Monday, June 21, 2010

Stimulating a Return to Imbalances

We aren’t going to see these stimuli, but even if we did, the status quo ante was and remains untenable. We’re reminded of this by Richard Alford, c/o Naked Capitalism. He writes:

Once one recognizes that the US is contending with structural as well as cyclical problems, then it is clear that a move to sustainable trend growth requires something other than the standard countercyclical stimulus. In order to achieve balanced sustainable growth the US will have to increase savings (relative to income and consumption), increase investment relative to income, and increase the production of tradable goods versus nontradable goods. However current US policy has consisted of efforts to stimulate private consumption (decrease savings), increase public dis-saving, subsidize consumption of nontradable goods (housing) all coupled with perfunctory calls for exports to double.


Which is why

the US does not face a simple choice between lower fiscal deficits and idle resources on the one hand, and temporarily higher deficits and trend growth with full employment on the other.


The first step toward enlightenment is to see that the accounting balances are everywhere and always binding. As long as the US has a substantial current account deficit, over time either fiscal deficits explode, private deficits explode or the economy crashes. In the short run, the main danger is an economic crash, so maintaining stimulus is essential, but in the longer run there is no solution without a structural shift.

The second step is to see that the interlocking constraints facing the US (and other deficit countries) are primarily driven by shortfalls in competitiveness, not national savings behavior. This follows from empirical examination of the channels through which the different variables affect one another. In particular, differences in interest rates due to savings–investment balances have little to no effect on trade balances, as I showed a few years back. So the structural solutions for the US have to focus on policies that demonstrably increase exports and reduce imports.

The third step is to inquire into why it is that the US has systematically adopted policies that have eroded its trade position over time. This opens the door to political economy. A very rough sketch of my view can be found here; I hope I have the chance to develop it further at some point. For now, it is enough to say that the economic crisis has not yet brought about the political shifts we would need to see in order for a different, more sustainable path to open up.

3 comments:

JW Mason said...

As long as the US has a substantial current account deficit, over time either fiscal deficits explode, private deficits explode or the economy crashes. In the short run, the main danger is an economic crash, so maintaining stimulus is essential, but in the longer run there is no solution without a structural shift.

This sounds reasonable but it's not. Until you put numbers in, it's not even wrong, it's vacuous. ANd people who have tried to put numbers on it have found that if nothing is done to close the deficit, "even by the year 2020, the negative NIIP/GDP ratio will be no higher than it is in several industrial economies today, and U.S. net investment income payments will remain very low. The share of U.S. claims in foreigners' portfolios will likely rise, but not to an obviously worrisome extent." You may think Bertaul et al. are wrong, but you have to challenge some of their specific assumptions. You can't just assert it.

When you consider that (a) there is no hard limit to a country's net foreign debt; (b) US net foreign debt is modest compared with levels that many other countries have sustained for long periods historically; (c) US net foreign debt is small compared with our gross foreign assets; (d) US foreign assets consistently earn substantially higher returns than foreigners' US assets; (e) the dollar is the world reserve currency, so US current account deficits are necessary if global liquidity is to expand along with global trade; and (f) demand for US financial assets is consistently stronger than demand for comparable assets elsewhere; then it's not at all obvious that large US current account deficits cannot be sustained indefinitely.

Personally, I would go even farther, and argue that with the current global financial architecture, big US deficits are more conducive to strong global growth and employment than balanced trade would be.

In any case, it needs to be shown -- in terms of concrete numbers and not just in some hazy equilibrium -- that the long-run as well as short-run situation is not fundamentally Keynesian.

Seems to me that current-account fears are just a different variant of the Austerianism that's calling for fiscal and monetary contraction. With the exception that progressives' immune systems are more vulnerable to the current-account strain.

Anonymous said...

Links in article do not work I would like to read your paper on trade vs investment balances.

TheTrucker said...

I can't seem to google this "Bertaul" character and I assume he is a financial crackpot like most neoclassicals.

When you consider that (a) there is no hard limit to a country's net foreign debt;

(And no limit at all to the amount of fiat money we can create and hence no reason whatsoever to borrow anyway)

(b) US net foreign debt is modest compared with levels that many other countries have sustained for long periods historically;

(Yet there is no reason for any foreign debt at all. If China spent the money they got from us instead of putting it in interest bearing mattresses then _OUR_ real economy would be significantly better off.)

(c) US net foreign debt is small compared with our gross foreign assets;

(And herein lies a reality: The US debt is owed to the rich who also own all the foreign assets. The common people owe all the money to the rich people who used their tax cuts to acquire the internal government dept and the foreign assets.)

(d) US foreign assets consistently earn substantially higher returns than foreigners' US assets;

(Which make the rich people even richer. All the world's rich loan money to the USA to get paid for their idle money and the money they screw their producer class out of)

(e) the dollar is the world reserve currency, so US current account deficits are necessary if global liquidity is to expand along with global trade;

(BWAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA! So you say the foreign coolies will be your slaves forever?)

(f) demand for US financial assets is consistently stronger than demand for comparable assets elsewhere;

(The US Republicans and the rich people they represent have been able to subjugate the coolies thus far, and still keep the American natives happy. But sooner or later there will be a revolt)

then it's not at all obvious that large US current account deficits cannot be sustained indefinitely. ---------

Forever is along time. But it can be done so long as the people are indoctrinated into lying pig financial crap posing as economics. Who knows how long this lying can endure?