Sunday, April 16, 2006

previous entry | main | next entry | TrackBack (0)

What to read about economics for this week

Barry Eichengreen, "Global Imbalances: The New Economy, the Dark Matter, the Savvy Investor, and the Standard Analysis," Journal of Policy Modeling, forthcoming. Here's how it concludes:

This paper has reviewed four perspectives on global imbalances. The standard analysis suggests that the U.S. current account deficit cannot be sustained at current levels. It suggests that there will have to be significant adjustments in asset prices to compress U.S. spending and significant changes in relative prices to crowd in net exports. At the same time, nonstandard analyses, focusing on the profitability of investment in the United States, the profitability of U.S. foreign investment, and the differential returns on U.S. foreign assets and liabilities suggest that U.S. current account deficits may be easier to sustain than implied by the standard analysis.

As for which view is correct, only time will tell. But uncertainty about whether a disorderly correction is imminent does not justify inaction. That a Category 5 hurricane strikes only once a generation does not absolve the responsible homeowner, living in a flood plain, from putting his house on stilts or investing in flood insurance. For the United States, insuring against a disorderly correction would involve progressively tightening fiscal policy and thus gradually narrowing the gap between absorption and production. The best way for China and other East Asian countries that export to the United States to meet this deceleration in U.S. absorption growth would be by loosening fiscal policy (increasing spending on social security, health care, education, rural infrastructure and the like) and thus stimulating demand at home. With demand growth slowing in the United States and accelerating in Asia, relative prices, in the form of the dollar exchange rate, will tend to adjust. The argument for gradual adjustment starting now to limit the risk of a sharp, disruptive adjustment later is still sound even if an eventual hard landing is less than certain.

While I've been travelling, I see that Greg Mankiw -- Harvard economist, former Chairman of the Council on Economic Advisors, and probably some other title I've forgotten -- now has a blog. It's worth checking out.

Mankiw is an honest broker -- he highlights a Dallas Federal Reserve study on globalization and governance, which finds that countries that are open to globalization are also among the best governed. However, Mankiw correctly points out that these are merely correlations -- globalization does not necessarily cause good governance (the other problem with the study is that it relies on A.T. Kearney's measure of globalization, which conflates a few causes an effects).

posted by Dan on 04.16.06 at 08:17 PM


There is no cost-free policy mix. Over-tightening and slowing down US growth can have just as bad effects if we don't know what we're doing. The Great Depression is possibly *the* real world example of that sort of error. I'm not fond of a nuclear proliferating remix of the 1930s and 40s.

There is no substitute for figuring out what is really going on and acting accordingly.

posted by: TM Lutas on 04.16.06 at 08:17 PM [permalink]

Re: Global Imbalances. Eichengreen claims that “only time” will tell which of the four views presented will prove correct, but it's clear his money is on the ol’ fashioned Standard Analysis, i.e., the US economy is headed towards a correction.

And he’s right. Odd, hard-to-explain things have indeed been happening in the US economy this decade and it makes sense economists would try to explain it away somehow, from New Paradigms to the three views covered here. Meanwhile, the 2001 recession wasn’t as hard as it should have been and thus didn’t allow for the economy to “cleanse” itself of bad investments; the economy shifted more than ever to consumption (87% of the economy to date) rather than production; savings are at all-time lows; personal debt at all-time highs. You simply cannot explain that away saying it's a brave new world.

But strict analysis of the numbers doesn’t take into account the reality of the shifting global trading blocs that historically held the US at its center but now have Asia gaining economic muscle, greater purchasing power and representing the true growth markets of the world (the U.S. as “growth stock” is a laughable concept: we are restricting immigration as Baby Boomers with little savings near retirement. No amount of “economic freedom” will make up for our imbalances).

Asia (I mean mostly China) is locking up natural resources with long term deals for copper in Chile, gas from Brazil and Iran, soy in Argentina, etc. With accumulated dollars they are looking to buy gold mines in Canada and oil companies in the US – unloading the greenback before letting it go to hell. That their success has been minimal in actually buying them to date doesn’t mean it isn’t a sound idea or that they’ll give up. Keep an eye out for more of it.

In the end, the US has painted itself into a corner for the sake of deferring pain and has made a series of bad decisions. We have each of us done the same as individuals at some time in our lives, so it isn’t such a crazy thought. But while the US economy is amazingly resilient and monstrously large, our margin for error is now too small for comfort: the main indicators are seriously off-balance, our foreign policy has left us with few friends and there is the wild card of another 911 on our soil. The US will emerge from the next recession again, but will find the terms are new and largely unfavorable to us.

posted by: St. James the Lesser on 04.16.06 at 08:17 PM [permalink]

"Never interrupt your enemy while he is making a mistake." Napoleon.

Do the chinese think of the USA as an enemy?

If so, it makes sense they'll give us time.

Let us dig our hole as deep as we can before they start shoveling the dirt down on us.

posted by: J Thomas on 04.16.06 at 08:17 PM [permalink]

What is strange on the list of globalization is that there is not Germany, China, Japan, the respectively n°1, n°3, n°4 in World export.
But I know that there is other parameters.

posted by: JLS on 04.16.06 at 08:17 PM [permalink]

Post a Comment:


Email Address:



Remember your info?