Full Employment, Trade Deficits, and the Savings Glut: A Fascinating Debate in the Macro Blogosphere

April 2nd, 2015 at 9:29 am

The macro blogosphere is on fire, as Bernanke, Summers, and Krugman are having a fascinating discussion that starts with secular stagnation (persistently weak demand, even in expansions), adds a strong dose of international trade with an emphasis on the Bernanke savings glut observations, and thus speaks to a lot of what we think about here at OTE.

Read it yourself—PK provides all the relevant links—but let me amplify a few points that struck me as particularly germane. I will also claim some ownership as the Bernanke comments were made at our full employment event and I’ve tried (along with many others) to raise/amplify the international dimension of this in terms of our persistent and large trade deficits—which result in part from Bernanke’s savings glut—as a significant barrier to full employment.

Larry agrees with Ben’s amendment to the sec stag analysis, i.e., the importance of including the impact of global imbalances of savings over investment (trade surpluses) on our own trade deficits:

With the benefit of hindsight, I wish I had been clearer in seeking to resurrect the secular stagnation hypothesis that one should take a global perspective…Particularly in the 2003-2007 period it is appropriate to regard Ben’s savings glut coming from abroad as an important impediment to demand in the United States.  Ben and I are, I think, in agreement that it is important to think about the saving-investment balance not just for countries individually, but for the global economy.

This latter point, about the balance for the global economy, is essential to grasp. I tried to explain it here as follows, adding the role of the dollar as one of globe’s main reserve currencies:

When a country wants to boost its exports by making them cheaper using the aforementioned process, its central bank accumulates currency from countries that issue reserves. To support this process, these countries suppress their consumption and boost their national savings. Since global accounts must balance, when “currency accumulators” save more and consume less than they produce, other countries — “currency issuers,” like the United States — must save less and consume more than they produce (i.e., run trade deficits).

This means that Americans alone do not determine their rates of savings and consumption. Think of an open, global economy as having one huge, aggregated amount of income that must all be consumed, saved or invested. That means individual countries must adjust to one another. If trade ­surplus countries suppress their own consumption and use their excess savings to accumulate dollars, trade­ deficit countries must absorb those excess savings to finance their excess consumption or investment.

Larry very efficiently explains the mechanics at work:

If there are more countries tending to have excess saving than there are tending towards excess investment, there will be a global shortage of demand.  In this case countries able to devalue their currencies will benefit from generating more demand.  Global mechanisms that concentrate on causing borrowing countries to adjust without seeking to shrink the surplus of surplus countries will tend to push the global economy towards contraction…Secular stagnation and excess foreign saving are best seen alternative ways of describing the same phenomenon.

So, what to do? I’ve focused on the need to push back against those who manage their currencies, but Paul, after an absolutely brilliant, Krugmanesque summary of the debate, tying everything together with Mozartian efficiency, fumbles at the end, dismissing currency manipulation as “pretty much irrelevant” because the problem is weak demand and thus policies to solve it must boost demand.

But…but…but, the whole point of this new Bernanke-inspired insight, with which both Paul and Larry agree, is that the weak demand of sec stag is a function of excess savings over investment, and the savings glut, generated in no small part by the currency accumulation mechanism I describe above, is a central player.

Summers gets at this point in concluding that “…there will be a need for global coordination to assure an adequate level of demand and its appropriate distribution” which perhaps explains his recent suggestion that in negotiating the TPP trade deal (the passage of which he supports), we should “…use the substantial leverage we possess in areas that do bear directly on middle-class living standards. These include the prevention of inappropriate producer subsidies — including through manipulated exchange rates…”

Baker weighs in briefly on the magnitudes involved (the size of recent trade deficits), which he argues match those of large public investment projects progressives long for.

Perhaps a good place to stop for now is to point out that this idea—a substantial investment in public infrastructure—is something probably those on all sides of this debate agree on. That said, even while we’re arguing about the policy solutions, we’ve made important diagnostic progress here by bringing the international dimension—the savings glut and the resultant US trade deficits as a barrier to full employment—into the discussion.

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7 comments in reply to "Full Employment, Trade Deficits, and the Savings Glut: A Fascinating Debate in the Macro Blogosphere"

  1. Sandwichman says:

    “we’ve made important diagnostic progress here by bringing the international dimension… into the discussion.”

