Dear WSJ: Account Imbalances Didn't 'Cause' Recession

Editor, The Wall Street Journal

200 Liberty Street

New York, NY 10281

To the Editor:

Alberto Alesina and Luigi Zingales say that "this recession is unusual is that it was caused in large part by a significant current-account imbalance due to the low savings rate of Americans (families and government)" ("Let's Stimulate Private Risk Taking," Jan. 21). Not so. A current-account imbalance might reflect conditions that portend recession, but it cannot cause a recession.

To see why, suppose that Uncle Sam declares Canada, Europe, China, and Japan to be parts of the United States. With no further changes, most of the U.S. current-account deficit would immediately disappear. Much of what were formerly classified as imports, exports, and international capital flows would now lose those special classifications – just as purchases, sales, and investments between, say, Nevada and Utah are adorned with no special classifications. And yet, surely no recession can be cured merely by reclassifying economic transactions.

But just as no such reclassification can cure a recession, no recession can be caused by the initial classification of economic transactions. Whatever foolish monetary or fiscal policies might spark bad investments, whatever irrational bubble-izing behaviors might move the market, or whatever unwise regulations (or lack of regulations) might encourage unsustainable investments, it is REAL factors such as these that bear the blame for market unrest and not the arbitrary measurement called the "current-account imbalance."


Donald J. Boudreaux

Don Boudreaux is the Chairman of the Department of Economics at George Mason University and a Business & Media Institute adviser.