NABE Panel: The Market Can Handle the Trade Deficit
March 2006
“NABE members believe that the market can handle the trade deficit, and that it is not a major problem for U.S. employment,” says Stuart Hoffman, NABE President and Chief Economist, PNC Financial Services Group. “The federal deficit is a much larger problem, and economists have little confidence it will be addressed.”
The NABE Economic Policy Survey presents the consensus of a panel of 192 members of the National Association for Business Economics. Conducted semiannually, this survey was taken February 15 – March 1, 2006. May be reprinted in whole or in part with credit given to NABE. This is one of three surveys conducted by NABE. The other two are the NABE Outlook and the NABE Industry Survey. David Wyss of Standard & Poor’s, Kathleen Camilli of Camilli Economics, and Catherine L. Mann of the Institute for International Economics conducted the analysis for this report.
Survey Highlights
- Terrorism edged out energy prices as the biggest short-term problem facing the U.S. economy, according to 26% of respondents, up from 20% in September. Energy prices represented the biggest fear of 23% of respondents, down from 30%. Worries about the twin deficits held near their levels of six months ago.
- In the longer run, health care costs, the federal deficit, and the growth of the dependent population are the primary problems, each chosen by over one-fifth of respondents. The largest strength continues to be the flexibility of the economy, with technology close behind.
- Monetary policy is about right. Although 76% of respondents said current monetary policy is about right, the panel split on where it should go, with 35% wanting further rate hikes and 55% for leaving rates at their current level. There was near-unanimity (89%) that the Fed will tighten, with 5% the most likely eventual target. Further, 77% of respondents expect Chairman Bernanke to move to inflation targeting. Only 13% believe that the housing bubble should be a major factor in tightening.
- Fiscal policy is too loose, according to 76% of respondents. Although 82% thought budget deficits should be cut, only 16% thought deficits would actually drop, while 35% expect deficits to increase. How to reduce the deficit was less clear, with 20% wanting the tax cuts extended as first priority while 20% would vote not to extend.
- Most economists believe that the market can handle the trade deficit. Only 21% thought that the gap is a major threat to the U.S. economy, while 12% thought it was actually good. Yet, 32% thought the problem was greater for the creditor nations than for the United States.
- How to reduce the trade deficit was less clear; 39% thought the deficit would remain high for the next decade. On a scale of 1 to 5 (5 most effective), orchestrating global growth was the preferred strategy, ranking an average 3.4. Reforming the U.S. tax system was number 2, at 3.1. Raising tariffs or subsidizing exports were the least favorite cures, ranking 1.3 and 1.5, respectively. Most respondents (54%) thought that stronger growth abroad would reduce the trade deficit, while 42% anticipated a sharp drop in the dollar as part of the solution. Fully 83% of respondents thought a sharp drop in the dollar would eventually cut the trade deficit. Only 2% thought a tariff was desirable.
- High interest rates are the major threat from the current account deficit, according to 45% of respondents, which will slow growth. That the politics of the trade deficit would eventu ally lead to protectionism was the major worry for 26%, while 10% thought the weaker dollar was the primary problem. Two-thirds of respondents said that free trade is not hurting U.S. employment, and 71% said that outsourcing of services was not a problem.
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