Why the Dollar Won't Tank
Foreign cash is fueling investment
If the financial crises that hit Asia and Latin America in recent years demonstrate anything, it's the fickleness of international investors and the ability of shifting hot-money flows to undermine seemingly sound economies. Now, some Cassandras are wondering whether it could happen in the U.S. The reason: a surging current-account deficit that's headed for uncharted waters.
With America's exports battered by sluggishness and recessions overseas and with imports swollen by higher oil prices and a growing influx of low-price foreign goods, the trade deficit in goods and services will soar some $86 billion during 1999, estimate economists at J.P. Morgan. And that's not counting a projected $14 billion increase in the bill the U.S. is paying to service its mounting international debt.
All told, this year's current-account deficit could hit $350 billion, or 3.9% of gross domestic product--above the record level it reached in the mid-1980s just before the dollar began its dramatic plunge. If investors decide they've had enough and the dollar tanks, U.S. interest rates could take off, ending the bull market and imperiling the expansion itself.
The good news is that most economists don't see this as a near-term threat. And the reason has to do with the intrinsic health of the U.S. economy.
While current-account deficits always reflect a gap between domestic savings and domestic investment, economist Michael Gregory of Lehman Brothers points out that, in the 1980s, investment was actually falling as a share of GDP. Driven by an exploding federal deficit, national savings were simply falling faster, and capital inflows were needed to fill the void.
By contrast, in the 1990s, he notes, the U.S. has enjoyed rising rates of both investment and national savings. With the federal budget moving into surplus, much of the money pouring into the U.S. has been helping to finance a high-tech investment boom. And since this enhances productivity and growth, it should make it easier for the nation to service its foreign debt.
Two other trends underscore the point: One is that capital goods have accounted for about 60% of the growth in imports over the past five years. Another is that a rising share of capital inflows have taken the form of foreign direct investment in U.S. business operations. Indeed, Joseph Quinlan of Morgan Stanley Dean Witter notes that such investment last year came to a record $193 billion--enough to cover 83% of the current-account shortfall.
The bottom line is that there's probably a lot more patient capital out there than some think. Foreigners know that, for the time being, a relatively strong dollar and large trade deficit are needed to help ailing economies overseas. And they also know that their capital is being put to good use in an essentially healthy U.S. economy.BY GENE KORETZReturn to top
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Keeping a Lid on Pay Inequality
Canadians have narrowed the gap
It's a development that has long puzzled economists. The Canadian and U.S. economies are highly integrated and have been subject to the same forces of globalization, increased competition, and shifting technology. Yet pay and income inequality has risen sharply in the U.S. but has remained relatively subdued in Canada. What accounts for these diverging trends?
A study by economists Kevin M. Murphy of the University of Chicago, W. Craig Riddell of the University of British Columbia, and Paul M. Romer of Stanford University provides a possible answer. In both economies, they find that technological change has been raising job skill requirements and thus putting upward pressure on the wages of well-educated workers--and downward pressure on the pay of the less educated.
But whereas in the U.S. the ratio of the earnings of college graduates to those of high school grads rose sharply, to 180%, between 1980 and 1994, it actually declined slightly, to 157%, in Canada during the same period. The explanation is related to Canada's more aggressive efforts to foster post-secondary school education.
Provincial governments have not only kept college tuition much lower than in the U.S., says Riddell, but have also provided extra funding for expanded enrollments. Thus, the share of high school grads who go on to earn college degrees in Canada has exceeded that in the U.S. in recent decades.
This has narrowed the pay gap in two ways: by increasing the supply of skilled workers relative to demand and thus tempering their wage premiums--and by simultaneously reducing the supply of less-educated workers and thus easing downward pressure on their pay.BY GENE KORETZReturn to top