Archive for the ‘International Trade’ Category

A Global Marshall Plan for Joblessness?

Pavlina Tcherneva | May 12, 2016

The corrosive social and economic effects of what have now become ‘normal’ unemployment levels require new solutions, and trade without full employment exacerbates the problem.

Global unemployment is expected to surpass 200 million people for the first time on record by the end of 2017, according a recent ILO study, and limitations of official statistics suggest that the problem is much larger. As conventional measures increasingly fail to produce tight labor markets and jobless recoveries become the norm, economists grapple with this new reality by calling it secular stagnation and by adjusting upwards the rates of unemployment deemed ‘natural’ — but the human, social and economic costs of this growing problem are rarely considered in economic modeling.

The Problem: A Global Unemployment Epidemic

Mainstream economic theory considers some level of unemployment to be ‘natural’ (i.e., unresponsive to policy remedies without creating some other problem like inflation), but it largely ignores the harsh human, environmental, and economic costs of unemployment. In fact, some of the best work on this question comes from disciplines outside of economics.

It’s not hyperbole to note, for example, that unemployment kills. Literally. Research shows that one in five suicides is related to unemployment, and joblessness causes 32–37 percent excess mortality for men. And while for women the impact is less clear, we know that there are robust and lasting negative effects from unemployment on social participation and social capital – all prerequisites for a fulfilling and productive life at home and in the workplace. The deep negative impact of unemployment on individuals’ mental and physical health is well-established. And joblessness has been found to have strong scarring effects on life satisfaction.

The link between crime and unemployment is also well-established. Certain criminal activities vary with the business cycle, and studies have found significant and sizable impact of unemployment on the rates of specific violent and property crimes. The connection between youth unemployment and crime is particularly troubling in the context of the ILO’s findings that 74 million young people are unemployed globally (one third of their overall global unemployment estimate). Other studies suggest that the actual number of jobless youth around the world may be six or seven times the ILO estimates.

Unemployment doesn’t just harm the unemployed. It also harms their children and families. It exacerbates infant mortality, depression, alcohol consumption, and the spread of infectious disease. And joblessness is a root cause of human/child trafficking and global sexual and labor exploitation.

This list only scratches the surface of the insidious effects of unemployment. While the ‘natural’ unemployment rate is embedded in virtually every forecasting model used by government and industry, none of them account for the extraordinary social and economic costs of the epidemic that this ‘natural rate’ actually represents.

The Solution: A Global Marshall Plan for the Unemployed continue reading…

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The Only Graph Needed to Explain the New Year’s Dive of 2016: Larry Summers Sort-Of Gets It, the Fed Doesn’t Seem to Get It, and the Media Seems Hardly Aware of It

Michael Stephens | January 11, 2016

by Daniel Alpert

A practically unnoticed phenomenon underpins the negative U.S. economic data trends we saw in Q4 2015 and the enormous increase in market volatility in the first week of 2016: the United States’ global competitors are—once again—using vast pools of low-wage, underutilized labor, a huge excess of domestic production capacity, and/or the ever-stronger U.S. dollar, to grab whatever share of demand they can in order to maintain/recover growth in a sluggish global economy.

While the plummeting price of energy—the result of insufficient global demand and huge new oversupply from North America itself—has cut America’s energy deficit to a level less than 20 percent of its 2008 peak, the overall current account deficit of the U.S. grew rapidly in 2014 and, more alarmingly, in 2015.  The nation’s current account is the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers.

But here’s the brutal bottom-line: the non-energy portion of the U.S. current account deficit, relative to GDP, has ballooned by 236 percent since its low in December 2013, during which period the energy deficit fell by 57 percent.

Alpert_The Only Graph_Fig1

The U.S. economy is showing weakness in Nearly Everything But Employment (“NEBE”) and even its salutary pace of job formation is plagued by an unusual level of temporary and low wage hiring, painfully low labor force participation and very low levels of nominal wage growth. Consumption is therefore not rising in a manner anywhere near the rise in headline job formation. And the demand-push inflation that one would normally expect to have emerged with the creation of 5.6 million jobs over 24 months is nowhere to be found.  In fact, the U.S. is joining the rest of the world in a persistent pattern of alternating deflation and disinflation (“lowflation”).

