The current condition of the United States’ trade could present a threat to the global economy, said Lawrence H. Summers, the president of Harvard University and former Secretary of the Treasury under President Clinton, at a talk Monday in Luce Hall.
In a speech sponsored by the Yale Center for the Study of Globalization, Summers stressed the troubling nature of the United States’ “current account deficit,” an economics term which means that the capital flowing into a country is greater than the capital flowing out. The large scale purchase of U.S. treasury bonds by nations such as India or China to supplement their own capital contributes significantly to the size of the United States’ current account deficit, Summers said.
Director of the Yale Center for the Study of Globalization and former president of Mexico Ernesto Zedillo said he was honored to have Summers speak.
“He is one of the great international economists, not only academically — he has also been a practitioner,” Zedillo said. “I think you could note that the topic he dealt with is absolutely central to the issue of globalization.”
Summers opened his talk by sketching out the United States’ CAD when compared with other economies. According to Summers, the United States’ CAD amounts to about $600 billion a year — 5.5 percent of the United States’ gross domestic product and 1.25 percent of the GDP of the entire world.
“The United States is absorbing two thirds of the current account surplus of the rest of the world,” Summers said. “Suppose the global economy rose in a completely balanced way. Each $1 increase in U.S. imports is then accompanied by a $1.50 increase in US exports.”
But, Summers said, the situation is actually far worse than it would appear on first glance. He said the tendency for the U.S.’s demand for imports to outpace foreign demands for imports and the comparative elasticity of U.S. imports with respect to U.S. income implies that as the world’s economy develops, the nation’s CAD will increase dramatically.
“I am aware of no credible argument that, without some form of significant discontinuity, the United States’ current account deficit will remain level, let alone decline,” Summers said.
Although Summers acknowledged that a borrowing economy is not necessarily a troubled economy, he said that statistics show the United States’ CAD warrants concern. Summers cited several examples of how the United States’ current CAD situation resembles that in troubled developing economies — low savings, investment in non-tradable goods such as real estate and high levels of official intervention from overseas.
The CAD will be a growing issue in the coming decade, Summers said, as economists have predicted the U.S. CAD will rise to as much as 8 percent of GDP in 2008. Some economists place the figure as high as 13 percent by 2010, he said.
“How long should the world’s greatest power remain the world’s greatest borrower?” Summers asked. “How long can the world’s greatest borrower remain the world’s greatest power?”
Audience members said they appreciated Summers’ perspective and the clarity of his speech.
“I think it was a brilliant presentation of our — situation around the world,” said T.N. Srinivasan, professor of economics and chair of the South Asian Studies department. “I think he is [an] outstanding economist and — policy maker.”
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