Bruce Greenwald on Structural Problems in the Economy and Unemployment
(H/T Guru Focus & Manual Of Ideas for linking to this)
Click Here Bruce Greenwald on Structural Problems in the Economy and Unemployment
Q. Which countries are in a position to play a leadership role in solving the crisis?
A. There is one iron rule that must hold, which is that the sum of all the surpluses and the deficits across all countries has to be zero.
Somebody has to eat the surpluses. It used to be Malaysia, Korea, Indonesia, and Thailand, and they paid the price and went from deficit to surplus, but somebody still has to eat their surpluses. So ultimately it goes to the country who can accommodate that, because it can borrow in its own currency. When the dollar falls, we don’t suffer the way the Koreans did, with unserviceable debt. The US is the deficit country of last resort.
The Asian countries are running protectionism – just differently – by manipulating their own currencies. They don’t do tariffs, and that’s why the dollar hasn’t been able to fall.
The problem from the perspective of the US is that if we are importing 9% more of our GDP than we are exporting, it is very difficult to sustain full employment. You basically have to have a zero saving rate or a bubble in the internet or housing. But you have to have some substitute demand.
A. The reason why World War II got us out of the Depression, and the reason that Argentina suffered because it didn’t participate, is that it is actually industrial policy that gets everybody off the farms.
That policy also accumulates purchasing power, so that when people are in the cities, there is demand for appliances and cars. They have moved and they are now part of the productive economy. So the demand is sustainable.
One of the great concerns at the end of WWII was that everyone thought we were going to go back to the Great Depression. In Argentina, of course, that happened. In the US and everyplace else, everyone was surprised and relieved. But the reason is that you’ve gotten everyone off the farms and into the cities. It was through both the war industries and in the army.
Q. So we are left with unsustainable consumer demand in the US and an imbalance in global trade. What is the solution?
A. You’ll notice that we basically fixed the banks, but the underlying imbalances are in no way fixed. Those who suffered the worst, in international terms, are the Japanese and the other big manufacturers. So what you’ve got is this fundamental economic imbalance that hasn’t gone away, which is going to mean slow growth.
We can resolve this by just directing tariffs. But Obama plays nice with others, and he’s not going to do that, which would harm the rest of the world. We can’t try to control our currency, because if we sell dollars we would drive the price of the dollar down, and Japan and China would just buy them and sell Yen or Yuan, and there’s no percentage gain in doing that.
So the actual way we could relieve the pressure is to have the IMF just print money and give it to Korea and the other countries so that they could buy Chinese and the other exporting countries’ goods without having to incur foreign debt. That is the Stiglitz plan and that’s the plan that the Chinese are talking about.
At the same time, you’d like to tax the surplus countries to force them to adjust. That’s a short-term solution. The long-term solution is you have to get people out of manufacturing – and governments have to cooperate in this effort – and get them into industries like health care. Cutting health care is not a good idea at this point. They have to work in education, housing, and financial services. But if all those industries are under attack globally, you are not going to get the jobs that you need to replace the manufacturing jobs.
There is this huge structural problem taking place. The governments can offset it to some extent. I think what you are going to see in the US is what you saw in Japan for years, which is stagnant demand. We will grow a little bit, imports will flood in, purchasing power will go out of the US economy, and we will stop growing, and then the government will do something and the dollar will fall a little. All these things will happen sequentially, but ultimately you are going to have slow growth.
Click Here Bruce Greenwald on Structural Problems in the Economy and Unemployment
