WASHINGTON – Treasury Secretary Paul O'Neill told Congress on Wednesday that the U.S. economy, rocked last year by a recession and the Sept. 11 terrorist attacks, "has regained its economic footing."
O'Neill predicted that the U.S. rebound would help lead the global economy to stronger growth by the second half of this year.
O'Neill delivered an optimistic assessment of U.S. growth prospects to the Senate Banking Committee, which called the hearing to listen to complaints from American companies that they are being hammered by the high value of the U.S. dollar, which has priced their goods out of overseas markets and opened them up to a flood of cheaper-priced imports.
However, even before the hearing began, O'Neill and other Treasury officials made it abundantly clear that the administration had no intention of changing its view that a strong U.S. dollar is in the best interests of the United States.
That declaration is copied from the Clinton administration, which also maintained that the U.S. economy reaps enormous benefits from a strong dollar, which helps to hold down inflation, provides consumers with a wealth of product choices from all over the world and attracts the billions of dollars in foreign investment the country needs to offset its huge trade deficits.
"I am convinced that the United States has regained its economic footing," O'Neill said, noting last week's report that the economy in the first three months of this year was surging ahead at a 5.8 percent annual rate, the fastest performance in two years.
"This performance is a testimony to the inherent resilience of our economy that over the past six months has continually surprised on the upside," he said.
O'Neill in his testimony took issue with a recent warning by the International Monetary Fund that the country's huge trade deficits were one of the biggest risks facing the recovery in the United States and the rest of the world.
O'Neill said the rise in the current account reflected the fact that investors around the world saw the United States as offering "extremely attractive rates of return" and was a testament to the "long term soundness and relative strength of our economy's fundamentals."
However, the committee heard a far different view from officials of the National Association of Manufacturers, the AFL-CIO, farmers groups and others who warned that the huge U.S. trade deficit was a threat to the economy that had already cost thousands of jobs. They blamed much of the increase in the deficit on a 30 percent rise in the value of the dollar since early 1997.
NAM President Jerry Jasinowski said the administration had to recognize the suffering an overvalued dollar was creating in the manufacturing world and work with U.S. allies to gradually reduce the dollar's value against other currencies, such as the Japanese yen and the European euro.
"The overvalued dollar is .... perhaps the single most serious economic problem facing manufacturing in this country," Jasinowski said in his testimony. "It is decimating U.S. manufactured goods exports, artificially stimulating imports and putting hundreds of thousands of Americans out of work."
C. Fred Bergsten, a prominent economist who heads the Institute for International Economics, a Washington think tank, told the committee that every 1 percent rise in the value of the dollar produces an increase of at least $10 billion in the current account trade deficit and he estimated currently that the dollar is overvalued by 20 percent to 25 percent.
The U.S. current account deficit, the broadest measure of trade, stood at $417.4 billion last year, near its all-time high of $444.7 billion set in 2000. If the dollar remains overvalued, Bergsten said, the U.S. current account deficit is likely to approach $500 billion this year and could hit $800 billion by 2006, an amount equal to 7 percent of the entire U.S. economy.
Bergsten said that the "worst policy" for the administration, faced with these enormous deficits, would be to continue its support for a strong-dollar and wait for market sentiment to change and start bringing the dollar down in what could be a very disruptive fall.
"It is time for the administration to change its policy toward the dollar ... to reduce the risk of the much more severe adjustment that will inevitably hammer us later if it continues to ignore the problem," Bergsten said.