ECON102: Principles of Macroeconomics (2021.A.01)

For the past quarter century, the United States has had a current account deficit and a capital account surplus. Is this good or bad?

Viewed from the perspective of consumers, neither phenomenon seems to pose a problem. A current account deficit is likely to imply a trade deficit. That means more goods and services are flowing into the country than are flowing out. A capital account surplus means more spending is flowing into the country for the purchase of assets than is flowing out. It is hard to see the harm in any of that.

Public opinion, however, appears to regard a current account deficit and capital account surplus as highly undesirable, perhaps because people associate a trade deficit with a loss of jobs. But that is erroneous; employment in the long run is determined by forces that have nothing to do with a trade deficit. An increase in the trade deficit (that is, a reduction in net exports) reduces aggregate demand in the short run, but net exports are only one component of aggregate demand. Other factors - consumption, investment, and government purchases - affect aggregate demand as well. There is no reason a trade deficit should imply a loss of jobs.

What about foreign purchases of U.S. assets? One objection to such purchases is that if foreigners own U.S. assets, they will receive the income from those assets - spending will flow out of the country. But it is hard to see the harm in paying income to financial investors. When someone buys a bond issued by Microsoft, interest payments will flow from Microsoft to the bond holder. Does Microsoft view the purchase of its bond as a bad thing? Of course not. Despite the fact that Microsoft's payment of interest on the bond and the ultimate repayment of the face value of the bond will exceed what the company originally received from the bond purchaser, Microsoft is surely not unhappy with the arrangement. It expects to put that money to more productive use; that is the reason it issued the bond in the first place.

A second concern about foreign asset purchases is that the United States in some sense loses sovereignty when foreigners buy its assets. But why should this be a problem? Foreign-owned firms competing in U.S. markets are at the mercy of those markets, as are firms owned by U.S. nationals. Foreign owners of U.S. real estate have no special power. What about foreign buyers of bonds issued by the U.S. government? Foreigners owned about 52% of these bonds at the end of December 2010; they are thus the creditors for about half the national debt. But this position hardly puts them in control of the government of the United States. They hold an obligation of the U.S. government to pay them a certain amount of U.S. dollars on a certain date, nothing more. A foreign owner could sell his or her bonds, but more than $100 billion worth of these bonds are sold every day. The resale of U.S. bonds by a foreign owner will not affect the U.S. government.

In short, there is no economic justification for concern about having a current account deficit and a capital account surplus - nor would there be an economic reason to be concerned about the opposite state of affairs. The important feature of international trade is its potential to improve living standards for people. It is not a game in which current account balances are the scorecard.