The substantial slowdown in China, the evident failure of Abenomics in Japan, the collapse of the Brazilian and Argentinian economies, and a failure of the eurozone to get off the mat despite the “anything it takes” monetary posture of the European Central Bank, have all contributed to declining global aggregate demand for all sorts of production. This has been reflected particularly acutely in the energy and other commodities sectors.

All of the foregoing constitute a bitter pill for the United States economy which, better than any other, was able to substantially reduce its trade deficit from the end of the recession through 2013 and to lever its size, its willingness to engage in extraordinary monetary easing early and often during and following the Great Recession, and its inherent resiliency to produce at least a tepid recovery while other regions slowed or remained mired in slump.

After all its deft maneuvering, the U.S. is once again being inundated by cheap imports and seeing its ability to export severely impaired, because of a combination of its competitors’ internal deflation and efforts (direct and indirect) to devalue their currencies relative to the U.S. dollar and each other’s.  This is vastly constraining U.S. economic growth and may result in its contraction at some point during 2016.

This nearly universal beggar-thy-neighbor behavior has all the makings of a very serious global economic disruption and proceeds from the same global economic imbalances that we saw before, during and after the Great Recession; the vast oversupply of labor, production, and capital relative to aggregate demand for all three.

Where is this coming from? continue reading…

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Kregel on the Vulture Funds

Michael Stephens | September 28, 2015

Jan Kregel, the Levy Institute’s director of research, was recently interviewed by the Buenos Aires Herald regarding Argentina’s economic prospects and its ongoing situation with the “vulture funds.”

On Argentina’s policy challenges:

So there are no alternatives to devaluation?

Argentina has one net advantage. As a result of the vulture funds it’s relatively insulated from the global crisis. Now it has a decision to make on how it is going to respond. China and Brazil didn’t have a choice but Argentina does. There has to be an exchange rate adjustment and it will be difficult because everybody else is doing the same thing. You can do it on a gradual basis but you would be doing it in a non-gradual context, taking the real as an example.

The government claims that a devaluation isn’t necessary and can be replaced by a larger consumption thanks to counter cyclical measures. Do you agree?

If you continue to go counter-current, that means the exchange rate will remain low. The country has a big opportunity to do import substitution due to the global context. Now is the moment to support domestic industry. The question is if you do that by increasing consumption or by more direct policies to stimulate manufacturing industries. You should first do the second, that will then boost consumption.

Argentina saw huge economic growth in the first years of Kirchnerism but now the economy has slowed down. What are the reasons for that?

When I was working at the UN, I used to come to Argentina and present reports at the Economy Ministry. The first question I asked officials is how long they thought Argentina could grow at eight percent. Usually the response was, why I thought that was a problem. Everybody actually believed that eight percent was something that could go on forever—that’s the reason behind Argentina’s current situation. Still, Argentina survived the world economic crisis much better than any other developing country.

And on the vulture funds:

Can the legal conflict with the holdouts be solved?

The most reasonable thing is to do nothing and let it sit there. The current US administration doesn’t support the claims of US investors and if the issue would go to any other court it is unlikely that it would be resolved. If you want to change something you just have to wait for the people who did it to die. Griesa is not very young and eventually has to retire.

Read the entire interview here.

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Austerity and Growth: Missing the Point

Michael Stephens | May 22, 2015

The pseudo-debate about whether Keynesians and other fellow travellers ought to be embarrassed when governments that engage in fiscal austerity nevertheless experience positive economic growth rates has become a distraction.

For countries like the US and the UK, it is possible under current circumstances for governments to implement budget cuts and still see their economies grow. But the truth of that statement is not fatal to the Keynesian-inspired critique of austerity policies; it is not by any means the end of the story. The more meaningful question is this: What would have to happen in these economies for significant growth to occur in the midst of budget tightening?

