Blanchard on current accounts

MIT's Olivier Blanchard presents his views on current account deficits later this week in the annual Mundell-Fleming lecture, at the IMF Seventh Jacques Polak Annual Research Conference in Washington, DC. This year the theme is capital flows, and Blanchard's papers is on Current Account Deficits in Rich Countries (PDF).

In this lecture he takes "a step back from current policy debates" and looks at "the case for policy intervention in the face of large current account deficits in rich countries." While "reducing these distortions ..is clearly desirable", he argues that the focus for policy should be on the distortions and "not the reduction of current account deficits per se." Blanchard concludes on this note:

If such measures were taken, existing simulations by the Fed and by the IMF suggest that imbalances will indeed be reduced, but will still remain large. The question is then whether more should be done. This is where this lecture is most relevant. The answer is maybe not, unless and until we have a good understanding of remaining distortions, and how they justify further policy intervention.

Comments

[Lafayette]

There is only one good reason for a current account deficit. It is in response to economic lethargy that provokes a climbing unemployment figure. It should be sharp and as short as possible in circumstances that are particular.

The European experiment (for lack of a better word presently to describe it) acknowledges the possibility for a deficit as long as it is not chronic. Otherwise, it is limited to 3% of GNP and for good reason. Beyond that threshold there is every reason to believe that it kindles inflation.

The impact on European countries, where taxation represents between 40 and as much as 52% of GDP, this rule is particularly difficult for countries that continue to think, as they have over decades, that the best way for politicians to get reelected is to spend before elections.

But the EU is not the USA, and in fact, the states are free to spend as they see fit - whether it adds to the total deficit or not. Is there any state in the union, in fact, that has legislation to forbid deficits?