Links to a couple of things you missed

January 4th, 2016 at 11:34 am

Over the holidays, I had a hand in a few pieces folks here might find engaging.

The Atlantic asked a number of folks from different fields to briefly hold forth on developments that gave us hope and despair re economic fairness. My take was top-down despair and bottom-up hope.

The International Economy ran a forum on the question: “What are the most critical global and domestic financial and economic issues the next president must address to help bring stability to the the global system?”

I’ve pasted in mine below and highlighted the last sentence because I think it may be an under-appreciated problem, one I’ll be writing about in coming days (and Ben Spielberg and I have a longer paper coming out on the topic as well). It also relates to the despairing part of The Atlantic piece.

BTW, interesting how many of these entries worry about the impact of the strong and possibly (likely?) strengthening dollar on US growth, jobs, and markets. That’s partly a function of the host venue, but it’s a good point, one I’ve often raised here, and it’s far from obvious that the next president will be willing to attempt do anything about it. As Fred Bergsten writes, “[The US] is the only country that has the economic capacity and, correctly or incorrectly, the political willingness to absorb a buildup of sizable trade surpluses in the rest of the world. The U.S. current account deficit is already headed toward $1 trillion over the next few years, and another 10 percent rise in the dollar, which would still leave the euro and yen and renminbi well above their lows of the past ten to twenty years, would take it close to $1.5 trillion. This would slice 3–4 percentage points off U.S. GDP. The current market consensus already expects a further dollar move in this range.”

My entry:

To the extent that American presidents think about global markets, it’s from the perspective of the U.S. economy. Their goal in this regard is less “to bring stability to the global system”—that’s more the turf of central banks and the International Monetary Fund—than to bring stability, growth, and prosperity to the American system.

Their interest in global stability thus gets invoked when instability abroad thwarts those goals. For example, in the depths of the Great Recession, President Obama urged the Europeans to do more stimulus, as their premature pivot to austerity had negative spillovers to the U.S. economy.

Going forward, there are two potential global trouble spots of this sort. First, and most pressing, the “global savings glut” that former Fed Chairman Ben Bernanke warned about a decade ago, wherein countries suppress internal investment/consumption in order to import demand from current account deficit countries, is still a drag on growth both here in the United States and in peripheral areas of the eurozone. The U.S. trade deficit has been stuck at a non-trivial 3 percent of GDP; that’s been a constraint on growth, one noted by our Federal Reserve as a rationale for holding rates near zero.

Second, there’s another recession out there somewhere, and unless policymakers learn the lesson that premature fiscal consolidation is terribly ill-advised, when it hits, our countercyclical arsenal will go untapped. This is particularly worrisome when you recognize that central banks are likely to be uncomfortably close to the zero lower bound (also known as the “liquidity trap”) on the interest rates they control. There is a real danger that in the next recession, both monetary and fiscal stimulus will be off the table, the former due to prevailing low rates, the latter due to ideology over facts.

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One comment in reply to "Links to a couple of things you missed"

  1. Kevin Rica says:

    The US certainly does not have the capacity to absorb a $ trillion trade deficit. If we have a savings glut now, that implies a much bigger savings glut then and a much bigger inflow of foreign savings that the one that caused the previous financial crisis. This way lies an even bigger financial crisis or a worse recession.

    Those who run the trade surpluses need to deal with their own surplus-savings problems at home and not dump their trash on our lawn.