Archive for June, 2010

The Headline of the G20 Summit

Well, there wasn’t much of one, really.  Of course heading into it we knew Toronto was only going to be a pit stop on the way to Seoul in November, but even still I’ve been surprised by the general lack of enthusiasm and the minimal media coverage of the event.  Talk of a bank tax seems to have completely evaporated over the past couple weeks (count that as a victory for Canadian diplomats), and there wasn’t much on financial regulation at all.  The biggest takeaway seems to be the commitment of advanced economies to cut deficits in half by 2013 and stabilize debt-to-gdp levels by 2016.  Leaving aside the question of whether or not this is the right strategy, it seems unlikely this “commitment” will actually do anything to shift behaviors.  Like most parts of these communiques, the section on fiscal tightening is triple- and quadruple-caveated, full of language about how plans will need to be adopted to national circumstances.  In other words, if a country wants to do this great, but if not, don’t worry about it.

I’m not someone who believes that international agreements which leave room for national discretion can’t have an effect; indeed, they can often provide important political cover and international pressure to pass unpopular but necessary legislation.  (“We aren’t happy about having to do this, but it’s important we do so to remain a member in good standing of the international community.”)  But this is only going to work for countries and in situations where populations see some benefits to supporting supra-national causes, even at the cost of a little national sovereignty.  Today, I’d guess this is probably the case in Canada and Australia, two small-ish powers eager to prove they belong on the global stage (and for whom multilateralism is tied into national identity); maybe the case in France, another country that enjoys playing an out-sized, magnanimous role in global affairs; but I doubt is true of many other advanced G20 countries.  You certainly aren’t going to see any Republican Senators here in the US justifying a vote saying “I know people aren’t going to like this, but a global governance institution told us to do it, and I think we should do what they say”.

Coincidentally, the two countries that might actually shift their behavior in response to an international commitment happen to be the two with the least fiscal issues:  Canada and Australia already have plans to return to balance budgets — a seemingly infinitely far off prospect for most advanced economies —  by 2014/15 and 2012/13, respectively.  So my take on the G20 pledge is that it might, at the margin, slightly increase France’s likelihood of taking meaningful action on the fiscal front.  Quite an accomplishment.

All that said, I don’t want to be too down on the G20; this was always meant to be an in-between meeting, and it’s better for the G20 to make modest statements than overreach.  Let’s hope for more out of Seoul.

And somehow the G8 still managed to make the G20 look incredibly effective by comparison: the G8’s big headline, a new initiative on maternal and infant health, came in at several billion less than expected, and even then still consisted of mostly repackaging previous commitments rather than any new funding. Sigh.

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Chinese wages, yuan appreciation, and global rebalancing

In the past couple weeks, the two big stories out of the Chinese economy have been reports of labor unrest and rising wages, and the news a few days ago that China would slowly allow the appreciation of its currency.  The former is an important development in the path toward a more stable post-crisis global economy; the latter, though welcome, is largely a political sideshow.

First to the news about wages.  Increasing the wage share in the Chinese economy is probably the single best way to address global imbalances (the other needed change is an increase in US savings rates, but this might have to wait until after the recovery is solidified).  The reason is simple: in any economy, final household consumption can be thought of as the result of two ratios: first, out of total GDP, how much income flows to households in the form of wages and other transfers, less taxes; second, of total household income, how much is spent on consumption vs. saved.

When looking to explain China’s low consumption, most commentators have focused on the second of these two ratios: they picture the thrifty Chinese family, squirreling away all of its income to pay for their children’s education and future health expenses.  Now if you believe this story, the only way to increase Chinese consumption is to convince Chinese households they no longer need to save as much — in other words, to build a resilient and wide-reaching social safety net and quality public schools (something we’re still struggling with here in the US) and induce a cultural shift away from saving toward spending.  A difficult task indeed.

But the good news is, that story isn’t really true, or at least isn’t the whole story.  Chinese household savings is high, but it’s not thaaaat high.  As the graph below shows, Chinese household savings increased during the 1990s, but between 1999 and 2006 was pretty much flat, bouncing around just below 25 percent; certainly high by US standards, but not so much by Asian standards.  It’s edged up a little in the past few years, but only to about 27 percent — still well below India’s rate, yet you rarely hear people complaining that Indian households save too much.

So Chinese final household consumption is low not because household savings rates are too high, but because Chinese household income is too low.  The upside of this is the fact that increasing Chinese consumption doesn’t require complex institution building and cultural shifts; all it takes is getting more money to households.  And with growing pressure to increase wages, it looks like soon they will be.  (For more see this recent paper for Brookings here, and for a more academic take see here.)

So where does the Chinese currency fit in here?  Well, the short answer is, it doesn’t.  Structural forces in the Chinese economy, like the total wage share, are far more important than small adjustments in the exchange rate.  A slow, gradual appreciation of the yuan is ultimately in both China’s and the global economy’s interest, but it’s not going to have nearly the impact you’d expect based on the political rhetoric in both China and the US.  I don’t really understand how the exchange rate got to be such a loaded political issue, where the US looks weak if it can’t force China to appreciate its currency, and China looks like its bowing to foreign interference if it takes minimal steps to bring its exchange rate more in line with its competitiveness.

Which brings me to the last point I’ll make, which is that there is some real benefit of China’s recent decision to inch the yuan upwards, but it has little to do with any actual economic forces.  Thanks to this week’s announcement, now a) the G20 can focus on real problems, like Europe’s mess, rather than getting locked in a debate over the yuan, and b) hopefully the rhetoric in both China and the US will be toned down, and the likelihood of a trade war between the world’s two most powerful economies during a very fragile global recovery will decrease.  So at least some good will come of it.

