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 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.

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9 comments in reply to "Larry Summers, of all people, misses China’s role in “secular stagnation”"

  1. Serene says:

    The problem of secular stagnation, in my belief, is primarily a problem of distribution. I don’t really buy into the idea of world-wide secular stagnation.

    How to redistribute? It is the problem of our times. I once suggested an idea of forced redistribution through trade treaties. I called it an inverse tariff.

    I think the idea holds a lot of merit and it should be discussed.

  2. Bob Palmer says:

    Excess savings, an anecdote: I have a friend who is involved in commercial real estate investing in Southern California. Chinese money, he says, is flooding his market. “And,” he said,”they don’t care what they pay!”

    There is certainly a glut of cash seeking “investibles” – office towers, Manhattan condos, vintage Ferraris, farmland, estates. In a more balanced time maybe most of this cash would finance productive wealth-creating investments.

    But we are as demand-constrained today as we are capital over-supplied. There is a tremendous mismatch between an income-constrained consumer sector, 70% of GDP, and global output from global producers that are owned by elites. So it is asset markets that benefit from investment. This is an unstable condition, and it is global.

    • AngloSaxon says:

      Demand constrained? Poppycock. We are nationally constrained on building communal projects. If capital only wants to finance consumption and products based around selfish consumption, that is all you will get.

      It is not a symptom of America, but the entire western world.

      • Bob Palmer says:

        Actually AngloSaxon I agree with you. Our consumer sector is too high at 70%~ of GDP. About 50% would be healthier. For that to happen investment in public goods as you suggest would have to rise, along with other reallocations.

        We seem to be stuck here. Two ways to get things changing for the better are (1) let the government run higher deficits and invest all of the funds generated in public goods (i.e. not in more tax cuts for the wealthy) or (2) increase taxes and invest the funds generated in public goods.

        (2) looks impossible, but the truth is that taxes and public goods investment are way too low in the USA. In the modern complex world shared goods are more important than on the past. Life would be better for all of us if that were the case. But how can you sell the public on the idea that they need a tax INCREASE !?

        • Smith says:

          It’s not an increase in taxes, it’s restoring rates, it’s closing loopholes, it’s curtailing excessive pay, it’s deliberately confiscatory rates at over a $1 million, same as Eisenhower (adjusted for inflation) same rates as period 1943 to 1963, it’s taxing corporations and forcing them to pay on their foreign profits repatriated or not. That era was marked by broadly shared prosperity, low inflation, and rising productivity. One could argue this prosperity also gave more breathing room to the civil rights movement.
          The public doesn’t want to see their money wasted. How does New York, New Jersey, and Massachusetts manage to spend $20,000 per student per year on education. Anyone think the taxpayer gets their money’s worth? Same with tax exempt status granted to ivy league schools that are run like a business. That means the government subsidized those schools to the tune of 25% to 35%. You and I essentially pay for the million dollar salaries of college presidents.

    • Serene says:

      Bob, this is precisely the problem that an inverse tariff would address. There’s a global glut not of savings but of wealth. It is worse in China that the US.

      The right trade treaty would force a redistribution of this capital to consumers. It has force because it is only invoked in cases of massive trade deficits like the US has with China.

      It is a serious, serious idea that needs to be discussed.

  3. AngloSaxon says:

    Sorry, but once again…………….at some point you will get it Jared: The trade deficit is the books balancing. What does that have to do with “secular stagnation” which doesn’t exist? So we have a trade deficit with them. We also get a ton of capital coming right back. China doesn’t have the consumer market yet to return the favor. Probably, never will.

    Capital flows are how this goes. Your excess savings come into the US as lowered consumer interest rates and other consumer enchancing liquidity boosting up consumption via debt. This happened in real estate starting in the late 90’s and formed one hell of housing bubble by 2003. This cycle, Oil and Auto’s. Might get a new burst back into RE as mortgage originations are starting to rise as liquidity returns while Auto’s have peaked and are running out of customers.

  4. Denis Drew says:

    Excess US savings? Savings by the top whatever percent, that is — while labor union-less Americans grow ever more severely short cash to demand anything. Cure that or cure nothing.

  5. Serene says:

    i can’t really explain why this ‘crap’ is in my head.

    From the time of about 16 years old, I know that I was contemplating things no other person ever thought of. Yes, kind of like Einstein.

    I’ve never been able to figure out what to do about it. It is a burden.