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.

Our full employment event…the video!

March 31st, 2015 at 10:14 am

Watch it here, where ‘it’ is the event CBPP ran yesterday for our full employment project. Ben Bernanke–now a fellow blogger(!)–gave a great keynote speech wherein he made a connection that I view as very important: adding an international dimension to the secular stagnation discussion.

After Ben B speaks, there’s a panel where Valerie Wilson, Andy Levin, and Maurice Emsellem all present important papers, which you can find here. Read them now!

As OTE’ers will note, I’ve often stressed the drag on growth from our persistent and sizable US trade deficits. And, importantly, as Bernanke pointed out in his earlier work, these deficits are not the result of profligate American over-consuming, but the outcome of excess savings in trade surplus countries who buy dollar reserves to gain a price advantage in export markets.

(See here for an explanation of these dynamics but I’ve got a longer post working on this, out soon:

“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.”)

I don’t have time to go through all the details of Bernanke’s talk but here’s a quick way to understand part of his value added to the secular stagnation discussion. When Larry Summers first put sec stag back on the map, as an example of the problem, he used the fact that even with a big bubble and very cheap money, demand in the 2000s was nothing special: “even a great bubble wasn’t enough to produce any excess in aggregate demand.”

Bernanke pointed out that the large trade deficits/GDP in those years are an important answer to why aggregate demand was constrained (the average deficit/GDP, 2000-10, was an historically large -4.3%).

Bernanke’s other interesting point: while China is less active in suppressing consumption, increasing savings, buying dollar reserves, and importing demand for abroad (ie, they’re doing more internal investment), Europe, especially Germany, has developed their own “savings glut” with similar impacts.
More to come, especially as I plumb some of the implications of the some of the other papers from the event.
Oh, and as noted above, Bernanke’s got a new blog! Very cool development in our world and I’m sure I’ll be amplifying much of what he’s thinking about.

The strong dollar, its impact on growth, and the TPP

March 27th, 2015 at 9:45 am

When it comes to the debate over whether the Trans Pacific Partnership trade agreement should include rules against managing currency, the recent, sharp rise in the value of the dollar offers a little something for everyone.

For TPP supporters who oppose a currency chapter—i.e., explicit actions to be taken against signatories who push down the value of their currency to subsidize their exports and tax their imports—it shows that the value of the dollar against other currencies, up 20% over the past year, can rise for reasons that have little to do with interventions by currency-managing countries. The current appreciation is due to stronger growth rates here compared to Europe, slowing demand in emerging economies, and central bank actions as our Fed is talking about raising rates (which boost the dollar’s value) while Europe’s central bank is aggressively lowering rates.

On the other hand, the dollar’s climb also shows how such an increase raises the cost of our exports, cheapens imports, and thus significantly dampens growth. This morning’s GDP report for 2014Q4 shows that while real GDP was up a moderate 2.2%, the growing trade deficit shaved one percentage point off of that growth.

Researchers from Goldman Sachs (no link) examined trade flows of durable goods and concluded that “the categories that have historically been most sensitive to the dollar have suffered disproportionately since the dollar began to strengthen…we find that the full effect of dollar appreciation so far has probably not yet appeared in the durables data, especially the impact on shipments. These findings reinforce our view that trade is likely to remain a drag on growth.” They expect trade to subtract six-tenths of a point from GDP growth in the current quarter.

It is precisely these sorts of growth impacts that motivate those of us calling for a currency chapter in the trade deal. The fact that the dollar’s rise is not due to actions by our competitors to artificially depress the value of their currency relative to the dollar is not irrelevant—it’s an important reminder that there are lots of moving parts in play here—but neither does nor should it assuage anyone’s concerns. The dollar remains the globe’s main reserve currency and it would be foolish to assume that countries will not at some point down the road accumulate dollars in the interest of raising their exports to us and reducing ours to them.

Interestingly, because the currencies of some of our major trading partners, like Japan and China, do not appear to be misaligned right now, the administration has argued that we don’t need language against currency manipulation. But you don’t throw away your umbrella just because it’s a sunny day. As Simon Johnson wrote in a must-read piece on this issue of currency and the TPP:

[There is] nothing to stop China or any other country from resuming large-scale currency-market intervention if and when it chooses. And the lack of diplomatic tension around exchange rates today makes this a good moment to raise the topic.

This last point is a strong one. If, as the administration claims, this just isn’t a big deal anymore, then it shouldn’t be hard to negotiate. Who’d object to rules against something they don’t do anymore?

As I pointed out above, we just had a decent growth quarter, driven by strong consumer spending, even amidst this dollar induced drag on growth. And as I often stress in this context, in 2000, the last time the US labor market was clearly at full employment, we had a large trade deficit of -4% of GDP (we also had a dot.com bubble, which is related to the trade deficit as well, as countries export their excess savings to us in ways that have led to investment bubbles). In other words, trade deficits can and are often offset by growth in other parts of the economy. But since the mid-1970s (!) they’ve been a drag on growth and a major factor in both the decline in our manufacturing sector and wage stagnation for many middle-class earners.