Amazing China Graph of the Day

I’ve been meaning to write something about Chinese wages for a while, but haven’t yet gotten around to it.  Hopefully I will soon, but in the meantime I think this editorial from the weekend’s FT broadly gets it right.  The main takeaway is that this is exactly what we should expect to see given the country’s phenomenal growth and development of recent years; moreover, if we’re serious about wanting to see rebalancing within China and the global economy, this is what we should *want* to see happening.  (I find it amazing how many American newspapers have been calling on the Chinese to let the yuan appreciate for years, then when news of wage increases hits the story becomes ‘but this will make our ipods and computers more expensive!’  More on that to come.)

For now, I just want to share the below graph, hidden in the appendix of the World Bank’s recently released Global Economic Prospects, showing metal consumption in China and the rest of the world:

Generally, when you see a graph of consumption of anything that is split between one country and the rest of the world, you’d expect the two series to be measured on separate axes.  Not the case here.  Eyeballing from the graph, China now accounts for about 40 percent of the world’s metal consumption.  Ridiculous.

I think this one graph might sum up the current state of the global economy better than any other.  More than anything, it shows that a decade ago, even though China was growing at 10 percent, it was still a small enough economy that it didn’t really affect the global picture.  But with China emerging as the soon-to-be-if-not-already second largest economy, that same 10 percent growth rate is reshaping the global economic landscape.  And when all other large economies are facing a prolonged slump, suddenly China is more or less the world’s only growth driver – and if you’re a metal exporter, your best friend.

More on political trust and credibility

I see since my last post Paul Krugman, MR, and the WSJ have all picked up on the similar topic of the role trust in government plays in the debate surrounding fiscal adjustment now vs. later (each with slightly different takes).  I’m happy to see such credibility questions getting greater coverage; as Tyler Cowen says, trust is an underused word in macroeconomics.

One aspect of the issue I find particularly interesting is the use of “rules” designed to constrict future actions, and to what extent they’re designed to change current behavior or future behavior.  For example, a recent German law compels the government to limit structural deficits to 0.35% of GDP from 2016 on — do you think this law is designed to alter behavior in the years 2016 on, or send the message today that no matter what else happens in Europe, Germany maintains its fiscal rectitude?  Note that this isn’t just an economics issue; when President Obama promises not to use nuclear weapons against non-nuclear states that comply with the NPT even if attacked by chemical or biological weapons, the goal is clearly to change behavior today, not actually restrict what the US will do under a hypothetical attack.

There are two drawbacks to making promises about future actions.  The first is that, broadly speaking, the more options available to policymakers the better.  Within development economics, for example, it’s widely recognized that “policy space” is very important to successful development, to allow governments to adjust to changing circumstances and implement policies suited to the particular time and place.  This is why many developing country governments fight against WTO agreements that restrict their options in years ahead.  Simply put, we should be cautious about tying the hands of future policymakers.

The second challenge is the question of, when push comes to shove, will policymakers abide by rules made by yesterday’s politicians?  For example, even if we pass a  law stating the government can’t bail out any banks in the future, I imagine that if during a future crisis such a move was deemed necessary, the Fed and/or Treasury would find a way to get it done. (The Fed in particular has shown amazing creativity over the past 18 months.)  I think it’s next to impossible for governments to make credible promises about what they will or will not do during a crisis.  Moreover, I don’t think we really should be making rules about how the government will act in crises; as the saying goes, rules were made to be broken.

The real problem, however, with “rules” designed to control future government actions is who will enforce them?  There’s some role for international organizations (like the WTO) in some cases, but when it comes to the question of fiscal adjustment there’s no real cop.  Other than, of course, the bond markets…

Yesterday’s Job Report…

… was bad.  Very, very bad.  Pay no attention to the headline number of 431,000 jobs, which is next to meaningless considering that 411,000 of those jobs are census-takers, positions which will only last a few months.

The important figure is 41,000, the number of jobs created by the private sector in May.  When there are 15 million unemployed people in the country (and millions more involuntarily working part time or discouraged and dropped out of the labor force), the creation of 41,000 jobs is a very small drop in the bucket; 0.27% of the unemployed, to be exact.

US policymakers now find themselves caught in the middle of a tug-of-war.  On one side is the recent news coming out of Europe, suggesting governments must begin taking their burgeoning sovereign debts seriously, and cut back on government spending.  On the other side is the need to get Americans back to work, which means more government spending.

There is a fairly obvious way out, thanks to the time-differential between the two issues.  Unemployment is an immediate problem.  Sovereign debt, on the other hand, is a long-term problem, as the government can still issue inflation-protected 30 year bonds with interest rates below 2 percent.

So the way out is to spend money now to maintain (or, given yesterday’s job numbers, restart) the recovery, while making a credible commitment to cut down government spending in the long run.  Unfortunately, the key word in that sentence is *credible*, and it’s far from clear the government is capable of this.  Particularly when the US Congress votes to spend half a billion dollars on a jet engine program which everyone agrees we don’t need. (If you want to be depressed about the state of American politics, look no further than the defense appropriations process.)

So the question is, in today’s environment, is there anything the government can do to assure markets it will act (at a future date) to cover its looming liabilities?  We can wait and see what President Obama’s Fiscal Commission comes up with, but I imagine that’s little consolation to the 6.8 million Americans who have been out of work for more than six months.



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