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 ...
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).
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).
Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast. Twitter: @dandrezner
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