Worldly Questions
Subject World financial reform, Trade deficit
Topic International Finance, International Trade
Key Words Trade Deficit, Recession, Inflation
News Story

The inauguration of George W. Bush as President may usher in a change in U.S. economic policy with respect to a number of domestic and international issues. In the domestic arena, the foremost question is whether a tax cut is needed to prevent a recession. As for international economic issues, the Asian financial crises, followed by the Russian and Mexican crises were challenges that the Clinton Administration had to face. The Bush Administration may be occupied with the ever-growing trade deficit, high dollar, competition from the euro, antiquated world financial structure, and the impact of a U.S. recession on other economies.

The U.S. trade deficit has been rising in the last decade. Borrowing, typically by foreigners buying U.S. bonds or other securities, has financed the increasing trade deficit. Some economists worry about this increased dependence on foreign investment because of the risk that a change in investor confidence can cause widespread selling of these financial assets. The ensuing shortage of capital will make it difficult for the Federal Reserve to cut interest rates at a time when the economy is retreating.

The Clinton Administration supported a high-dollar policy. Paul O'Neil, Bush's choice for Treasury Secretary, has stated that he also supports this policy. When the dollar is high vis--vis other currencies, exports decline and imports increase. As a result, investment in the export sector is discouraged and the trade deficit tends to increase.

An economic slowdown in the U.S. will reduce inflationary pressures and reduce the trade deficit. However, if the U.S. decline produces a sharp decrease in exports, especially from Asian economies, this may trigger another worldwide financial crisis.

Other international issues such as the slow pace of financial reform, worker abuses, poverty, and the establishment of international environmental standards will be issues confronting the Bush Administration.

(Updated February 1, 2001)

1. What organizations are primarily responsible for providing economic advice to the President? What is the makeup of these organizations?
2. What is meant by a high-dollar policy? How could such a policy be accomplished?
3. If the President decided that he wanted to reduce the trade deficit, what policies could he propose? If the Federal Reserve also decided that a reduction in the trade deficit was needed, how could they assist?
4. How does an economic slowdown in the U.S. affect other economies? Describe the changes that might occur to an economy like Japans.
Source Jeff Madrick, "Economic Scene," The New York Times, January 18, 2001.

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