The US economic policy structure was aware that they were accommodating China and NAFTA, and aware that the tool of demand management was consumer spending. They might or might not have been aware that the consumer spending was financed by borrowing against housing wealth, but if they weren’t, they thundering well should have been. They got a structural increase in personal sector debt because they wanted one and set policy in order to create one. There’s no good calling it a “bubble” or a “puzzle”
Pointer from Tyler Cowen. Read Davies’ entire post.
We have the basic identity
S – I = (T-G) + (X-M)
That is, the excess of domestic savings over investment equals the government surplus plus the trade surplus. This is true whether we are in a recession, a boom, or anywhere in between.
What Davies seems to be saying is that China wanted a lot of (X-M), which gave us a big negative (X-M). Holding (T-G) constant, this gives us a big negative S-I. Since we didn’t do much I, we did a lot of dissaving. And this drop in personal saving is yet another meaning for the very plastic phrase “secular stagnation.”
There can’t be a structural shortage of demand, because demand is a nominal concept.
For decades after The General Theory, there were arguments over what Keynes really meant. Seeing what Larry Summers has unleashed, one can understand how this happens. At a time when economic performance is disappointing and people are groping for explanations, a guy who is known to be a great economist offers an answer that is vague but sounds clever. He then leaves it to other people to come up with a precise version. Unfortunately, the precise versions are problematic, meaning that they are either unsound in terms of theory, inconsistent with evidence, unable to support the explanation and policy implications of the vague version, or all three. We proceed to cycle back-and-forth between the clever-sounding vague version and the precise, problematic versions.
I think Davies version of the story is completely wrong. The Chinese didn’t send us M. We paid a bunch of people in China to assemble a bunch of stuff, and we sold it to everyone, including ourselves.
The odd piece of data that trips up the conventional story is that US net income from foreign investments is high and growing. The book value of our foreign investments is very negative, but the market value is very positive. So, every year, Americans earn a lot of income from abroad. We use some of it to buy things (M), and we reinvest the rest. Then, foreigners have to ship us even more M in order to get more cash to invest in the US, just to keep from falling even more behind. Any trade deficit of less than about 1/2 to 3/4 of a trillion $ a year would be unsustainable – for everyone else.
http://idiosyncraticwhisk.blogspot.com/2013/08/stop-hatin-on-trade-deficit-aka-america.html
In my experience, any argument that brings up NAFTA is assuredly wrong.
Honestly, I’m re-reading the general theory now and with the exception of a couple of (unimportant) sections, it’s pretty clear. I have a sneaking suspicion it’s only really “vague” to people who didn’t want to understand it in the first place.
The economy is growing now, but would it be growing without QE? If not, then Larry would be right. I don’t think he is but we are close enough to his being right that we should consider it, should we be so in the future.
Secstag, in Summers use, mean the business cycles have not been recovering fully. That is what he and Krugman noticed. That is the symptom. Arnold is right, these two were not about to discuss the cause as the liberal thought police are on the prowl during pre-election.