Is US Budget Deficit Losing its Evil Twin?

IS the United States the world's largest debtor nation? Nope. United States-owned net assets abroad are probably about equal to the assets owned by foreigners in the US, says David Rolley, a DRI/McGraw-Hill economist.

Was the Gulf war profitable for the US?

Yes, at least from an international payments standpoint. Payments made by Japan, Germany, Saudia Arabia, Kuwait, and the United Arab Emirates could improve the US balance of payments by $25 billion this year, says Lawrence Veit, an economist with Brown Brothers Harriman, a New York investment bank.

For years, the deficit in the US current account, which measures the country's performance not only in merchandise trade but also in investments and services, was regarded as a twin evil with the budget deficit. Is that trade deficit still so bad?

Nah. ``It is a completely manageable deficit,'' says Mr. Rolley. ``We should have no problem financing it.''

He's forecasting a current-account deficit this year in the $40 billion to $50 billion range. Mr. Veit says $50 billion.

Another economist, Lawrence Kudlow of Bear, Stearns & Co., predicts only $30 billion, about 1 percent of the nation's total output of goods and services.

These numbers are well down from the $99.3 billion deficit in 1990, reported earlier this week by the Commerce Department. They are also more optimistic than the consensus of 50 economists from several countries compiled by Globescope Publications Inc. in Glen Carbon, Ill. Their average forecast puts the deficit this year at $87 billion and $79 billion next year.

Several factors are working in favor of an improved US trade balance:

1. The price of oil imports should be lower this year than last year. Rolley assumes $17 a barrel in 1991; Mr. Kudlow $18. The average last year was about $24.5. That could reduce the oil import bill by $10 billion to $12 billion.

2. With a recession in the US, the balance of trade in goods should improve as Americans are more reluctant to buy imported cars, clothes, home furnishings and so on. Veit speaks of a $20 billion reduction in the merchandise trade deficit.

3. US exports should continue to grow, since the economies in such major markets as Japan and Continental Europe continue to expand, though at a slower pace than in 1990.

4. Kuwait has awarded US companies 70 percent of the 171 contracts so far for reconstruction of that nation. Total cost of that rebuilding could amount to more than $100 billion over the next three to five years.

5. Though the US dollar has strengthened in value on the foreign exchange markets in recent weeks, American goods remain highly competitive in most foreign markets.

``The dollar is an undervalued currency,'' says Veit. ``We really have some fine companies in the US. The United States economy is a lot better than advertised.''

He notes that spending on plant and equipment by US companies has increased from 6 percent of national output in 1971 to 9 percent last year, expenditures that modernize the economy.

Kudlow points out that productivity in US manufacturing grew more than 4 percent a year between 1982 and 1990. That, combined with strict cost control, enabled US labor costs per unit of production to fall by 7 percent during 1982-90.

6. Official figures put the US net external debt at $700 billion at the end of 1990. But this hasn't resulted in a negative flow of net interest and dividends yet. In other words, last year American companies earned $2 billion more from their investments abroad than foreign companies earned from their's in the US.

In theory, this could be because American investors got better performance from their foreign investments than foreigners did here. In fact, Rolley says it's an accounting phenomenon. US investments abroad are measured officially by their book value - the cost of the original investments. Since these were mostly made decades ago, they are now actually worth at least four times as much today. Foreign investments in the US are more recent and have not enjoyed nearly as large a capital gain over the years.

Finally, some economists contend that the US international payments deficit is linked closely to the size of the budget deficit. Veit says: ``History proves that to be an outrageous lie.''

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