Larry Summers, of all people, misses China’s role in “secular stagnation”

April 10th, 2017 at 8:57 am

My old Obama admin econ team colleague Larry Summers gets some important aspects of the China story wrong in this oped today. Weirdly so, given his exposure as a top (and very effective) policymaker the last time the downsides of financial imbalances whacked the globe.

Larry argues, and I agree, that none of the stuff team Trump is worrying about re China’s economy and international accounts makes sense. The problem, he argues, is China’s grab for “soft” power, filling an international gap while making an international power-grab, as the US goes insular. That may well be true. I don’t like when economists, myself included, get all policy sci on us, but it happens, and Larry may be onto something important.

He’s also clearly right that China is not intervening in currency markets to depreciate their currency. The Trump team is about 10-20 years late on that one.

But Larry is surprisingly blasé about a China problem: excess savings (really, an East Asia problem, as Brad Setser points out). I associate this problem with Summers’ own work on “secular stagnation”—persistent demand shortfalls even in recovery. Another way to view sec stag is as a function of excess savings: the globe is awash in more savings that we have good, productive uses for. That, in turn, can lead to depressed interest rates, credit bubbles, large trade surpluses in savings glut countries, which in turn force large trade deficits elsewhere, and high unemployment, depending on what offsets are in play in trade deficit countries. Larry himself has recognized this problem (as has Ben Bernanke since the mid-2000s in his seminal savings glut speech) and wisely called for public infrastructure investment to help offset it.

Our trade deficit with China is 1.6 percent of GDP; that’s a significant drag on demand. In terms of offsets, the Fed is pushing in the other direction (tightening) and the fiscal authorities…um…Congress…can’t find the light switch. We’re of course doing better than most other advanced economies, but here we are in year eight of an expansion and (slight) output gaps still persist.

Just last week, Martin Wolf at the FT wrote about the threat China’s close-to-50-percent-of-GDP savings rate poses for the rest of the world (our savings rates are typically in single digits). He worries about excessive internal investment, enforced in part by capital controls prohibiting outflows, generating an asset bubble. Or, if the controls break down, large-scale exports of their surplus savings to a world that is already demand constrained. Interestingly, a smart paper by Larry et al. provides an explicit role for such capital flows in dampening demand and making it harder for the US to hit higher growth rates (“We find capital flows transmit recessions in a world with low interest rates and that policies that trigger current account surpluses are beggar-thy-neighbor.”)

If a Chinese asset bubble forms and implodes, and/or they export a lot more of their excess savings, that will slam down their currency—no matter what propping up they try to do—and our trade deficit with them will grow, perhaps sharply (Setser’s worried about this too, though less so than Wolf). Unless offsets are in play, a big “if” in the Trump-Republican-Congress world, this will hurt American workers.

There’s a problem in economic criticism today where people argue, essentially, if Trump does it, it’s wrong. Re China, the Trumpists are shooting at the wrong target—currency vs. excess savings and capital flows. But that doesn’t mean all’s clear on the Asian financial front.

Jobs report for March: A tale of two surveys (but not of a jobs slump)

April 7th, 2017 at 9:52 am

The monthly survey of workplaces revealed a slower pace of job growth in March, as payrolls grew by 98,000, the lowest gain since last May, and down from the pace in recent months, while downward revisions reduced payroll gains from the first two months in the quarter by 38,000. The survey of households, however, told a more robust story of the March labor market, with unemployment down to a cyclical low of 4.5%, and for the right reasons: job seekers finding work, not giving up and leaving the labor market.

That’s the lowest unemployment rate since May 2007, while the underemployment rate–a more encompassing measure of labor demand important gauge–fell from 9.2% in February to 8.9% in March, its lowest rate since December 2007.

While some news sources will be tempted by this below-trend payroll number to declare a slump in employment growth–“if it bleeds, it leads”–that would be a mistake. One month does not a new trend make. The monthly confidence interval for change in payrolls is 120,000 (meaning that there is a 90 percent chance that the true change in payroll employment for the month of March lies between about -20,000 and 220,000; that’s the statistical noise I’m always going on about), the underlying trend remains solid, weather effects may have been in play in March, and the household survey looks strong.

