Raghuram Rajan: Who says the dollar is an exorbitant burden for America?

Subscribe to enjoy similar stories. A prominent economist once told me that macroeconomic policy debates are all about the prime mover, to which other variables respond. The implication, he explained, is that “You can invert policy prescriptions simply by claiming a different forcing variable." A paper by Stephen Miran, published before he was nominated to chair US President Donald Trump’s Council of Economic Advisers, does precisely this.

Since his views likely reflect those of the administration, they warrant close attention. The traditional view of why the US runs chronic trade deficits is that it overspends, owing largely to its fiscal deficits (the ‘forcing variable’). But the true forcing variable, Miran argues, is the rest of the world’s hunger for US financial assets, especially Treasury bonds.

Foreigners want ever more US Treasuries for their foreign-exchange reserves and for financial transactions, and the US has had to run large fiscal deficits to meet this exorbitant demand. The resulting capital inflows keep the dollar too strong for US exporters to compete, leading to persistent trade deficits. The argument is unpersuasive.

First, consider the timing. The US started running a steady trade deficit in the mid-1970s. It began running a steady fiscal deficit around the same time, with the exception of the late 1990s, when capital-gains taxes and private consumption soared because of the dot-com boom, temporarily shifting the locus of US overspending from government to households.