CLEVELAND — President Reagan, stymied by the government's failure to make a dent in the nation's record trade deficit, found sunshine Monday in the gloom of that imbalance: The flow of foreign capital to this country is a sign that the United States is a sound investment, he said.
And, Reagan said, while other nations maintain trade surpluses, "The United States, which has been the engine keeping the world economy moving forward, has a trade deficit, because our growing economy enables us to buy their goods."
The trade deficit, which reached an all-time high of $17.6 billion for the month of October, an increase of 25% over September, has resisted solution and has become a sensitive political issue in the young presidential campaign.
The White House called the October figure a disappointment when it was made public in December but has been fending off efforts to impose protectionist measures intended to restrict foreign imports that critics of the President maintain are taking away American jobs.
In the past, the President has been much more critical of the trade deficit--the measure of the movement of goods and services across the nation's borders. In November, he said it "remains far too high and we must remain absolutely diligent in our efforts to bring that deficit down."
While not rejecting the need to trim the deficit, Reagan said Monday that in focusing on the trade deficit, "we must beware of single-entry bookkeeping."
"The other side of the ledger shows that the growing, dynamic U.S. economy has attracted $159 billion in foreign capital into the United States. Trade deficits and inflows of foreign capital are not necessarily a sign of an economy's weakness," he said in an address to the City Club of Cleveland, a 75-year-old public policy forum.
Reagan's view was challenged by Nobel Prize-winning economist Franco Modigliani of the Massachusetts Institute of Technology in Cambridge, Mass.
In a telephone interview, Modigliani said the President was demonstrating "a profound misunderstanding of the role of borrowing abroad."
"It's perfectly true this borrowing abroad for the purpose of increasing one's capital may be an indication that you have good investment opportunities," he said. "But when you have capital imports resulting from and produced by a $200-billion fiscal deficit, then that is a sign of weakness in, and madness in, the government that allows that to happen."
Administration officials have said that for fiscal 1989, beginning next Oct. 1, Reagan will submit a budget in which the deficit will be $136 billion--the figure ordered by the Gramm-Rudman budget balancing law. But outside economists have said that the government's planning is based on overly optimistic economic assumptions and that the deficit figure, in reality, will be higher.
While not questioning Reagan's assessment of the role of the trade deficit in the nation's overall economic picture, Jerry Jasinowski, chief economist of the National Assn. of Manufacturers, said in another interview that the rate of growth of the United States' international debt "has been extraordinarily fast and has been the principal cause" of the instability in world currency markets that has brought generally sharp decreases in the value of the dollar.
"We and the Administration and the country in general are looking forward to a decrease in the trade deficit and we ought not to pretend that the size of the trade deficit is desirable," he said. Indeed, economists are predicting a slight drop in the trade deficit when November's figures are announced Friday.
First 100 Years
Reagan pointed out that the United States ran a trade deficit during its first 100 years, in its transformation from an agricultural to an industrial economy. Now, in the move from "the industrial age to the information age, we continue to attract investment from around the world."
"Some people call this debt," he said. "By that way of thinking, every time a company sold stock, it would be a sign of weakness and it would be much better to be a company nobody wanted to invest in rather than one everybody wanted to invest in."
Referring to California's "external debt" to other states and nations, he asked: "Does this augur bad days ahead for California? On the contrary, one might argue it's a sign of strength."
"Historically fast-growing economies often run deficits in the trade of goods and services, experiencing net capital investment from abroad," the President said, describing the phenomenon as "predictable and up to a point desirable."
In a look at the overall performance of the economy, Reagan sought to portray the fruits of his seven years in office as leading to growing employment nationally and in Cleveland.
He pointed out that the number of jobs in the United States increased by 3 million last year and that unemployment in Cleveland had fallen from 15% in 1979 to 10%.