Shooting Ourselves in the Foot at the G-20 Meeting

The G20 should not set target ranges for members' current-account balances. If they set any target ranges it should be for members' national saving rates. The US national saving rate (national saving divided by national income) last year was -1.5%, i.e., the US is now saving less than nothing. The US net domestic investment rate (net domestic investment divided by national income) was 1.8%. The difference between these two figures is the US current account deficit, which equaled 3.3% of national income. Were it not for Chinese and other foreign countries and nationals who invested in the US, the US net domestic investment rate would also have equaled -1.5%; i.e., the current account deficit measures the amount of investment done in the US by foreigners net of what Americans invest abroad. So we should be very grateful to the Chinese and others for investing in our country.

But to blame, as US Treasury Secretary Geithner is wont to do, our current account deficits on the Chinese and to claim they are manipulating their currency just because they are running a fixed exchange rate regime (something the US did for decades and that every US state does routinely with every other US state) is to supplant economics with demagoguery. If America wants to reduce its current account deficit, it has but one option--consume less and save more.