A Fascinating Debate in the Macro Blogosphere
Jared Bernstein | On the Economy  |   April 2nd, 2015

The macro blogosphere is on fire, as Bernanke, Summers, and Krugman are having a fascinating discussion that starts with secular stagnation (persistently weak demand, even in expansions), adds a strong dose of international trade with an emphasis on the Bernanke savings glut observations, and thus speaks to a lot of what we think about here at OTE.

Read it yourself—PK provides all the relevant links—but let me amplify a few points that struck me as particularly germane. I will also claim some ownership as the Bernanke comments were made at our full employment event and I’ve tried (along with many others) to raise/amplify the international dimension of this in terms of our persistent and large trade deficits—which result in part from Bernanke’s savings glut—as a significant barrier to full employment.

Larry agrees with Ben’s amendment to the sec stag analysis, i.e., the importance of including the impact of global imbalances of savings over investment (trade surpluses) on our own trade deficits:

With the benefit of hindsight, I wish I had been clearer in seeking to resurrect the secular stagnation hypothesis that one should take a global perspective…Particularly in the 2003-2007 period it is appropriate to regard Ben’s savings glut coming from abroad as an important impediment to demand in the United States. Ben and I are, I think, in agreement that it is important to think about the saving-investment balance not just for countries individually, but for the global economy.

This latter point, about the balance for the global economy, is essential to grasp. I tried to explain it here as follows, adding the role of the dollar as one of globe’s main reserve currencies:

When a country wants to boost its exports by making them cheaper using the aforementioned process, its central bank accumulates currency from countries that issue reserves. To support this process, these countries suppress their consumption and boost their national savings. Since global accounts must balance, when “currency accumulators” save more and consume less than they produce, other countries — “currency issuers,” like the United States — must save less and consume more than they produce (i.e., run trade deficits).

This means that Americans alone do not determine their rates of savings and consumption. Think of an open, global economy as having one huge, aggregated amount of income that must all be consumed, saved or invested. That means individual countries must adjust to one another. If trade ­surplus countries suppress their own consumption and use their excess savings to accumulate dollars, trade­ deficit countries must absorb those excess savings to finance their excess consumption or investment.

Larry very efficiently explains the mechanics at work:

If there are more countries tending to have excess saving than there are tending towards excess investment, there will be a global shortage of demand. In this case countries able to devalue their currencies will benefit from generating more demand. Global mechanisms that concentrate on causing borrowing countries to adjust without seeking to shrink the surplus of surplus countries will tend to push the global economy towards contraction…Secular stagnation and excess foreign saving are best seen alternative ways of describing the same phenomenon.

So, what to do? I’ve focused on the need to push back against those who manage their currencies, but Paul, after an absolutely brilliant, Krugmanesque summary of the debate, tying everything together with Mozartian efficiency, fumbles at the end, dismissing currency manipulation as “pretty much irrelevant” because the problem is weak demand and thus policies to solve it must boost demand.

But…but…but, the whole point of this new Bernanke-inspired insight, with which both Paul and Larry agree, is that the weak demand of sec stag is a function of excess savings over investment, and the savings glut, generated in no small part by the currency accumulation mechanism I describe above, is a central player.

Summers gets at this point in concluding that “…there will be a need for global coordination to assure an adequate level of demand and its appropriate distribution” which perhaps explains his recent suggestion that in negotiating the TPP trade deal (the passage of which he supports), we should “…use the substantial leverage we possess in areas that do bear directly on middle-class living standards. These include the prevention of inappropriate producer subsidies — including through manipulated exchange rates…”

Baker weighs in briefly on the magnitudes involved (the size of recent trade deficits), which he argues match those of large public investment projects progressives long for.

Perhaps a good place to stop for now is to point out that this idea—a substantial investment in public infrastructure—is something probably those on all sides of this debate agree on. That said, even while we’re arguing about the policy solutions, we’ve made important diagnostic progress here by bringing the international dimension—the savings glut and the resultant US trade deficits as a barrier to full employment—into the discussion.

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