Part of the solution surely involves reducing the federal budget deficit—a policy with merit even apart from its impact on the trade deficit. (For more background on federal budget matters, see Multifamily Executive, February 2004, p. 64.) Unfortunately, there is, as yet, no political consensus on how this should be done, making substantial improvement unlikely in the short term.
And there’s another side to the needed adjustment. As Federal Reserve governor Ben Bernanke pointed out at a March lecture in Richmond, Va., much of the capital inflow in recent years has resulted not in more business investment with corresponding improvements in productivity, but rather in more houses and higher house prices, both of which have encouraged greater consumption.
Mark Obrinsky is chief economist for the National Multi Housing Council in Washington, D.C. “The greater the extent to which capital inflows act to augment residential construction and especially current consumption spending, the greater the future economic burden of repaying the foreign debt is likely to be,” Bernanke said.
Here’s another way to say this: we’ve largely wasted the huge capital inflow of recent years on a binge of house buying and consumption. It’s time to right this ship and get it moving forward again.