It is enough to drive economists nuts. They strive to teach students simple definitions. Then the media use the terms erroneously and undo everything. This happens frequently, especially whenever the U.S. Commerce Department releases quarterly tabulations of the nation’s balance of payments accounts.
Somehow, journalists always confuse the “current account” with the “capital and financial account.” This may sound like pedantic quibbling. It is not. Confusing the two accounts in news stories misleads the public on how international financial flows affect economic conditions here at home.
It shouldn’t be all that hard. Balance of payments accounts attempt to tabulate all flows of money into and out of a country. The overall BOP is divided into two subaccounts — the “current account” and the “capital and financial account.” (Before 1999 the latter was simply called the “capital account” and many economists still use only that term.)
The current account, which many reporters confusingly describe as “the broadest measure of trade,” is far more than that. It is a tabulation of all short-term financial flows. Trade in goods is included. So are payments for financial services, insurance, shipping, engineering design and other services. Also included are royalties for intellectual property such as films, TV programming, books, software and patents disseminated in other countries. Direct payments made by individuals, such as the $40 billion or so that foreign nationals living in the United States remitted back home, are included. So are funds sent abroad by churches and charities.
Government payments such as foreign aid or payments for military facilities in other countries are yet another component of the current account. Finally, interest, dividends, rent and business profits are included. This last rubric is income from investments, but most decidedly are not investments themselves.
These fall into the capital and financial account. They may be portfolio investment, such as a U.S. mutual fund buying stock in Swedish companies or a Dutch insurance company buying U.S. corporate bonds. It may be direct investment, such as 3M or Cargill building a new factory in Brazil or a Canadian firm building an office tower in downtown St. Paul.
It seems pretty straightforward. The balance of payments records all financial flows. Everything except investments goes in the current account; investments go in the capital account.
Commerce’s Bureau of Economic Analysis makes this pretty clear in its press release. It is headed “U.S. International Transactions.” There are two major subheadings, “Current Account” and “Capital and Financial Account.” Could it be clearer?
Evidently this is not clear enough. The New York Times ran a story Wednesday headlined “U.S. Trade Gap Reached Record $166.2 Billion in 2nd Quarter,” saying “the broadly based current account deficit … reflected the imbalance of the United States trade and capital flows.”
The Associated Press report, which the Pioneer Press ran, said: “The ‘current account’ report is considered the best measure of a country’s international economic standing because it tracks not just the goods and services reflected in the government’s monthly trade reports but also investment flows between countries.”
Many publications ran a Reuters story: “The U.S. current account gap widened again in the second quarter, growing to a record $166.18 billion, the Department of Commerce said Tuesday. The gap — the broadest measure of trade and investment flows between the United States and the rest of the world came in well above analysts’ expectations.”
CBS MarketWatch wrote: “The current account deficit is the broadest measure of the nation’s economic balance sheet with the rest of the world. It encompasses both trade and capital flows.”
Bloomberg News was no better: “The deficit in the current account, the broadest measure of trade because it includes investments, rose from $147.2 billion in the first quarter.”
Not all the media blew it. Forbes, Business Week and the Financial Times all ran pieces that didn’t confuse the two categories.
Again, why does it matter? The erroneous stories cited essentially stated that the U.S. balance of payments, including investment flows, showed a net outflow of $166 billion. In reality, this sum excluded investment flows that amounted to a total inflow of $147 billion. That sum is the amount the United States borrowed from other countries in three months and is added to much larger foreign debts amassed over decades. It is the new IOU we just signed and threw on the pile already on the table.
Telling the public that investment flows are included in the current-account deficit is sloppy journalism. It obscures a key public policy issue. Reporters should check their old econ textbooks more often.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.