Finding an answer to that last question is one of the strengths of the approach to thinking about the economy pioneered by Wynne Godley, and fleshed out further in the Levy Institute’s strategic analysis series. This approach also provides a clear understanding of how deeply irresponsible it is to cut government spending under present economic conditions: because the danger, given the state of the US and UK economies, is not just that budget cuts might slow down the economy, but that they might not.

Let’s look at the United States in particular. In their just-released report, Dimitri Papadimitriou, Greg Hannsgen, Michalis Nikiforos, and Gennaro Zezza point out that, with the exception of a short cycle in the ’70s, “there has been no other recovery in the modern history of the US economy in which government spending decreased in real terms.”

Exceptional Austerity_Levy Institute Strategic Analysis_May 2015

The Congressional Budget Office is predicting that the budget deficit will continue to shrink over the next few years, from 2.8 percent of GDP in 2014 to 2.4 percent in 2018. At the same time, the authors note, the CBO is telling us that GDP will grow at 2.8 percent, 3 percent, 2.7 percent, and 2.1 percent in 2015, ’16, ’17, and ’18, respectively. If we assume that both of those forecasts (for the budget deficit and GDP growth) come true, what would the rest of the economy need to look like?

The United States has run current account deficits, which act as a drag on economic growth, for decades. And despite the recent increase in net exports of petroleum products, which has helped keep the US trade deficit from returning to its sky-high precrisis levels, there is little reason to think that the external deficit will substantially improve over the next few years (if anything, the authors argue, it is likely to get worse. There’s more on recent developments in the foreign sector beginning on p. 6 of the report).

That being the case, GDP growth rates of the sort projected by the CBO can only come to pass on the basis of a rise in private sector spending. In fact, Papadimitriou et al. show that private sector spending would have to expand so much that it would exceed private sector income for the first time since the crisis. In other words, growth would depend on rising private indebtedness.

If the dollar continues to appreciate further and the economies of US trading partners end up performing worse than the IMF expects (a very real possibility, the authors point out, given the optimism of IMF forecasts), this increase in private sector spending over income — and thus the increase in the private debt-to-income ratio — would have to be even larger. Here’s what that would look like (in the chart below, “Scenario 1” corresponds to slower growth among US trading partners [by 1 percent of GDP annually], “Scenario 2” to a 25 percent appreciation of the dollar over the next four years, and “Scenario 3” to a combination of the two):

Austerity and Private Debt_Levy Institute Strategic Analysis_May 2015

If private spending doesn’t blow up in this way, the CBO’s optimistic growth projections won’t come about. But if growth does occur, it can only do so (given the external deficit) through a process that raises the debt-to-income ratio of the private sector. As the authors point out, this is precisely the same process that led to the Great Recession and its aftermath.

What’s worse, the state of income inequality in the United States is such that this increase in private debt will be borne disproportionately by households in the bottom 90 percent of the income distribution. Unlike the federal government, which can service its debt through mere keystrokes, US households cannot sustain rising debt ratios of the sort portrayed in the chart above (though the amount of public hand-wringing spent on the debt of the former, as compared to the latter, would suggest the opposite). As Papadimitriou et al. write:

“Increased borrowing of one kind or another can often be sustained for a long time … but eventually, retrenchment takes place relative to incomes. The consequences of any further retrenchment in debt-financed consumer spending would be felt throughout industries that produce for the US consumer, and again, as we noted above, the recovery in real private domestic consumption is already weak relative to any previous recovery.”

To bring this back to the tired discussions surrounding austerity policies: yes, it is possible for the United States to have both tight budgets and rising GDP over the next few years. Fiscal conservatism doesn’t make economic growth impossible in the near term — it makes it impossible to grow without increasing financial fragility. In the absence of a significant increase in net exports, keeping the government budget on its current track will lead to either stagnation or an acute crisis.

Austerians in the United States and elsewhere have been allowed to portray themselves as the champions of steely-eyed realism and prudence. In reality, unless their budget proposals come attached with some workable plan to substantially reduce trade deficits, they are courting private-debt-driven financial crises. In any meaningful sense, they are the true practitioners of fiscal irresponsibility.

