. That means extra income and production in the Pacific Basin; more American orders for European goods; sales for Latin American mines and African tropical products.
The Japanese and West European recoveries are by now evident. The hope is that these have a long way still to go. Perhaps later, when our expansion is an old and tired one, we shall be grateful to experience some reciprocal pull from those we helped to grow.
High real interest rates
Is the picture all one rosy color? It rarely is in economics. And now is no exception.
America is indeed a good neighbor on current-trade account in the balance of payments. But on capital account, we do present some problems.
Measured against our rates of inflation, our interest rates are exceptionally high - higher than they have been for decades and decades. President Reagan avers that this is happening only because people irrationally fear inflation. His secretary of the Treasury denies day and night that our colossal structural fiscal deficit has anything to do with the highness of real interest rates.
Secretary Regan has not convincingly faced the evidence. President Reagan is himself not very experienced in judging economic questions. But even if economists were wrong in their linking up high American interest rates with fiscal thriftlessness, it is a fact that real interest rates are high here.
High US interest rates do push up interest rates abroad. They do direct foreign savings to our shore and away from where they originate.
When the Federal Reserve is obliged to permit real interest rates to rise - or, in order to keep our boom a sustainable one, is obliged to contrive higher real interest rates here - that makes it harder for the Bank of England, the Bundesbank, and the Bank of Japan to lower interest rates abroad in the interest of firing up the eocnomic locomotives there.
So, on capital account, America has not been altogether a good neighbor.
At summit meetings, heads of state lecture Ronald Reagan against the evil of large fiscal deficits. This is an exercise in futility. No politician will take chances in an election year. And besides, Reagan does want to balance the budget , but only by having his Democratic opposition acquiesce in cutting down sharply on welfare expenditures.
Naive politicians abroad say, ''If the dollar is agreed to be too high, why shouldn't the powerful American government intervene to set it right?''
I have no philosophical objections to exchange-rate interventions. And, as an economist concerned with the political threat of political protectionism as a response to the noncompetitiveness of US manufactures, I would give much to have the dollar depreciate relative to the yen, mark, and other European currencies.
But the sad truth is that the Federal Reserve and US Treasury Department are virtually powerless to affect significantly the dollar exchange rate. It is not billions of dollars, but hundreds of billions, that are involved.
To be sure, the Federal Reserve could peg for a brief period of short-term interest rates below their current market levels. But in doing so, the Fed would risk having to create an avalanche of new money. It is naive to expect such action from the Federal Reserve. And to tell the truth, I could not counsel it even were it achievable.
The dollar, I guess, will float downward in the years ahead. But if the recent declines in Wall Street stock prices were not able to start a stampede out of the dollar, one suspects that the underlying strength in our capital accounts is still quite formidable.
Enjoying the good season
Events go remarkably well. What foreigners should wish from America is that they continue to do so.
Still, too much of a good thing adds up in economics to a bad thing. So far the second year of our recovery is overly strong. From abroad as at home, one should urge a few simple policies:
* The Fed should continue to restrain the economy's exuberance, aiming for a durable and sustained advance.
* Congress and the newly elected president should amplify the limited progress achieved in reducing the overlarge structural fiscal deficit. This will mean new taxes and higher taxes. It will mean cuts in some cherished defense and civilian programs. The sacrifices will not be basic and they will be worthwhile.
People of goodwill abroad can then, in this summer of our content, concentrate on some of their own continuing problems.