of world-wide inflation, which also affects surplus countries, it would be too much to expect these countries to pursue fiscal and monetary policies which would add to these inflationary pressures. Exchange Rate Adjustments By Surplus Countries Countries in persistent balance-of-payments surplus could, however, revalue their currencies, as Germany did last year. This is an efficient method because it concentrates price changes, in the first instance, on international transactions. It also helps dampen inflationary pressures within surplus countries and it may be welcome to them for that reason. However, export and import-competing industries, will resist this approach, particularly in a situation in which they are faced with rapidly rising costs. The resistance may be less if changes are small and gradual. By the U.S. The question may be raised whether the U.S. could not restore balance in its external accounts by increasing the official dollar price of gold. There are serious obstacles to this course of action which stem from the preponderant role of the U.S. in the world economy and from the role of the dollar as a key currency. If the U.S. attempted to devalue unilaterally, most countries would simply follow suit in order to maintain their competitive position in world markets. Any exchange rate realignment would have to be negotiated-and a downward adjustment of the dollar would probably be no easier to negotiate than an upward adjustment of certain foreign currencies. There are several distinct disadvantages to an increase in the dollar price of gold. It would probably be more harmful to the role of the dollar as a key currency than other forms of currency realignment in terms of the continued willingness of central bankers and private holders to continue to hold dollars. It would reward present holders and producers of gold, penalize present dollar holders, and it would be a backward step in the evolution of the world monetary system away from gold. Import Surtax and Export Subsidy It has been suggested that instead of a formal devaluation, the U.S. might improve its competitive position in the world market by an import surtax and export subsidy on all merchandise trade. This would be a de facto devaluation. It would not distort the structure of domestic production since it would apply across-the-board and market forces would continue to operate. It would be temporary and could be terminated when it is no longer needed, e.g., if the fundamental imbalance is corrected by exchange rate adjustments, or if inflation abroad catches up with inflation in the U.S. There are drawbacks, however. The measure could undermine confidence in the dollar if it is viewed as a pre cursor of devaluation. Also, some foreign countries may follow suit. Finally, there is a danger that a large number of exceptions would be introduced which could turn the scheme into a protective measure for specific industries. But the proposal deserves consideration as a shortterm device, provided it is subject to some form of international surveillance; and it may have its uses as a bargaining tool in negotiations for exchange rate realignment. Specific Restraints on International Transactions As a general rule, such measures are least appropriate because: -They are selective, distort the pattern of production and tend to perpetuate existing inefficiencies, -They are most likely to provoke foreign retaliation. This is particularly true of selective import restrictions. Likewise, any intensification of existing restrictions on government procurement would be undesirable because it would seriously prejudice our chances to preserve and improve our access to foreign markets, particularly for such important U.S. exports as aircraft and capital equip ment. Export subsidies also have a protective effect; they are self-defeating in the end because exporting countries tend to align their practices fairly promptly. (However, indirect measures, through the tax and credit systems, may have a slight advantage because of their lower visibility.) Selective Restraints on Capital Exports have traditionally been considered less objectionable than restrictions on current transactions because (a) fewer people are directly affected by such controls; (b) such controls are less likely to provoke countermeasures; (c) they are more easily phased out; (d) their general economic impact was thought to be more limited. The question arises, however, whether higher priority should now be assigned to the free flow of capital, in view of the growing importance to the United States of direct foreign investments and of the returns therefrom. So far as present U.S. capital restraint programs are concerned, it is generally agreed that they have probably benefited the U.S. balance of payments by shifting the locus of financing abroad; but it is questionable whether these controls will continue to yield significant net benefits, even in the short-run; and the rising costs, in terms of loss of future investment earnings, suggest that they should be phased out. There are some steps we could take in this area, however, which would be legitimate and beneficial for our balance of payments. First, we should increase pressure on surplus countries to remove their restrictions on commodity imports and capital exports and to increase their foreign aid programs. Second, we should make every effort to increase the export consciousness of our industry and to eliminate any constraints and disincentives to U.S. exports. Third, we should remove any artificial incentives to capital exports such as may be inherent in our tax system, and we should work toward the reduction of incentives abroad which tend to induce capital outflows from the United States. Fourth, we should review existing impediments to foreign investment in the United States. Definition of Balance-of-Payments Deficit Since foreign thinking about our balance of payments is influenced by the way it is presented in our statistics, we should avoid exclusive reliance on presentations which, as we have seen, tend to exaggerate the magnitude of the problem, particularly in years in which short-term capital movements are important. More emphasis should be given to a third measure, the "basic balance" which includes such items as trade, services, government expenditures and long-term capital flows but excludes short-term capital movements. THE UNITED STATES BALANCE OF PAYMENTS A LOOK AHEAD By Hendrik S. Houthakker I. BALANCE OF PAYMENTS: RECENT TRENDS AND THE PROJECTED For more than a decade, the United States balance of payments has been considered a problem. According to the two most common balanceof-payments measures, the United States has usually been in deficitsometimes by substantial amounts. There have, of course, been exceptions: on official transactions, there were surpluses in 1966, 1968 and 1969, and there was a small liquidity surplus in 1968. (In the absence of special financial transactions, the liquidity balance would have been in deficit by $2.6 billion, instead of the $171 million surplus actually recorded.) Nevertheless, the continuing general pattern of deficits, accompanied by the decline in the current account (including unilateral transfers) from a $5.9 billion surplus in 1964 to a $0.9 billion deficit in 1969, have been the source of continuing concern. It is not, of course, simply the fact of deficits which has been the source of concern. During the 1950's, the liquidity balance of the United States was in deficit every year but one (1957), yet there was little deep concern about the balance of payments until relatively late in the decade. This was because deficits were correctly seen as not necessarily bad in themselves. At a time when the United States still had a predominant position in the international economy, and the balance of payments difficulties of many of its trading partners resulted in continuing balance of payments restrictions, it was widely considered desirable for the United States to run deficits: they would help restore the balance of payments strength of other countries, and thereby set the stage for a relaxation of exchange restrictions and the growth of a freer international monetary system, with benefits for international trade and investment. In those circumstances U.S. deficits contributed to a better and more efficient international system. The change in attitude toward U.S. deficits came in the latter part of the 1950's. At the end of 1957, the U.S. gold stock totalled almost $22.9 Hendrik S. Houthakker is a Member of the Council of Economic Advisers. |