Many of us are happy to see that Larry Summers, who served as President Clinton's Treasury Secretary and head of President Obama's National Economic Council, had a column talking about secular stagnation in the Washington Post. As they say here in Washington, if you repeat something that is true long enough, Larry Summers will eventually write about it in the Washington Post.
Unfortunately, Summers still only has part of the story. He notes the possibility that investment demand may have shifted downward because of slower population growth. He also notes that upward redistribution of income may have reduced consumption, since the rich tend to save a larger share of their income than the poor and middle class. It is great to see these points being made by a distinguished economist, however Summers continues to miss the most obvious drain on demand: the trade deficit.
The trade deficit is running at a $500 billion annual pace, more than 3.0 percent of GDP. This is demand that is going to other countries, not the United States. If we snapped our fingers and made the trade deficit zero tomorrow it would translate into roughly 4.2 million jobs directly and another 2.1 million indirectly through multiplier effects for a total of 6.3 million jobs. In other words, this is a big deal.
By comparison, the shift in income from everyone else to the one percent was equal to roughly 10 percentage points of personal income. If we assume that the rich spend 75 percent of this increment and everyone else would have spent roughly 95 percent, then the difference is 2 percentage points of personal income or around 1.6 percentage points of GDP. That is a bit more than half as much as the contribution of the trade deficit.
Summers should know about the trade deficit since he is one of the people most responsible for the deficits we face today. It was his engineering of the IMF bailout of countries from the East Asian financial crisis (with Alan Greenspan and Robert Rubin as accomplices, and Stanley Fisher at the IMF playing a supporting role) that led to the sharp over-valuation of the dollar that gave us large trade deficits.
In standard textbook economics, capital is supposed to flow from rich countries like the United States to poor countries in the developing world which can better use the capital. This implies that rich countries would have trade surpluses, not deficits. This actually was more or less happening in the years prior to the crisis in 1997. Developing countries were on net borrowers.
However the terms of the bailout were viewed as so onerous that countries throughout the developing world decided that they had to accumulate as many reserves as possible in order to avoid ever being in the same situation with the IMF. This meant deliberately keeping the value of their currencies down against the dollar and running large trade surpluses. This corresponds to the large trade deficit run by the United States.
In short, Larry Summers certainly should know about the trade deficit, he helped give it to us. If we want to reverse secular stagnation a very good place to look would be a smaller trade deficit brought about by a lower valued dollar. (We can also cope with a chronic shortfall in aggregate demand by shortening work hours, as Germany has done. Summers apparently opposes this route because he has decided that this is not the American Way.)
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