Saturday, June 19, 2010

Government Spending and the Slump

In assessing the impact of the stimulus on the economy, one trap that many people seem to be falling into is confusing "federal spending" with "government spending." In fact, over 60% of the government purchases contribution to output (i.e., the G component of GDP), comes from state and local government. While federal component of fiscal policy has been expansionary, the state and local part has been pushing in the opposite direction, a problem that may get worse, according to Ezra Klein:
Some 46 states are facing budget gaps that will require them to cut spending or raise taxes. The Center on Budget and Policy Priorities estimates that in 2011, the states will have to come up with a total of $180 billion.

These budget shortfalls are the equivalent of a massive anti-stimulus, which some experts believe has overwhelmed the $787 billion stimulus passed by the federal government in 2009.

On this, see also Bruce Bartlett and Stephen Gordon (and this previous post).

Super-Asinine Propensities

As Economix notes, Mark Thoma has coined the term "austerians" for those who are calling for budget cutting in the face of continued high unemployment. That's pretty good, but I think Keynes said it even better, as his biographer Robert Skidelsky writes in the FT:
When the Conservative-Liberal coalition that had succeeded the Labour government introduced an emergency budget in September 1931, Keynes again stood out against the chorus of approval. The budget was, he wrote, “replete with folly and injustice”. He explained to an American correspondent that “every person in this country of super-asinine propensities, everyone who hates social progress and loves deflation, feels that his hour has come and triumphantly announces how, by refraining from every form of economic activity, we can all become prosperous again.”
Speaking of Alan Greenspan... Paul Krugman, Andrew Leonard and Calculated Risk respond to his super-asinine WSJ op-ed. See also Andrew Leonard on Skidelsky's piece.

Update (6/23): Paul Krugman says: [A]nti-stimulus appeals to a fundamental meanness of spirit that is always present in the political world. The super-asinine we shall always have with us.

Tuesday, June 8, 2010

What Happens to a Global Rebalancing Deferred?

Tim Duy notes that the shifts in relative global demand that would lead to a 'rebalancing' of current account deficits and surpluses seem to be on hold. With the crisis in Europe leading to a decline in the euro, which, in turn appears to have given China cold feet about letting the yuan rise, it looks like we may be back to the status quo ante where the US is the world's "consumer of last resort". He concludes:
Where does this all leave us? The rest of the world is intent on pursuing a begger thy neighbor strategy, with the US being the neighbor. I suspect US policymakers will eventually relent; it will be the only choice left. All we can do now is sit back and wait for the inevitable explosion in the US trade deficit, waiting idly by for the next crisis and the "chance" to bring some sanity to the global financial architecture.
Michael Pettis believes that the European crisis makes the yuan revaluation more urgent, but he is not optimistic that the powers-that-be see it that way. He worries the end result will be trade tension and protectionism:
Most policymakers around the world – while publicly excoriating the US for its spendthrift habits – are intentionally or unintentionally putting into place polices that require even greater US trade deficits.

This cannot be expected to happen without a great deal of anger and resistance in the US. The idea that suffering countries should regain growth by exporting more to the world, and that rapidly growing surplus countries should not absorb much of this burden, will only force the US into even greater deficits as US unemployment rises to reduce unemployment pressure in Europe, China, Japan and elsewhere.

I would be surprised if the US accepted this with equanimity. On the contrary, I expect it will only exacerbate trade tensions and ensure that next year the dispute will become nastier than ever.

Of course, real exchange rates can adjust due to price changes as well as exchange rate movements. Some of the recent wage gains by Chinese workers give some reason for optimism. In a story about rising prices of Chinese exports, the Times' David Barboza writes:

Last week the Japanese automaker Honda said it had agreed to give about 1,900 workers at one of its plants in southern China raises of 24 to 32 percent, in hopes of ending a two-week strike, according to people briefed on the agreement. The new monthly average would be about $300, not counting overtime.

And last Thursday, Beijing announced that it would raise the city’s minimum monthly wage by 20 percent, to 960 renminbi, or about $140. Many other cities are expected to follow suit.

Analysts say the changes result from the growing clout of workers in China’s economy, and are also a response to the soaring food and housing prices that have eroded the spending power of workers from rural provinces. These workers, without factoring in the recent wage increases by some employers, typically earn $200 a month, working six or seven days a week.

But there are other reasons. Analysts say Beijing is supporting wage increases as a way to stimulate domestic consumption and make the country less dependent on low-priced exports. The government hopes the move will force some export-oriented companies to invest in more innovative or higher-value goods.

Also, other emerging market countries are providing another engine of demand. At project syndicate, Mohammed El-Arian and Michael Spence write:

Over the past two years, industrial countries have experienced bouts of severe financial instability. Currently, they are wrestling with widening sovereign-debt problems and high unemployment. Yet emerging economies, once considered much more vulnerable, have been remarkably resilient. With growth returning to pre-2008 breakout levels, the performance of China, India, and Brazil is an important engine of expansion for today’s global economy.

High growth and financial stability in emerging economies are helping to facilitate the massive adjustment facing industrial countries. But that growth has significant longer-term implications. If the current pattern is sustained, the global economy will be permanently transformed. Specifically, not much more than a decade is needed for the share of global GDP generated by developing economies to pass the 50% mark when measured in market prices.

(see also Mark Thoma's comments).