Brad DeLong--Economics Only

International Capital Mobility Once Again

Mark Thoma points us to David Wessel asking Stanley Fischer about the benefits of international capital mobility:

Economist's View: Diminished Expectations: David Wessel of the Wall Street Journal says expectations of benefits from allowing financial capital to flow freely between countries are fading:

Ten years ago, with spectacularly bad timing, finance ministers and central bankers gathered in Hong Kong and declared that encouraging the free flow of capital across borders should become as much a part of the International Monetary Fund's mission as encouraging trade in goods and services. That was in September 1997, in what turned out to be the opening act of the Asian financial crisis...

[A]nxiety about unfettered flows of money could return if recent market turmoil persists, economies falter and politicians react to public suspicion... that globalization means huge profits for Wall Street, hedge funds and private-equity investors and uncertain benefits for workers. Amid all this, intellectual architects of the world financial order are rethinking the case for allowing money to move wherever it wants.... The theory was that capital would flow from rich to poor countries because returns would be higher there, and that would spur growth in the poor countries.... But money is actually flowing heavily from poor nations (China) to rich countries (the U.S.), the reverse....

The rationale for free flows of capital is undermined and the advantages are less than evident. So are the benefits worth the risks.... Stanley Fischer says they are.... [T]he benefits "have much more to do with your world view, how your people look at the world, and what they need to do to prosper."... In short, exposure to global capital markets... forces financial markets and firms to be more efficient, offers businesses and consumers better terms for borrowing and lending, reduces openings for corruption and discourages short-sighted domestic economic policies. It isn't the money; it's the collateral benefits...

The Value of the Euro

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The euro has risen further than I had realized since late 2000--albeit not since its start in 1999.

Econ 210a: February 14: Question: Europe's Post-WWII Golden Age

A growing literature develops explanations for 'Europe's golden age' (the European economy's fast growth in the third quarter of the 20th century). Is this effort misguided? In other words, do we really need fancy explanations for a straightforward phenomenon that is easily explained in terms of convergence and delayed structural change?

In Condemnation of One-Equation Economics

I really don't like one-equation economics.

One-equation economics assumes that certain economic quantities are fixed in stone, examines one equation--usually an accounting identity--and concludes that somebody else's preferred policies will be ineffective and counterproductive. It does so by ignoring the fact that one of the aims or effects of the somebody else's policies will be to change the values of the economic quantities that are--by assumption and only by assumption--claimed to be fixed in stone.

Here's Stanford's Michael Spence. The one equation is the international savings-investment identity. The quantities assumed fixed are domestic saving and investment:

 

We Are All in It Together - WSJ.com: [I]t would be useful if we stopped pretending or alleging that China's exchange-rate policies are the root cause of our trade deficit.

   

If our savings rate is stubbornly stuck below our investment rate, and if China does allow its currency to revalue over time, then we will simply run a deficit with another collection of countries, and from a domestic point of view, nothing much will have changed. Except that we won't have this subject to discuss with China anymore.

"If our savings rate is stubbornly stuck below our investment rate." If. If. If. As Michael Mussa likes to say in these circumstances: if my grandmother had wheels, she would be a bus.

If China's central bank ceases buying its $200 billion a year of dollar denominated assets, and if nothing shocks the behavior of other central bank or collection of private foreigners, two things will happen: (1) the value of the value of the dollar will fall, and (2) U.S. interest rates will rise. The fall in the value of the dollar will boost U.S. exports and diminish U.S. imports, and the trade deficit will shrink. And--as long as the Federal Reserve is successful in avoiding recession--the rise in interest rates will reduce investment inside the United States and also lower asset values, which will make homeowners and investors feel poorer and increase their savings. It will thus reduce the gap between savings and investment, and so diminish the capital inflow.

Only if investment is stubbornly unresponsive to changes in the price of hiring capital and if savings is stubbornly unresponsive to  housing and financial market wealth will Spence's "if" be true. But does Spence argue that investment is unresponsive? Does he argue that savings are unresponsive? Does he argue that there will be some other shock to the economy--that, for example, the Federal Reserve will fail to maintain full employment and thus that savings will fall because of recessions? No. He says "if." And he only says "if."

Now Mike Spence might argue that the Wall Street Journal does not give him much space, and that even if the Wall Street Journal gave him more space his readers would not give him more time. He might argue that he has to compress and simplify his argument: make it "clearer than truth." He might say that he is not a philosopher discoursing to fellow philosophers walking outside in the sunlight, but rather addressing the ignorant chained in the underground cave, and that it is his job to cast shadows on the wall that will lead those chained underground to support the policies they would support if they could understand the issues, if they were philosophers strolling in the sunlight.

And, Spence might say, it is his job to use whatever means are necessary to keep his readers from supporting destructive policies. He has to cast a shadow on the wall of the cave to get them thinking that tariffs and quotas on imports from China are not a way to reduce America's trade deficit and boost overall fand manufacturing employment.

Point taken: whatever effects (and there would be some) tariffs and quotas on imports from China would have on the level and distribution of employment in the U.S. would be accompanied by much more destructive blowback consequences. Tariffs and  and quotas on imports from China are not a good idea. Getting China to boost consumption and domestic absorption would be a good idea. Closing the U.S. budget deficit would be a good idea. Boosting U.S. private savings would be a good idea. But doing none of those and doing tariffs and quotas instead? Not a good idea.

However, lowering the level of the debate by asserting that the Chinese government's purchase of $200 billion a year of dollar-denominated bonds doesn't affect the U.S. trade balance--that is not a good idea either. Those of us who walk outside in the sunlight and see reality as it is have a moral responsibility to bring others out of the cave: to raise the level of the debate, rather than to focus on casting handshadows that ultimately cannot but mislead.

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UPDATE: Greg Mankiw compliments Michael Spence's one-equation international economics:

 

Greg Mankiw's Blog: Spence on the Trade Deficit: Economist Michael Spence (erstwhile Harvard prof) has a nice piece on the U.S. trade deficit and the Chinese exchange rate in today's Wall Street Journal. His bottom line:it would be useful if we stopped pretending or alleging that China's exchange-rate policies are the root cause of our trade deficit. If our savings rate is stubbornly stuck below our investment rate, and if China does allow its currency to revalue over time, then we will simply run a deficit with another collection of countries, and from a domestic point of view, nothing much will have changed. Except that we won't have this subject to discuss with China anymore.

   

The linkage among saving, investment, and the trade deficit is a topic that will feature prominently in ec 10 this spring.