Over at the Washington Center for Equitable Growth: More and more these days, I find myself perturbed when I read Kenneth Rogoff. The models he uses are the models that he built and the models that seem to me to make the most sense. But I repeatedly find him making judgments about how the models apply to the real world that I cannot follow.
For today's example...
Kenneth Rogoff: More Facts and Less Populism: "When the US Treasury recently added its voice to the chorus of critics of Germany’s chronic current-account surplus...
...it underscored the deep disagreement over what, if anything, should be done about it. The critics want Germany to increase its contribution to global demand by importing more and exporting less. The Germans view the maintenance of strong balance sheets as essential to their country’s stabilizing role in Europe.... The debate has too often been informed more by ideology than facts.... READ MOAR
So we start with a standard warm-up exercise: the staking-of-the-claim that he is a reality-based technocrat and that those who disagree are ignorant, or ideologically blinded...
During the first half of the 2000’s, US policymakers chose not to worry about sustained current-account deficits, which peaked at above 6% of GDP. They argued at first that the deficits merely reflected the world’s attraction to superior US investment opportunities, an odd position given that the US was not growing especially quickly compared to emerging markets. Later, academic researchers identified more plausible reasons why the US might be able to run large deficits without great risk, as long as investors’ desire for diversification, safety, and liquidity sustained global demand for US assets. But policymakers should have recognized that even these better rationales had limits, and that massive sustained current-account deficits are often a blinking red signal of deeper problems--in this case, over-borrowing by households to finance home purchases...
And here I say: "Huh?!"
As Helene Rey, Pierre-Olivier Gourinchas, and many others have taught us, the US current account deficits of the 2000s were--quite surprisingly--not accompanied by any substantial deterioration of the U.S. global net asset position. Investors in the US received relatively low returns, probably because what they were purchasing was A form of political risk insurance rather than seeking risk-adjusted return. With the worry that global in balances were creating an unsustainable path for the US net asset position that would lead to an inevitable dollar crash and dollar crisis off the table, worries about global imbalances were reduced to the worry that when rebalancing took place it would produce high structural unemployment as the U.S. would be unable to rapidly and smoothly move workers out of consumption goods, domestic construction, and other investment sectors into exports. That worry also proved false through 2008: the U.S. was having no trouble moving workers and resources from sector to sector--until the crash.
So can Rogoff pulls out a third hindsight-driven reason to ex-post fear the global imbalance that was the US trade deficit in the early 2000s: that it was fueling "over-borrowing by households to finance home purchases". And, yes, there was overborrowing and overbuilding:
But the amount of overbuilding was small in context: $1 trillion more of housing built than trend growth would have predicted, and the value of that housing was substantial--total losses by homebuyers, homebuilders, and those who financed them amounted to $500 billion at most in the collapse of the housing bubble, compared to the $4 trillion of real communications, hardware, and software company value destroyed in the collapse of the dot-com bubble. In a $50 trillion/year global economy with $200 trillion of real asset values, a $500 billion loss is a bad day on the stock market, not a grave imbalance that should take down the global economy for a decade.
The housing crash did, but not because the magnitude of the overbuilding was large--not because of "over-borrowing" by feckless households. Rather, it was overleverage by feckless bankers that did it--yet that is not something that Rogoff mentions.
So then, having written something that I cannot avoid seeing as getting the source of the current U.S. (and global!) depression wrong, Ken turns to Germany:
In the case of Germany, of course, we are talking about surpluses, not deficits.... The issue is not simply Germany... [also the] Netherlands, Switzerland, Sweden, and Norway.... But what is the cause, and is it related to policy? Certainly, no one can criticize northern Europe for exchange-rate undervaluation.... Keynesians look at these surpluses and say that the northern European countries should drive them down by running much larger fiscal deficits to boost domestic demand. They have a point, but they grossly overstate the case. Many studies have shown that changes in private savings and investment tend to offset partly the current-account effects of higher fiscal deficits.... Demand spillovers from German fiscal policy to Europe are likely to be modest, particularly in the eurozone’s troubled countries, like Greece and Portugal. Germany trades with the entire world...
And I want to say: wait a minute. If the studies Ken is referring to are the studies I know, they study economies far from the zero nominal lower bound on interest rates in which there is full or near-full monetary offset to neutralize effects of changes in fiscal policy on aggregate demand. Investment typically rises when fiscal deficits fall because central banks lower interest rates in order to make it so. Savings rise when fiscal deficits fall because much of the change in deficits takes the form of changes in taxes, and the marginal propensity to save out of income is not small.
These have, as best as I can see, no relevance to the current situation at the zero nominal lower bound on short safe nominal interest rates when the Eurozone has an enormous structural cost imbalance which requires either higher inflation in the north Europe, or a long and extremely painful deflation in the south of Europe. My view is that northern Europe ought to choose the first--that even for northern Europe it would be better than being taxed for the next decade in order to keep the pain of economic adjustment in southern Europe low enough to keep southern Europe from dropping the European project. But that's a view you can argue over. What you should not say--or, at least, what I think you should not say--is that studies of times when the economy was not at the zero nominal lower bound to interest rates are relevant to the effects of fiscal expansion and contraction in northern Europe today.
Yet after that, Ken calls for:
Policies to promote public and private investment... [to] tame the surpluses in the short term and strengthen German growth in the long term....
And adds the standard call for structural reform:
One might add that there are still extensive impediments to competition in the service and retail sectors in many northern European countries. Removing them would increase consumption of all goods, including imports.
Before resorting to both-sides-do-it hippie- and austerian-punching:
It is wrong to believe that simplistic answers, such as more fiscal stimulus or more austerity, are a panacea; more often, the underlying problems relate to debt, structural rigidities, low investment, and weak competitiveness...
And all I can think is: that ain't what the models say when:
- the economy is deeply depressed with unemployment much higher than the natural rate,
- short-term safe interest rates are at their zero nominal lower bound, and
- even long-term government borrowing rates are less than long-run growth rates.
To pretend that times are normal when they are not is, I think, leading Ken substantially astray...