E C O N O M I C R E P O R T O F T H E P R E S I D E N T

services and the international flow of financial resources. In fact, one can asreadily argue that the desire of foreigners to acquire attractive U.S. assets isresponsible for the U.S. trade deficit as the reverse.This link between the flow of goods and services and the flow of financialresources highlights another way of looking at the trade and current accountdeficits. From a national accounting perspective, a country’s current accountbalance equals the difference between national saving and domestic investment(plus a statistical discrepancy and after minor adjustments). When thedemand for domestic investment in the United States exceeds the pool ofnational saving, borrowing from foreigners—a rise in national indebtedness—makesup the difference. Conversely, when saving exceeds investment,the surplus is invested abroad.Is it good or bad for a country to get into debt? The answer obviouslydepends on what the country does with the money. What matters for futureincomes and living standards is whether the deficit is being used to financemore consumption or more investment.In this respect, the deficit in the 1990s differs radically from that in the1980s. The United States experienced large current account deficits in themid-1980s (Chart 6-7), when net domestic investment fell as a share ofGDP, and net national saving fell even faster. By contrast, in the currentexpansion the deficit has been associated with rising shares of GDP devotedto both investment and saving. The deficit’s growth indicates that the rise innational saving, due to reduction of the Federal budget deficit, has not keptpace with the increase in investment. It signals rising investment rather thanfalling saving.That a falling trade balance can coincide with a robust economy is nosurprise; indeed, both economic theory and empirical observation lead oneto expect such a pattern. A strong economy raises demand for imports and isgenerally associated with high demand for investment. As Chart 6-8 shows,GDP growth in the United States’ trading partners as a group fell sharply in1998, reflecting weaker growth in Europe, recession in Japan, and outrightcrisis in emerging markets. By contrast, U.S. growth remained robust. Sincethe end of 1997, the U.S. trade deficit has risen from about 1 percent ofGDP (its average throughout the mid-1990s) to about 3 percent. Thedramatic difference between U.S. and foreign growth appears to be theprimary cause of the increase in the deficit, as demand grew more rapidly forall products, including imports, in the United States than elsewhere. Fromthe perspective of capital flows, expected returns on investment have beenrelatively attractive in the United States. As a result, the United States hasabsorbed substantial net inflows of capital. Whether viewed as a phenomenonin the international flow of goods and services or as a phenomenon inthe international flow of financial resources, the result of these recent devel-232 | Economic Report of the President