    You mean to tell me that up to now economists have left out the international dimension?


  2. Sandwichman says:

    Here is what Keynes wrote in 1933 in an article titled”National Self-sufficiency.” It seems to me that he was talking about something along the lines of “sec stag” and about the unlikelihood of being able to overcome it in the context of a global financial movements.
    :
    “…I have become convinced that the retention of the structure of private enterprise is incompatible with that degree of material well-being to which our technical advancement entitles us, unless the rate of interest falls to a much lower figure than is likely to come about by natural forces operating on the old lines. Indeed the transformation of society, which I preferably envisage, may require a reduction in the rate of interest towards vanishing point within the next thirty years. But under a system by which the rate of interest finds, under the operation of normal financial forces, a uniform level throughout the world, after allowing for risk and the like, this is most unlikely to occur. Thus for a complexity of reasons, which I cannot elaborate in this place, economic internationalism embracing the free movement of capital and of loanable funds as well as of traded goods may condemn this country for a generation to come to a much lower degree of material prosperity than could be attained under a different system.”


  3. Smith says:

    The big complaint here is that focusing too much emphasis on international balance of trade and monetary issues instead of labor and management issues blinds one to real solutions. Yes we’re at a disadvantage, to put it politely, due to other countries’ economic policies. Yes this blog has been a leading voice in pointing to that problem and the trade deficit. However, there are other factors involved that seemingly ignored.

    Why aren’t policies and laws that prevent or deter shipping jobs overseas considered?
    Why isn’t the gross mismanagement of the auto industry considered as a contributing cause to the trade imbalance (vehicles are 1/4)?
    Why isn’t energy independence still an important goal since the oil kingdoms can only spend so much here (except it seems for the United Arab Emirates) ?

    How convenient for economists to blame a foreign country for our troubles instead of our business leaders and government and labor policy. If you read here, you’ll see autos account for 1/4 of the deficit, oil another 1/4, (plus china accounts for other 1/2)
    http://www.bloomberg.com/bw/stories/2004-12-05/the-auto-deficit-stuck-in-neutral

    What that means? (Aside from of the top selling 20 vehicles in Japan and top 20 in Germany, only one US company, Ford, has a model.) If we can’t figure out the trade deficit with Germany, Japan, and Mexico, how can you possibly think China will be more amenable.

    Here’s the data for 2014, the first number is the deficit* of $540 billion deficit all countries, second is total trade
    https://www.census.gov/foreign-trade/balance/c4280.html 73 Germany 172
    https://www.census.gov/foreign-trade/balance/c5700.html 342 China 570
    https://www.census.gov/foreign-trade/balance/c5880.html 66 Japan 200
    https://www.census.gov/foreign-trade/balance/c1220.html 34 Canada 658
    https://www.census.gov/foreign-trade/balance/c2010.html 53 Mexico 534
    Our deficit with Mexico is huge considering the size of the economy, volume is partly from shipping unfinished goods back and forth, likewise Canada, maybe oil involved, but still right up there with Japan and Germany?

    The surplus countries, the census reports Hong Kong separately for which we run a nearly $50 billion surplus
    http://www.census.gov/foreign-trade/top/dst/2013/05/surplus.html
    (doesn’t change that much, and these are the latest figures I could get from the site, don’t know why they’re not updating with current anymore)

    Those arguing for infrastructure should realize it will help capital more than labor, it may marginally help with higher employment, but doesn’t restore balance of labor vs capital, lessen inequality, reduce debt burden, and make the U.S. more competitive and free. Krugman has argued for higher inflation without reducing power of businesses to control prices, higher permanent deficits to supply missing demand instead of better wages and reduced debt. I’m for infrastructure and lower trade deficits and world peace, but that can happen along with continued exploitation, wage stagnation. Wage stagnation is the operative condition, not secular.


  4. Denis Drew says:

    About all I get out of this is that the same rich-getting-richer (scooping up all the eco growth) leads to under-demand (sec stagnation) around the world — just as it does here — hurting us here too by lower demand for our exports.

    Helicopter money? Keynes has no guidance on that — no helicopters in his time. 🙂


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