It is not unusual for the two surveys released on jobs day to tell somewhat different stories, and the key point to keep in mind re these monthly numbers is that they are noisy. Therefore, we want to be careful not to over-interpret one month’s results. Instead, we should look at the underlying trends.

Our monthly smoother helps amp up the payroll signal by averaging out some of the noise in the monthly data, taking averages of monthly payroll gains over 3-, 6-, and 12-month spans. Over the past three months, payrolls added 178,000 jobs on average, close to the underlying trend for the past year of 182,000. Given the size and growth of the US labor force, these averages represent a solid pace of job gains that is clearly and steadily moving the job market to full employment. It is, however, a slower pace of monthly payroll gains compared to earlier in the recovery (a year ago, the 12-month average was 229,000).

Source: BLS, Author’s calculations

Still, today’s lower-than-average (and lower-than-expected) payroll number does not alter my assessment that the job market is closing in on full employment. Of course, if future months show a clear deceleration of the ongoing trend–say, a downshift from close to 200K/month to 100K/month, this would signal a decline in hiring activity and could (I’d argue “should”) slow the Federal Reserve’s plans to raise rates.

Meanwhile, tighter job markets provide wage earners with more bargaining power. On average, as the next figure shows, average wage growth has accelerated in recent months, from around 2% to a pace north of 2.5% (March came in at 2.7%). A few caveats, however, are notable. First, inflation has also picked up in recent months, partially due to normalizing energy costs, and was growing most recently at about the pace of hourly wage growth, implying flat real hourly earnings. Also, on an annualized quarterly basis, wage growth was 2.4% in 2017q1, below its recent trend. Given data volatility, this doesn’t yet imply a slowdown, but we’ll track this going forward.

Source: BLS, Author’s calculations

A few other notable results:

–The employment rate for prime-age workers, a closely watched measure to see if the labor market recovery is pulling working-age persons into the job market, was 78.5% last month, up half-a-percentage point over the past year, and another sign of progress. These 25-54 year-old workers have clawed back 3.7 out of 5.5 percentage points, or two-thirds, of their losses since the big downturn. It is thus extremely important to heavily discount reports that such workers are out of the reach of a strong labor market. Some surely are, but many others are clearly not. Be very careful, my friends, not to conflate the cyclical with the structural!

–The decline in the underemployment rate reflects the monthly tick down of about 150,000 involuntary part-timers. Over the past year, that measure of slack is down by about half-a-million workers (6.1 million last March to 5.6 million this March). The figure shows a steady, improving trend in the number and employment share of part-timers who’d prefer full-time work, though the series is not quite back to pre-recession levels.

Source: BLS, Author’s calculations

–Fans of seasonal adjustment were concerned that the March payroll number would be biased down due to weather effects, specifically unseasonably warm weather that raised February’s job gains and, conversely, a winter storm in March that blanketed parts of the Northeast and Midwest during the week in which the job surveys are in the field. But BLS data on absences from work due to weather show a huge spike in full-timers who had to work part-time due to weather (the largest on record for March with data back to the 1970s), but not much of one for people not at work at all. Still, the part-time issue could have dampened March’s payroll count, yet another reason not to worry yet about slumping job creation.

In sum, moderate, steady GDP growth amidst low productivity continues to equal solid job creation that is squeezing slack out of the labor market. The overall pace of job gains has probably slowed a bit but that is not unusual as we move towards full employment and face utilization constraints. However, there’s still room to run on the supply side of the job market, as the prime-age employment rates and involuntary-part-time series reveal. Also, it will be very important for the Fed to carefully track the wage growth point I made above regarding the slower quarterly rate. If that sticks, they’ll want to be very careful not to shut down wage gains just as they’re catching on.

To the trade ramparts once more, NPR edition

April 6th, 2017 at 10:44 am

What with our president chilling in FL with China’s president, I am again obliged to quickly complain about a growing misunderstanding of trade deficits. This time, I got set off by an NPR piece, one that made an important, fundamental point, but missed the bigger picture.