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The Plunging Euro and Its Muddled Cheerleaders

Jörg Bibow | March 16, 2015

Greg Ip had a couple of pieces on currency wars and gyrations in the Wall Street Journal last week (here and here), essentially arguing that talk about currency warfare is much beside the point and that exchange rate gyrations are merely benevolent side-effects of monetary policies that will inevitably make the whole world better off. The Financial Times had an editorial on the ECB’s QE and the euro plunge that ran along the same lines, bluntly declaring that “any criticism from outside the eurozone that the fall in the single currency will kick off a global currency war [was] misplaced.” And Bloomberg summed it all up by proclaiming that the whole currency war talk is a “load of baloney,” fearing that the currency war nonsense talk might lead to trade restrictions, which would do real harm.

While the Financial Times sees no cause for alarm at all it seems, Greg Ip’s alarm bells would only go off if China were to retaliate by weakening the renminbi.

So there appears to be a consensus that all is currently for the best in all possible currency worlds. As ever so often, the consensus may be seriously off track here.

Consider Greg Ip’s main point, which is that monetary easing cannot do any harm by weakening a currency because it simply forces other central banks to follow suit, which eases the global monetary stance, which is all for the good. Well, the argument fails to distinguish situations in which all countries share common monetary policy requirements from situations in which that is not the case. The former kind of situation prevailed right after the Lehman bankruptcy, when the Federal Reserve’s easing provided the scope for a global monetary easing. This benevolent alignment didn’t last very long, however, as the U.S. monetary stance proved to be excessively easy for numerous countries in the emerging world — countries that may today be held back by the financial fragilities that were created at that time. Fast forward, recovery in the U.S. appears to be leading the world economy today, creating the opposite kind of challenges. So is the Federal Reserve prodding everyone else to tighten too, to the benefit of the world? Or are the ECB’s QE adventures prodding the Federal Reserve to change course, to the benefit of the world and the U.S.? If neither is the case, will the resulting exchange rate gyrations really benefit the wider world — unless China devalues its currency, that is?

The new consensus overlooks that it matters to the global economy whether important countries are mainly driven by domestic demand growth or mainly freeload on net exports.

The evolution of current account imbalances and contributions of net exports to GDP growth in the key countries featured in talks about currency wars is revealing.

The U.S. had persistent negative net exports GDP growth contributions and a rising current account deficit prior to the crisis of 2008-09. The crisis then halved the U.S. current account deficit. And post-crisis QE and dollar depreciation saw U.S. domestic demand growth stimulate (disappointingly meager) U.S. GDP growth while net exports made a broadly neutral contribution as the U.S. current account deficit was contained overall. Suffice to mention that U.S. energy production was an important swing factor in this outcome. The U.S. non-energy external balance has deteriorated with the U.S. recovery.

Japan ran huge current account surpluses prior to the crisis. As the favored carry-trade currency, the yen was cheap at the time. When crisis struck, the yen appreciated sharply at first, and Japan’s current account imbalance has since disappeared as net exports made negative GDP growth contributions in the last four years. More recently, the yen’s appreciation was partly reversed by means of QE starting in 2013 when the Japanese authorities also initiated a program to stimulate domestic demand.

The eurozone had a broadly balanced external position prior to the global crisis. Internally, however, diverging competitiveness positions led to huge imbalances, which then imploded. As the eurozone authorities’ policy response suffocated domestic demand, positive GDP growth contributions from net exports were the currency union’s only lifeline. The eurozone has a surging current account surplus, the biggest in the world today, with Germany and the Netherlands as the lead stars.

It is true that China had by far the biggest current account surplus prior to the global crisis. But China has also gone through by far the biggest rebalancing since. China’s current account surplus halved in absolute terms; in relative terms it plunged from 10 percent of GDP to roughly 2 percent within a short period of time. In fact, the country has experienced quite persistent negative GDP growth contributions from net exports since the crisis.

In essence, in the years since the global crisis, China was the number one global growth engine, while the eurozone was the world’s outstanding drag on growth, undermining a proper recovery. Germany’s bilateral trade and current account balances vis-à-vis China are in surplus today.

