Hearing of House Committee on the Budget - The Economic Outlook and Current Fiscal Issues

HEARING OF HOUSE COMMITTEE ON THE BUDGET - THE ECONOMIC OUTLOOK AND CURRENT FISCAL ISSUES

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Mr. Cuellar. Thank you, Mr. Chairman. Chairman Greenspan, I appreciate the work you have done as Chairman of the Board of Governors for the Federal Reserve Board and, of course, your staff for so many years. We really appreciate your work.

Let me direct your attention to the trade deficit. The United States back in 2004 ran a trade deficit on goods and services in an amount of about $618 million. That was up $121 billion--sorry, billion dollars from the 2003 trade deficit, which was at $497 billion.

What does that mean when you talk about this large trade deficit that we have? That is, the net importation of goods and services, instead of having more exportation--as you know, more exportation means more jobs for the American people--but when you look at this large trade deficit that we have, what does that mean in simple terms to the American economy and what does that mean in simple terms to the ordinary American?

Mr. Greenspan. Well, first let me just say that all of the analysis that economists have been involved with over the years has found little relationship between the trade deficit and jobs. We have had low unemployment rates with large deficits. We have had low unemployment rates with large surpluses. The issue is largely the extent to which we interrelate with the rest of the world. And it turns out that the net imports of goods and services moves very closely, with the so-called current account deficit, which is a measure of how much money we have to borrow to effectively finance the net trade deficit. And what we do in that process is open up our economy to a significant amount of foreign investment, and, at the same time, open up our economy to very considerable access to goods from abroad, which we obviously purchased because they are either cheaper or better than what we produce at home.

And the way things stand at this stage is that the combination of the desire on the part of the American people to purchase foreign goods as distinct from American goods and the willingness of foreigners to finance imports by the amount of money they are willing to invest here, that combination is what is creating these numbers.

We would not have a trade deficit, if there was not an interest on the part of Americans to buy foreign goods. Remember, there wasn't 50 years ago--I mean we basically had a large trade surplus and imports were not all that large. But that has changed, and it has changed because Americans have perceived that the quality and the price of foreign-made goods is to our satisfaction. If our views change, that figure is going to go down. Or if foreigners are increasingly less willing to invest at the rate, the $600 billion rate they are investing, we won't be able to finance that. It is basically an issue of choice on the part of the American people of what we want to do with our purchasing power.

Mr. Cuellar. You are saying that the trade deficit, when you look at this chart up there, has no effect on the employment level in the United States? Is there any concern to have a trade deficit besides saying Americans want to buy more foreign goods? Are there any concerns we ought to look at?

Mr. Greenspan. Yes. The concerns really in large part reflect the fact that the current account deficit, meaning the borrowing that is done to finance those, accumulates over the years and that debt to foreigners requires us to pay interest on the debt, and that hence gets to an even larger amount.

What we have to be sure of is that everything is in balance. To the extent that we don't want to create too large a net debt to foreigners who may not wish to finance it at some point, we obviously should constrain our appetite for imported goods.

But the one thing that works very well for us is that we have prices and exchange rates and differential wage rates in various countries. And markets create a balance of these things. And it is one of the reasons why globalization has effectively improved the standard of living in the United States, very materially in my judgment, and as best I can judge has improved the standards of living of all of those who have chosen to engage in open free trade.

It is a very complex set of institutions that are involved in this and there are a lot of people who are disadvantaged by severe competition, whether it is domestic competition or foreign competition. And what we have learned is that as difficult as competition is for a lot of us, and very few of us like our competitors, it is tough, we have to acknowledge the fact that competition has actually enhanced standards of living and has made us all work harder, better, and created I think a better society.

Mr. Cuellar. Thank you, Mr. Chairman.

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