The piece made another in a series of logical leaps that should not be made, specifically: because the trade deficit is not always a problem, it is never a problem. (Alert readers will recognize this as a close cousin of “because China does not now suppress the value of its currency, neither they nor any other country will ever do so.”)

As I wrote here, let us not forget our balance-of-payments serenity prayer: “Keynes, give us the wisdom to understand when the trade deficit is problematic and when it’s not.” But the NPR piece cited two economists (and only these two) who argued that a) trade is always win-win, and b) a growing trade deficit “…means we’re growing, and we’re growing faster than the rest of the world.”

That’s way too dismissive (to be fair, the piece included the admission that at some periods in the past, trade deficits hurt some communities, but claimed that’s not a problem with trade deficits; it’s a problem with inadequate redistribution to those hurt by trade).

There are two, related reasons why this meme of trade deficits as always benign are wrong. First, as Dean Baker stresses in his pushback on this story, the dismissive view assumes full employment, such that any drag from trade is assumed to be made up elsewhere.

It’s true that if we’re not at full employment, any drag from imbalanced trade can be offset by monetary or fiscal policy (though the industry composition effects Baker stresses–the fact that are trade deficit is exclusively in manufactured goods–are germane even if these cases). But what if the interest rate is too close to zero and the fiscal authorities can’t find the lightswitch, much less implement complementary macro policies? The connection between those ‘ifs’ and any advanced economies is left as an exercise for the reader.

But the other part of the problem of the trade deficit–the one completely left out of the NPR story–is the macro and financial market imbalances part, that I and many others are increasingly writing and worrying about (see links here but also read Wolf and Setser for interesting takes).

The view from this perspective recognizes that while economists generally bow at the altar of savings, just like there’s such a thing as excessive debt, excessive savings is also a thing. In fact, in the global economy, they’re flip sides of the trade accounts, and the financial flows generated by countries with high levels of savings (and thus, high trade surpluses) drive trade deficits in countries to which those savings are exported.

This can create investment bubbles (the dismissive team implicitly assumes capital flows are always put to good, productive use; they assume away credit bubbles) as in our housing bubble, a problem recognized by Ben Bernanke in 2005, or, as in the case of Germany’s 8% of GDP trade surplus, weaker demand, as they “beggar their European neighbors” while neither the monetary nor the fiscal policy authorities step up to make up the difference (Bernanke has also critically noted the German surpluses).

It simply does not make economic sense to ignore such potentially and actually destabilizing imbalances as China’s or Germany’s excess savings and their implications for global stability. As Setser puts it: “…at some point China’s savers could lose confidence in China’s increasingly wild financial system. The resulting outflow of private funds would push China’s exchange rate down, and give rise to a big current account surplus—even if the vector moving China’s savings onto global markets wasn’t China’s state. History rhymes rather than repeating.”

Brad goes on to argue that China has time to bring down its savings rate in ways that can stave off a crash, but he’s anything but dismissive of the potential threat.

Look, I’ve read my Minsky. I get that economic amnesia besets everyone as economic expansions get long in the tooth. But the credit implosion of the Great Recession isn’t that far behind us, tales of “secular stagnation” abound (where weak demand, part of which is tied to our trade deficit, is not offset by countervailing policies), and eight years into the recovery, we’re still not quite at full employment nor have we fully closed our output gaps.

So please, let’s take a much more nuanced view of trade deficits than they’re always fine or always awful.

OTEpc: Episode #6

April 6th, 2017 at 8:13 am

Check it out, cats and kittens, as Ben and I briefly kibbitz on current events (healthcare and taxes) before getting into a discussion of trade policy with our illustrious guest Lori Wallach, with whom I’ve worked closely on these issues, and Chad Bown, who brings a smart take from the more traditional econo-corner.

Oh, and then there’s a snippet of this burning hard bop vibes solo Bobby Hutcherson (I beg of you, listen to the whole track and tell me if it’s not extremely cookin’), and a topical trade joke from Ben.