The latest monetary policy initiatives and currency gyrations should be read against this background. The consensus suggests that euro devaluation through the ECB’s belated QE is just fine, a measure for the general good of the world. Apparently the plunging euro is not designed to augment and sustain the eurozone’s freeloading on external growth; it is not the mechanism by which the eurozone exports its homemade mess to innocent bystanders. By contrast, as Greg Ip states explicitly, if the Chinese authorities were to devalue the renminbi, that could be seen as beggar-they-neighbor policy, an attempt to steal demand from their trading partners. Apparently, China is obliged to provide positive growth stimuli to the global economy and must not try to contain the damage that eurozone freeloading has on its development.

Surely Dr. Schäuble and Germany’s export industry can only applaud the new consensus. Never mind the shallow double standards on which it rests. Or do we all begin to adopt the kind of logic that prevails in Dr. Schäubles “parallel universe”* — making it yet another German export success?

 

* Back in September 2013, Dr. Schäuble famously suggested (see my comment) that critics of the brilliant eurozone crisis management undertaken under his stewardship were living in a “parallel universe where well-established economic principles no longer apply.” Eurozone crisis management has been so brilliant that the world now enjoys its fruits at a super-competitive euro exchange rate. Bravo! More cheerleading please.

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Internal Devaluation in Greece

Gennaro Zezza | November 30, 2013

In a recent speech at the Levy Institute conference on “The Eurozone Crisis, Greece, and the Experience of Austerity” held in Athens, Mr. Yves Mersch, a member of the Executive Board and General Council at the ECB, made it clear that the success of the troika plan for the Greek economy requires the current account balance to improve as the public deficit is reduced. In his own words,

To facilitate an export-led recovery, this trend [decreasing competitiveness] has to be corrected and there is no way this can be achieved in the short run other than by adjusting prices and costs. I know the difficulties that such adjustment creates and the criticisms that are leveled against it. But we are in a monetary union and this is how adjustment works. Sharing a currency brings considerable microeconomic benefits but it requires that relative prices can adjust to offset shocks.

The troika requests for a reduction in costs have been met by Greeks, as our first chart shows.

ch_wage

Indeed, nominal wages(1) have fallen by 23 percent from their peak in the first quarter of 2010, and real wages(2) have fallen by 27.8 percent over the same period.

While it is true that prices started to fall later than wages, and therefore the improvement in competitiveness has been limited, its impact on exports is doubtful.

exttrade_sep

The chart above shows that nominal exports of goods have somewhat improved, but if we decompose exports of goods using the Eurostat database by SITC categories, we learn that most – if not all – of the increase in exports of goods is related to oil products(3). Indeed, recent news indicates a fall in non-oil exports.

tradegoods_aug

Summing up, internal devaluation has so far had negligible effects on Greek exports, while the fall in the purchasing power of wages has added to the fall in domestic demand generated by fiscal austerity, and thereby contributed to the unprecedented crisis in Greece.

Our July projections have so far been on track, and we predict that even if prices keep falling, as advocated by the troika plan, the response of the current account will be too slow to compensate for fiscal austerity. Strategies to increase employment and income are urgently needed.

Notes:
(1) The wage index is taken from the Hellenic Statistical Authority (ElStat).
(2) Real wages are obtained by deflating the wage index by the Overall CPI published by ElStat, seasonally adjusted in Eviews and converted to quarterly frequency.
(3) We use the SITC category “Mineral fuels, lubricants and related materials” for our measure of oil-related exports.

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Is an R&D-Led Export Strategy Our Best Shot?

Michael Stephens | November 26, 2013

Dimitri Papadimitriou, in Reuters’ “Great Debate” series:

The U.S. needs an export strategy led by research and development, and it needs it now. A serious federal commitment to R&D would help arrest the long-term decline in manufacturing, and return America to its preeminent and competitive positions in high tech. At the same time, increasing sales of these once-key exports abroad would improve our also-declining balance of trade.

