Caught Off Balance

A year ago, in a moment of New Year's euphoria, President Kennedy predicted that the chronic deficit in the U.S. balance of payments could be cut from $2.5 billion in 1961 to $1.5 billion in 1962--and might well be eliminated altogether in 1963. Last week the Administration ruefully faced the realization that the nation will show a payments deficit of at least $1.9 billion for 1962, and that there is no chance for balance until 1964 at the earliest.

The end of the U.S. gold outflow may even be farther away than that, because the 1962 payments deficit is worse than it looks. The "income" side of the ledger was artificially fattened when France. Italy and Sweden agreed to pay off ahead of schedule some $664 million in postwar U.S. loans. And "outgo" was probably reduced by several hundred million dollars because some European and Canadian banks refrained in 1962 from their usual year-end "window dressing"--the practice of bolstering cash balances for the annual report by temporarily pulling back money on deposit in the U.S.

One thing that threw the 1962 predictions off was the economic austerity program that Canada adopted last June. This strengthened the Canadian dollar and prompted investors who had previously been taking their money out of Canada to send $600 million north of the border during the third quarter of the year. But the fundamental reasons for the continuing payments deficit are longterm. Among them:

sbFOREIGN AID: U.S. military and foreign aid added some $3 billion to the payments deficit in 1962, and, says Treasury Under Secretary Robert Roosa, "the blunt fact is that these claims on our balance of payments will continue."

sbEASY MONEY: Since credit is abundant in the U.S. and borrowing costs are usually much lower than abroad, many foreign governments and businessmen prefer to get their loans in the U.S. In 1962, foreign borrowing in the U.S. probably totaled nearly $1 billion. Higher U.S. interest rates will discourage this outflow, but also might discourage U.S. economic growth.

sbINADEQUATE EXPORTS: U.S. exports in 1962 increased an estimated 6%, to $21 billion. But imports, which historically rise in a period of economic expansion, jumped 10% to some $16 billion.

Since the Administration is unlikely either to raise interest rates or to reduce foreign aid significantly, the only real hope for ending the U.S. payments deficit lies in a massive increase in exports. President Kennedy's Trade Expansion Act is designed to achieve just that--but it is unlikely to have major effects before 1965.

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