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.
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7 comments in reply to "Our full employment event…the video!"

  1. Peter K. says:

    On a first-name basis with Bernanke??? That’s crazy!

    While prepping for the event and working on the book you may have missed Yellen’s big speech. It seems like she and Bernanke are on the same page. I thought her speech was amazing, but she kept putting in these throwaways bits for the inflationistas. It appears as if the Fed and Bernanke disagree with the bond market on how quickly Europe will recover. The former may be right if Europe eases up on the fiscal austerity.

    They both mentioned reverse “hysteresis.”

    “A tight labor market may also work to reverse some of the adverse supply-side developments resulting from the financial crisis. The deep recession and slow recovery likely have held back investment in physical and human capital, restrained the rate of new business formation, prompted discouraged workers to leave the labor force, and eroded the skills of the long-term unemployed.15 Some of these effects might be reversed in a tight labor market, yielding long-term benefits associated with a more productive economy. That said, the quantitative importance of these supply-side mechanisms are difficult to establish, and the relevant research on this point is quite limited.”


    • Jared Bernstein says:

      I read it and liked a lot of it but I’m writing a pretty critical piece about her dissing of wage targeting…I think targeting wage growth makes a lot of sense right now and I thought her objections in here were weak. And I’m a huge Yellen fan.

      • Peter K. says:

        That was disappointing and seemed to come out of left (or right) field. Only a few days beforehand, DeLong blogged:

        “The easiest way to fix this problem would be to revise the Federal Reserve Act — perhaps to add “healthy rate of nominal wage growth” to the list of Federal Reserve monetary policy objectives.”


        After dismissing the targeting of wage growth, in the next paragraph she challenged John Taylor about the Taylor rule. Within the context of the speech it was almost as if she was positioning herself as centrist by disagreeing with DeLong (and you) on the one hand and Taylor on the other hand.

  2. Smith says:

    I agree trade deficits are a serious problem, caused in part by currency manipulation. Measures should be taken to address the effect on the American economy. However:
    – Where is the discussion of oil imports which still drain our economy and fund autocratic governments and indirectly, terrorists? What about greater development of safe alternatives to complement and eventually supplant gains from fracking? More dollars for R & D including basic science.
    – Who thinks that auto imports from Germany and Japan are not still a problem in terms of imbalance? Granted, it’s not all Detroit’s fault because the U.S. is such a larger market than either Germany or Japan. What can be done to prevent another bailout of the auto companies when they again fail to compete with foreign competitors? Again, one area where the federal government could intervene without actually running the companies is in basic science research. But something should be done about big autos gross mismanagement and desire to close northern union factories to move jobs south or overseas. Laws that prevent German factory closings would help.
    – We could try to persuade China to hurt their own economy in order to help us, and lessen the hold of the ruling class who profit from exports, or we could try to prevent American businesses from moving their manufacturing overseas in the first place. Which is more effective, arguing with the leader of the most populous country on earth, with the second largest economy, or Wal Mart?
    – Finally let me explain why “a great bubble wasn’t enough to produce any excess in aggregate demand” It’s not from mysterious sec stag, it’s from rising debt, mortgages and student loans, increasing inequality, bloated financial sector, and weakened labor. Part of the bubble was from people borrowing because wages abnormally stagnated. The power of capital continues to rise while labor is further weakened. Labor is weakened by lack of full employment, growth of service sector vs. manufacturing, shipping jobs south and overseas, labor regulations changed by Bush in the 2000s, and Clinton in mid 1990s weakening FLSA, and the continued expansion of a separate class of workers who are not free, can not bargain, can not strike, face deportation if they lose their job, and thus also affect everyone’s position, no not illegal immigrants, but the legal ones face those conditions, and the Democrats including Obama who do nothing to change that, but in fact support expansion. Their unwillingness to upset business leaders, throw out the current bill, and change the debate to one about immigration of free labor is going to damage their chance of affecting all progressive policies. See the comments to the extreme article below:
    (to clarify, I’d favor amnesty, increased employer sanctions, the end of requiring employee sponsorship, the continuation of the diversity lottery, holding levels at about the same we have now instead of expanding them during high unemployment, adding economic triggers as Senator Durbin and others supported.

  3. Robert Salzberg says:

    Good post but I would have added regulation as the third pillar to fiscal and monetary policy.

    A living wage, breaking up the monopolies in banking & telecom, progressive taxation, environmental policy, stronger social safety net, free and fair elections etc are the core things we can do to set the table for equal opportunity in America. While many/most of my items were included in JB’s post, I think it’s important to consider government regulation as a separate component perhaps replacing fiscal policy since it encompasses fiscal policy.

  4. William Meyer says:

    Sorry to keep harping on critical stuff here, as you are one of the sanest voices in the public opinion sphere, but I must ask, along with Dean Baker, why economists continue to treat the consequences of the US trade posture as if it is outside their “Overton Window”? I have been raising the question of the apparently significantly negative impacts of globalization and US trade policy on this country’s economic prospects for years and get no answers or even engagement. Now, in 2015, Mr. Bernanke deigns to notice that our trade deficits might be connected to the remarkably slow US growth of the past 15 years? Gee, funny, the fact that our economy slowed remarkably just about the time international trade really picked up under NAFTA and the WTO must just be a weird coincidence, huh? But remember, only cranks and wing nuts question the idea that international trade only any terms is always and everywhere a good thing, because Ricardo “proved” it. This topic is amazingly under discussed except by the guardians of international capital flows, where they sigh with relief that evil protectionists couldn’t get much traction even in the downturn. Sigh.

  5. Dave R says:

    Hi Jared – Isn’t Bernanke’s first post (‘Why are interest rates so low?’) only true when we are at full employment? When we are not at full employment (ostensibly the last 7 years), interest rates can be below the equilibrium rate without fear of inflation, and so that’s what the fed has been doing, correct? So it is more like “interest rates are low because we haven’t had full employment and thus we can keep rates low to spur investment without inflation”, more than “there is a low equilibrium rate these days”…?