It’s the best shot the U.S. has to energize its weak economic recovery. R&D investment in products sold in foreign markets would yield a greater contribution to economic growth than any other feasible approach today. It would raise GDP, lower unemployment, and rehabilitate production operations in ways that would reverberate worldwide.

For our R&D/export model, we posited a modest infusion of $160 billion per year — about 1 percent of GDP — until 2016. We saw unemployment fall to less than 5 percent by 2016, compared with CBO forecasts that unemployment will remain over 7 percent. Real GDP growth — instead of hovering around 3.5 percent, by CBO estimates, on the current path — gradually rose to near 5.5 percent by the end of the period.

Read it here.

The research underlying these proposals and projections can be found in the Levy Institute’s most recent US macroeconomic analysis: “Rescuing the Recovery: Prospects and Policies for the United States

sa_10_13

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No Sound Defense of German Mercantilism, Nowhere

Jörg Bibow | November 12, 2013

In “America’s misplaced lecture to Germany,” Gideon Rachman ends up offering a singularly misplaced defense of Germany. Quite similar to the typical stories one hears on this matter in Germany itself, Rachman appears to be unaware of how self-contradictory his arguments really are. To begin with, after describing the Federal Reserve’s QE policies as both a vital support to the world economy and an addictive drug, he goes on to identify the markets’ reaction to tapering by the Fed as the “biggest threat to the global economy in the coming year.” Does he suggest here that, once adopted, QE policies can never be reversed without causing market turbulences and that QE policies, therefore, should never have been adopted in the first place? That would beg the question as to what else would have provided that vital support to the world economy which Rachman himself attributes to these very policies.

The real issue here is why such overburdening responsibility for supporting the global economy has come to rest on the Federal Reserve’s shoulders. Apparently without seeing the connection, Rachman supplies one reason himself: the “particularly mindless game” of toying with defaulting on the national debt on the part of the US Congress that has accompanied harsh fiscal contraction in the US this year.

Another reason is to be seen in the fact that Europe’s economy, especially the eurozone under German austerity leadership, has been shrinking for years. Europe is still the US’s most important trading partner. It may be a matter of annoyance rather than envy that US firms find themselves exporting into a shrinking market while German firms enjoy participating in the recovery of their important US market. Globally, then, QE may also be seen as a defense against bloated German export surpluses, benefiting from a euro exchange rate that is way undervalued as far as Germany is concerned.

But Rachman also refers to the situation inside the currency union, attesting that Germany has generously provided large-scale bail-outs for its eurozone partners in crisis. Again, he is missing an important connection here. continue reading…

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Can R&D Help Get Us Out of this Mess? A New Stock-Flow Analysis

Michael Stephens | October 23, 2013

Dimitri Papadimitriou, Greg Hannsgen, Michalis Nikiforos, and Gennaro Zezza have just published a new strategic analysis for the US economy, with a baseline projection and alternative policy simulations through the end of 2016. The report takes a closer look at the potential payoff of R&D investment in the context of a US export strategy.

As Papadimitriou et al. point out, fiscal policy at the federal level is simply stuck on a self-defeating course, with nothing but further growth-killing contraction on the horizon. Their baseline projection shows that if we stay on the current fiscal path, in which the deficit continues to shrink rapidly, growth won’t be high enough to appreciably bring down the unemployment rate — as far out as 2016 unemployment would be just below 7 percent.

The significant increases in federal spending that would be needed to accelerate the recovery and quickly bring down the unemployment rate don’t seem to be politically viable, to put it gently. So the authors turn to the external sector; more precisely, to an export-oriented strategy driven by innovation.

Research and development may be an area in which a proposed increase in government investment would attract less rabid congressional opposition. And from the authors’ perspective, recent revisions to the National Income and Product Accounts (NIPA) now allow us to get a better handle on what to expect from this sort of strategy: “we now enjoy an improved ability to conduct an inquiry in this area: R&D activity is the largest change to measured US GDP, with the recently revised NIPA concepts treating this sort of spending as a form of investment.”

