Cutting the Losses

For the past half-dozen years, a remarkable number of economic decisions have been affected by one persistent problem: the U.S. balance of payments deficit. To fight it, the Federal Reserve Board raised interest rates, the Administration pleaded for stable wages, Congress toughened the tax treatment of businessmen's foreign earnings and obliged tourists to cut back on their overseas souvenir buying. Last week the first estimates for 1964 heightened Washington's confidence that the U.S. at long last may be closing its bothersome and embarrassing deficit. Preliminary figures show that the deficit, which was $527 million in 1963's fourth quarter, declined in 1964's opening quarter to between $250 million and $375 million.

Exports Up. The improvement came partly because the U.S. sold wheat to Russia and partly because some payments that Washington had hoped to collect last year did not come in until this year. But there was much more to it than that. The proposed U.S. tax on purchases of foreign stocks--among many other deficit-fighting measures put forth under President Kennedy--has already reduced capital outflow. The threat of this tax, which is likely to become law this summer, has already been effective because the tax will be retroactive to last July.

At the same time, Europe's inflation has made U.S. exports more competitive in world markets, shaken confidence in foreign currencies and prompted many U.S. and foreign investors to shift their "safe haven" capital to the U.S. Much of this money comes from wealthy Latin Americans, oil-rich Arabs and, Washington believes, even from Communist bigwigs--possibly including the Red Chinese. Investors are also uneasy about a slide in the French stock market, Italy's new austerity program and the forthcoming British elections. Says a top banker in Paris: "The economic news from the U.S. is good, and the big professional investors want to be in on it."

Pressure Off. If the trend continues, Lyndon Johnson will have another campaign point, and the U.S. will enjoy much more freedom of maneuver in foreign and domestic economic policy. For one thing, the better balance relieves the U.S. of much political pressure from the French, who have brandished their large hoard of dollars as a weapon and, says Chief Economic Adviser Walter Heller, often made U.S. officialdom feel "like mendicants"; last year the French drained off $500 million worth of U.S. gold and threatened to convert even more dollars. No one can be certain if or when the U.S. will achieve a surplus--partly because foreign nations will take steps of their own if they begin to run big deficits. But the Treasury believes that within a year the U.S.'s annual payment position will be within $500 million of balancing.

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