Staying Competitive:
U.S. Economic Policy
Review By Ronald McKinnon
Fred Bergsten and the Institute of
International Economics, The United States
and the World Economy: Foreign Economic Policy for
the Next Decade. Washington, DC: IIE Press,
2005, 488 pp. $26.95.
The United States and the World Economy:
Foreign Economic Policy for the Next Decade suggests
policy changes to resolve the economic
problems of the United States
and the implications of these suggested
policies for the rest of the world. The
authors are drawn from the Institute
for International Economics (IIE). C.
Fred Bergsten, director of the IIE,
leads with a 50-page essay entitled "A
New Foreign Economic Policy for the
United States," whose title aptly
explains its content. The meat of the
book lies in Bergsten's piece, with the
rest of the thirteen chapters further
developing some of Bergsten's ideas.
In proposing an agenda for improving
U.S. foreign economic policy for the
next decade, Bergsten is often on the side
of angels. He wishes to counter the
domestic protectionist backlash against
globalization by pushing Congress to
extend the president's trade promotion
authority in order to complete the multilateral
Doha round of negotiations
under the World Trade Organization
(WTO) by 2007-including cutting agricultural
protectionism everywhere. He
backs this assertion with the convincing
argument that per-capita income in the
United States has benefited enormously
from previous trade negotiations and
that this could continue into the future.
A purist might quibble with some of
the institutional mechanisms that
Bergsten proposes for bolstering
America's free trade ethic. He, along
with Lori Kletzer and Howard Rosen in
a follow-up essay, wants to greatly
expand trade adjustment assistance for
workers harmed or displaced by manufactured
imports or outsourcing in the
service area. However, there are potential
problems with the large, new
bureaucracies that may be required for
such expansion. For example, these new
establishments might struggle to differentiate
between trade-related distress
and pure distress. Another option
would be to strengthen general unemployment,
welfare, and educational
benefits in the face of rapid technical
change, whether the distress is traderelated
or not. More questionable is his
support for new bilateral or regional
trade agreements that, of course, cut
across the multilateral grain of the
WTO. Most dubious of all is his proposal
for a human capital tax credit, as
discussed in the otherwise excellent
essay by Catherine Mann on the outsourcing
of services. This is a particularly
dangerous prescription when U.S.
fiscal deficits are already out of control.
On the other hand, Bergsten is second
to no one in raising the alarm over
escalating federal fiscal deficits and
their link to rising current account
deficits in the U.S. balance of payments.
That theme is strongly reiterated
in Michael Mussa's essay,
"Sustaining Global Growth while
Reducing External Imbalances."
Indeed, all of the authors agree that
meager saving by American households
and negative saving by the federal government
is the root cause of the trade
deficit. Bergsten and Mussa express their hope that the fiscal deficit will be
reduced in the near future, but Mussa
muses that this may not happen because
of the U.S. demographic problem with
rising Medicare expenses.
Whether the U.S. saving deficiency
increases or decreases in the future,
these authors-joined by Nicholas Lardy
in his essay on China and, most vehemently,
by Morris Goldstein in his essay
on the international financial architecture-
all advocate a large devaluation of
the dollar as a first step in reducing the
U.S. current account deficit.
Unfortunately, since 2001, the dollar
has depreciated significantly against the
currencies of the major industrial
countries; for example, it has declined
by over 30 percent against the euro.
Thus the IIE authors all focus on the
East Asian bloc's ability to keep the renminbi
(Chinese paper currency) stable
at 8.28 yuan per dollar since 1994, a
feat that has been possible in large part
because of China's growing strength.
They suggest that if China appreciates
the renminbi by 20 to 25 percent, the
U.S. current account deficit might be
reduced by 1 to 2 percent depending on
whether China's appreciation induced
similar appreciations in other East
Asian countries.
Quite incredibly, none of the authors
in this far-ranging volume provide any
econometric support-or even a theoretical
model in a technical appendix-to
demonstrate the quantitative impact of a
20 to 25 percent appreciation of the
renminbi on China's trade surplus or
on the U.S. trade deficit. Astonishingly,
this unsubstantiated projection of the
impact of an appreciation of China's
currency is highlighted as a central conclusion
in the volume's Executive
Summary.