Twin deficits, growth and stability of the US economy: Editor's introduction

摘要

This Special Issue of the Journal of Policy Modeling on "Twin deficits, growth and stability of the US economy" arose out of the session that I organized and chaired at the Annual Meeting of the American Economic Association held in Boston on January 8, 2006. The term "twin deficits" was coined in the early 1980s during the Reagan presidency, when both budget and trade deficits soared. Those who believe that budget and trade deficits are "twins" believe that large US budget deficits lead to higher interest rates in the United States, which attracts funds from abroad, and these in turn lead to an overvaluation of the dollar and to US trade and current account deficits. However, from basic open-economy macro, we know that budget deficits lead to trade deficits only if budget deficits are larger than net private domestic savings. Since budget deficits, net private domestic savings, and trade deficits are jointly or simultaneously determined, there is no reason for budget deficits to necessarily or directly lead to trade deficits (i.e. for them to be twins). In fact, inspection of the time series data show that US budget and trade deficits seemed to move together (i.e. to behave as twins) only in the 1980s and from 2001 to 2004, but not in the 1990s and in 2005. "Growth" is included in the title of the Special Issue because a tax reform that reduces taxes can stimulate growth only up to a point. Finally, unsustainable US trade deficits can be dangerous because they could lead to a collapse of the dollar, higher interest rates and lower growth in the United States, and to world economic instability. These are the topics, which the papers in this special issue address.