They examine the effects of an increase in R&D spending of $160 billion per year (around 1 percent of GDP) through the end of 2016. This would be R&D expenditure focused on fields with applications in the tradable goods and service sector. In addition to the fiscal stimulus effects, part of the mechanism here is that innovation would increase average productivity in these export sectors, reduce unit costs and relative prices, and thereby boost export volume (“We assume that this spending is aimed exclusively at reducing domestic costs of production, although in reality the effects might also include bringing novel products to market overseas”).

The results of the R&D simulation show that unemployment would drop below 5 percent by the end of the projection period (2016Q4), with economic growth nearing 5.5 percent. Their simulations also suggest that R&D investment would be slightly more potent than the same amount invested in infrastructure, though the authors don’t present this as an either/or policy choice.

The result is particularly noteworthy, given that the meat-axe approach to federal budgeting over the last couple of years has meant that government investment in R&D has been stagnating — and is scheduled for big cuts (from ITIF, via Brad Plumer):

R&D Sequester Cuts

Papadimitriou et al. also introduce a note of caution in their new report. Many economic forecasts assume that the post-financial-crisis deleveraging process — the reduction of the private sector’s debt-to-GDP ratio — will end shortly. In other words, a lot of growth projections for the next few years assume renewed household and business borrowing.

The authors run a simulation in which deleveraging continues for households in particular. Why should we consider this possibility? “Following the work of Wynne Godley, we think it reasonable to argue that historical norms are relevant as benchmarks for household indebtedness ratios.” In this instance, taking that approach would mean treating the private sector’s negative net saving from the 1990s through the 2000s as an exception.

This is what household indebtedness would look like in this scenario (“scenario 3” in the figure, which includes the R&D investment of 1 percent of GDP per year. “Scenario 1” and “scenario 2” correspond to the infrastructure and R&D investment scenarios, respectively, but with the CBO’s more optimistic assumptions about the path of household debt):

Continued Household Deleveraging

If households continue to reduce their debt levels, the positive effects of the R&D investment would be somewhat blunted: growth would just fail to reach 5 percent by the end of 2016 and the unemployment rate would be about 5.5 percent (compared to sub-5 percent unemployment for the R&D scenario in which the household deleveraging process ends).

The upshot is that policymakers need to be prepared for the possibility that the deleveraging process is not finished. If households continue to reduce their debts, there will be even more drag on the economy — and an even more urgent need for ambitious thinking about policies to boost growth and employment.

You can read the report here (pdf).

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The IMF’s Puzzling Current Account Projections

Gennaro Zezza | September 23, 2013

The following table has been computed using data from the latest (April 2013) IMF World Economic Outlook database, with IMF estimates starting in 2013 for most countries.

Current Account Balances_IMF April 2013

In my view, these projections are based on heroic assumptions and wishful thinking. The eurozone is supposed to improve its position, even though the current account balance of Germany is supposed to drop substantially (from 1.52 percent of US GDP in 2012 to 0.93 percent in 2018): Greece, Italy, Portugal, and Spain are all supposed to move from a current account deficit in 2012 to a surplus from 2013 onwards, and France is also supposed to reduce its current account deficit.

It therefore seems that the IMF is assuming some equilibrating process inside the eurozone, but overall this area will either be importing less from abroad (while keeping its exports constant) or exporting more. In the former case, the eurozone will impart a deflationary impulse to its trading partners. In the latter case, which area is supposed to absorb the additional eurozone exports? Looking at the table, the candidates are either the United States, which is projected to see its current account deteriorate even further, or developing countries.

If export-led growth from China – the only country in the BRICs for which the IMF projects an improvement in its current account – and the eurozone must rely on additional demand from developing countries, plausibly out of borrowing, global imbalances will trigger a new round of financial instability worldwide.

The other puzzling feature in IMF projections is the substantial fall in the current account of OPEC countries. Is the IMF hoping for a permanent shift of the world economy away from oil products, and therefore a fall in the price of oil? If this is the case, I would expect a fall in the US current account deficit, rather than an increase. But given the permanent turmoil in the Middle East, hoping for a consistent drop in the price of oil may be wishful thinking.

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