Hastert vs POTUS

Denny Hastert is working his way up. Having practiced on minor White House aides, he is now beating up on the President himself:

Directed by House Speaker Dennis Hastert, Republicans this coming week will undertake a remarkable exercise: the public thrashing of President Bush's principles on a major initiative. House "field hearings" on immigration, scheduled for San Diego and Laredo, Texas, weren't designed with fact-finding in mind. Their intent is rather to batter the Senate-passed immigration bill, which embodies Mr. Bush's goal of combining border security with a guest-worker program for the 12 million illegal immigrants already here.

From today's Wall Street Journal.

Compared to previous speakers like Newt Gingrich, Hastert been almost invisible to the broader public. I would like to see a journalist write about the economic legacy of Dennis Hastert. Based on what I have seen, I doubt it would reflect the classically liberal free-market philosophy of most Republican-leaning economists.

The Current Acccount vs the Trade Deficit

A commentator asks:

Professor Mankiw, Would you please discuss the differences between current account deficits and trade deficits? They are often discussed as if they were interchangeable, but I notice that for some countries they diverge significantly.

Here is a brief overview.

The trade balance is the amount a country receives for the export of goods and services minus the amount it pays for its import of goods and services.

The current account is the trade balance plus the net amount received for domestically-owned factors of production used abroad.

Hence, if an American owns an apartment building in London, the rent he receives is part of the current account but not part of the trade balance. In essence, the current account is a very broad measure of the trade balance where the income from domestically-owned factors used abroad are considered an export of factor services and the payments for foreign-owned factors used here are considered an import of factor services. To continue our example, the current account treats our American landlord as if he were an exporter of housing services.

Two things to note: 1. If a Brit owns an apartment building in Boston, the treatment of the rent he receives is similar, but with the opposite sign for the U.S. current account balance. 2. When an American buys an apartment building in London (or a Brit in Boston), that purchase appears neither in the trade balance nor in the current account. It is a capital account transaction.

You might ask, when we write Y=C+I+G+NX, what is NX? The answer depends on how we define Y. If Y is Gross Domestic Product, then NX is the trade balance. If Y is Gross National Product, then NX is the current account.

For the U.S. economy, these two measures are close, and so economists sometimes use the terms interchangeably (even though they are not precisely the same). But for countries with large net foreign assets or debts, the difference can be larger.

The View from Down Under

Because CEA Chair Eddie Lazear recently drew some parallels between the U.S. and Australian current-account imbalances, it might be useful to review the Australian perspective on the U.S. economy:

As a result of persistent current account deficits, the foreign asset position of the United States moved from net external asset holdings of 13 per cent of GDP in 1980 to net external liabilities of 21.3 per cent of GDP in 2002. If the current account deficit were to remain at 5 per cent of GDP over the next ten years, United States net external liabilities would rise to around 56 per cent of GDP in 2014.

This would represent the highest ratio of net external liabilities to GDP in United States history. Nevertheless, there are a number of advanced economies with ratios of net external liabilities to GDP higher than this: the Scandinavian countries in the mid-1990s; and Canada, New Zealand and Australia at present. In terms of their wider macroeconomic performance, these countries do not seem to have been adversely affected by these relatively large stocks of net external liabilities....

The relevance of the Australian and New Zealand experiences may be that the United States could perhaps continue to run sizeable current account deficits for many years with no obvious harmful side-effects — provided the United States fiscal deficit is significantly reduced (or eliminated). If, over time, the United States fiscal deficit was significantly reduced, that might also see a significant narrowing of the United States current account deficit — but the experiences of Australia and New Zealand caution against automatically assuming that outcome.