The current dollar episode is a reminder that currency values matter and while manipulation is not in play this time, it could be so again in the future. If the TPP is as important as its advocates say it is, I can think of no better time and place to take preventive action against those who manage their currencies to our disadvantage.

Ideas to boost wage growth from the Resolution Foundation

March 26th, 2015 at 3:38 pm

I’ve often touted the UK think tank, the Resolution Foundation, for their timely, accessible, and smart policy work on all the key issues–macro, micro, budgets. But their work has been particularly important in raising the issue of wage stagnation in the UK–basically, the Brits caught our wage disease–median and low-wage stagnation, growing dispersion–later than us, but catch it they did.

Now RF’s out with an edited volume called Securing a pay rise: The path back to shared wage growth with chapters by some of the top UK economists (and a couple of Yanks thrown in for good measure, including myself and Arin Dube, one of the top authorities on the minimum wage).

I’ve not yet read everything in there but here are a few highlights:

–John Van Rheenen writes about the productivity/wage split, particularly regarding the median wage. Both he and Steve Machin lean strongly into the idea that faster productivity growth would help boost wages, though I didn’t think either said enough about what it would take to reconnect faster productivity growth to median and low-wage growth. OTOH, Van Reenen does something you don’t see enough of: he thinks in some depth about ways in which the UK could boost what’s been a flat productivity trend, including a pretty granular set of ideas for investments in public infrastructure (guided by an independent board/planning commission), housing reform (the housing market in big UK cities has looked awfully bubbly for a while now), skills training, and incentives for more patient capital.

Alan Manning presents one of the more in depth analyses I seen recently of the decline in worker bargaining power. I find this to be a resonant point (despite the fact that they refuse to spell labor the way we do! Don’t they know the credo of US union-busters?: “There’s no (yo)u in labor!”):

When it comes to thinking about how wages are determined, these days one must think about things from the perspectives of employers as that is with whom the decision now lies. Once workers would have been looking for the first opportunity to press for higher wages, now employers are looking at pay rises as a last resort. What makes employers pay higher wages is when they are struggling to recruit and retain workers, as a result of competing for labour directly with other employers. One of the features of the labour market in recent years (and not just the UK, the US as well) is that the level of direct job-to-job moves has been falling – these days a higher proportion of new hires are from non-employment rather than from other jobs.  And when your latest hire is from non-employment there is no other employer to compete directly with.

As he notes, there’s been less employment churn here as well and that’s one reason for reduced wage pressures. His solutions include full employment, improved labor standards, more union power, and grass roots mobilization around pay.

–Like all of these authors, Simon Wren-Lewis calls for better macro policy in the interest of promoting full employment–I mean, it is the land of Keynes. He makes a point that I’ve been featuring in much of my writing lately as well: when the Fed funds rate is stuck at zero and demand remains weak, fiscal policy is that much more important. But with politicians turning to austerity at tremendous costs to their constituents, Wren recognizes the need for a plan B:

Central banks have tried quantitative easing (QE), and this has had some effect, but it remains a very uncertain and ineffective policy. There is a simple and straightforward alternative which would be much more effective: creating money and giving it to people to spend. This is what economists call helicopter money, although some have recently called it QE for the people. QE involves creating large amounts of money to buy financial assets, with highly uncertain effects on demand. Helicopter money would involve creating much less money with a much more certain positive impact on demand.

He goes through the reasons why this could work (convincingly, I thought)–and not necessary risk spiraling inflation–but at least here, I’m quite certain our Fed’s charter would disallow QE for people. Last I checked, the Fed couldn’t even buy municipal bonds (they were restricted to Treasuries and “agency” MBS). Thus, it would take Congress to legislate a peoples’ QE, which um…isn’t gonna happen. Still, I get his motivation–he’s trying to simulate more direct fiscal policy measures through the independent monetary authority. Good for him for thinking outside the box!

I look forward to reading the rest of the entries and suggest you do as well.

 

Book chapter summary: politics and the reconnection agenda

March 26th, 2015 at 7:58 am

Over at PostEverything.

As I say in the piece, I can’t get through a presentation of this material without someone asking the completely reasonable question: what makes you think any of this stuff has a snowball’s chance of Congressional support?

One could argue: well, the pendulum will swing back and we need to have a robust agenda loaded when it does.

One could argue: what are progressive economists supposed to do in these dark ages–just sit on our hands until facts are once again de rigueur?

And there’s something to both of those. But in the final chapter of my forthcoming book, I’ve tried to dive deeper into some current political dynamics. See what you think.