Wednesday, November 30, 2016

Two Generations of Trade Deficits: A Wee Complaint with Jared Bernstein

I was loving the latest from Jared Bernstein until I got to this passage:
I do know that we must start by lowering our economically large, persistent, and distortionary trade deficit, especially to the extent that it is pumped up by other countries manipulating savings and exchange rates.
Jared and I are the same age – both born in 1955. I started teaching economics when Ronald Reagan became President. It was about this period of time when we started witnessing persistent current account deficits. Most of us back then blamed a massive inward shift of the U.S. national savings schedule (created by Reagan’s tax cut for those of us who did not drink the Ricardian Equivalence Kool Aid) that led to a massive dollar appreciation. The next time we saw a large appreciation of the dollar was the late 1990’s. I recognize that Jared is channeling the excellent Dean Baker who often writes stuff like this:
Robert Rubin was also the chief architect of the “strong dollar” policy. Lloyd Bentsen, Rubin’s predecessor as treasury secretary, was quite happy to see the dollar fall. The logic was straightforward: A lower dollar would improve the US trade deficit. If the dollar falls relative to the euro, yen and other currencies, then it is more expensive for people in the United States to buy imported goods. Therefore, they buy domestically produced goods instead. Similarly, if the dollar falls in price relative to other currencies, then it is cheaper for people living in other countries to buy US exports. This will increase US exports, thereby further reducing the trade deficit. A lower valued dollar was in fact supposed to be one of the main dividends of the deficit reduction policy that President Clinton pursued from the start of his presidency. The argument was that lower deficits would lead to lower interest rates in the United States. If interest rates in the United States fell, then foreign investors would buy up fewer US government bonds and other financial assets. This gave us the lower dollar and improved trade deficit. That was more or less the picture until Rubin succeeded Bentsen as treasury secretary in 1995. Rubin began touting the strong dollar.
Dean is right to note the move to a mix of low interest rates and fiscal discipline that was part of the early Clinton years. This mix was the reverse of the Reagan macroeconomic mix. But as Dean blames the public statements of one official for the dollar appreciation over the next several years, I have a small problem:
If one thinks about the Clinton policy mix – fiscal restraint with easy monetary policy – it was the opposite of the Reagan policy mix. To the degree we lowered our interest rates relative to the rest of the world, one would expect ceteris paribus that the dollar would devalue increasing net exports. Of course the dollar appreciated and net exports fell but that was the result of the investment boom which led to a strong increase in real GDP, employment, and even real wages. When progressive critics complain that U.S. macroeconomic policy cost growth and jobs by letting net exports fall, they confuse cause and effect.
Should the U.S. pursue more national savings like we did in 1993? My answer would be no unless we could get more world investment given the legacy of the last several years with the Bernanke global savings glut combined with a dearth of investment. The hope in the U.S. is that we have our own infrastructure investment boom. Now if we can get nations like Germany and China to invest more, perhaps our next investment boom can be accompanied by rising U.S. net exports. But note alleged currency manipulation is not exactly the key issue.


reason said...

Curious, I was also born in 1955.

But re this discussion. I think you are both wrong here. Domestic policies probably have relatively little to do with it. As I saw very well discussed by Dean recently, it has much more to do with the Asian crisis, the IMF response and the response of the newly developing Asian economies with their massive savings rates and export driven growth. What happened post the break down of Bretton Woods was something similar - basically foreigners shifting their reserves into dollars.

reason said...

US based commentators really have a tendency to interpret everything in domestic terms (something that someone in say NZ or Belgium would never even think of doing). Sure you are a big economy, but you still aren't the only economy in the world.

ProGrowthLiberal said...

Reason - I think you are misreading this even worse than Dean and Jared are. I am not saying it is all foreign events v. domestic events. All I - and most international economists (eg Brad Setser) - am saying is that there is a model of how this works. The model starts with the basic premise that the current account = national savings - investment. It also considers how various events impacts floating exchange rates. Dean and Jared tend to ignore these matters. And alas you are too.

reason said...

"I am not saying it is all foreign events v. domestic events."
??? It's me that saying it is mostly foreign events and less domestic events.

"current account = national savings - investment"

Agreed, but what is not at all clear is what is the dependent variable here.

" It also considers how various events impacts floating exchange rates."

Yes but I thought that theory on this had a very poor track record. All I know is that the US currency seems to always move in the wrong direction (going up when the deficit gets worse instead of going down - whereas for instance with a country such as New Zealand the reverse is true).

reason said...

P.S. I agree with you that Dean's view that jawboning had much to do with the appreciation of the dollar unlikely. But I think the deficit will remain a problem without international co-ordination. And the deficit means wealth flowing out of the country - you are selling the farm in order to consume and at some stage that won't be sustainable anymore.

reason said...

So failing international co-ordination (and with Trump in charge there looks to me no chance of that), I think your best bet is to aim for considerably higher inflation and just print money. Eventually the neo-mercantilists will decide they have enough dollars, and your domestic monetary policy will get some grip on the road again. (Oh one thing you could do as well is to move to adjustable rate mortgages - they are one of Australia's little secrets. That wasn't so much planning as a happy accident, but it converts monetary policy into something that works more like fiscal policy. Cut interest rates and it flows immediately into disposable income.)

Owen Paine said...

What a garble

Are we to accept as fact
The fed under Greenspan and treasury under Rubin/Ziffle
couldn't engineer a falling dollar path thru the boom of Clinton term 2 ?

There are more variables here and possible degrees of freedom of policy action
Then pgl appears to comprehend

He might consider using a model or two

These macro historic trajectories are complexly motivated

Party partisan sycophancy obscures the options

I note banging on Reagan's deficit fails to comprehend carter appointed Volckers boston crab hold on credit flows
And the consequent nominal interest surges

Owen Paine said...


The term national savings rate is a Boy Scout misnomer
I suggest u Reserve that Calvinist merit term
for Dicken's Scrooge and your maiden aunt

Of course if trump gives the wealthy and they high of income a big tax break
We' ll have to listen to more fiscal budget buster clap trap from Clinton faction macro hacks

Owen Paine said...

The school masterly evocation of a model
In pgl's comment

Only adds irony to the garble

Here the "model less mind" cries use a model
When reason himself blows hot wind
Thru the vacuities in pgl's post

The tea pot in polite tempest remains a back parlor gurgle

I suggest more job work
At least Get paid for this fragmentary garble
That or retire to the Everglades and thrash about in a real not a virtual swamp
U might delight the Alligators and escaped pythons enough
To devour your foot or squeeze your throat

Owen Paine said...


Increased foreign demand for dollar denominated paper does hold up uncle SAMs imperial forex rate

But as dean strenuously points out
This too can be countered by fed and treasury policy
Allowing the dynamics of various interconnected paper markets to dictate
An adverse course of forex is either delinquency negligence or narrow interests at work
In this case those narrow interests were those of Mistress Wall Street and her many privateering MNC clients

The domestic industrial job class played shock absorber