Trade deficit and falling dollar nothing to fear says Arthur Laffer

America's large trade deficit and corresponding fall in the dollar should not provoke hasty policy changes or anxiety among U.S. consumers, says economist Arthur Laffer.

The United States has been able to finance the trade deficit (currently about 5.6 percent of national income) because it is the only growth country among all the developed nations – a veritable capital magnet.

Thus, rather than a sign of a structural flaw in the fabric of the U.S. economy, Laffer says the trade deficit is a "stark reminder of America’s privileged status as the most pro-growth, free market, rule of law economy the world has ever known." By contrast:

Germany hasn't enjoyed an economic surge in growth since the 1960s.

France still mandates a 35-hour work week and the government controls half the economy.

Japan's stock market is depressed and its government's unfunded liabilities are out of control.

Today, the dollar's value falls within its historical range. At some point the dollar will become too cheap and the terms of trade will self-correct, resulting in a lower U.S. trade deficit (or capital "surplus"). Laffer says the natural ebb and flow of currency markets should be left alone.

While there have been times when the dollar's depreciation warned of much higher inflation and interest rates, such is not the case today. The Federal Reserve has not accommodated any higher inflation and as a result the markets do not anticipate it.

Source: Arthur Laffer, Destination U.S.A. Wall Street Journal, January 3, 2005.

For WSJ text (subscription required) http://online.wsj.com/article/0,,SB110471293088514892-search,00.html

For more on Economic Growth http://www.ncpa.org/iss/eco/

FMF Policy Bulletin/ 18 January 2005