There seems to be a thaw in the currency war. President Obama and President Hu had a long telephone conversation today and my guess is that the Treasury will hold off on naming China a currency manipulator in two weeks. I hate to be a pessimist, but this might be very temporary. Unless the US and China, with the involvement of Japan, Germany, and deficit Europe, don’t work out very quickly a real agreement, in which surplus countries make serious efforts to create domestic demand over the next several years, and to reduce their surpluses, in exchange for which the deficit countries agree to slow down their domestic adjustments, the fight will only be very temporarily postponed, and the next round will be much angrier.
Any agreement must deal with more than the RMB. It must involve the whole range of issues which depress consumption in the surplus countries and force it up in the deficit countries. That means that not just the currency, but also interest rates and credit expansion (and workers wages, if anyone dares to address that). I suspect an important part of the discussion will involve Chinese attempts to reduce savings by improving the social safety net, since this is widely believed to be a reason for China’s high savings, but as I have written many times, I think this issue is largely irrelevant.
My guess is that, unfortunately, along perhaps with promises on the social safety net, the currency will be the main topic. On that topic, Daniel Ikenson of the Cato Institute has an OpEd piece in today’s Wall Street Journal in which he worries that “forcing China to appreciate its currency through sanctions will impose higher prices on American consumers, thereby reducing Americans’ real incomes.” Steve Roach made the same point in his Financial Times OpEd piece last week, and this is one of the most widely-cited reasons for opposing RMB appreciation or, what amounts to the same thing, dollar depreciation. But while it may be true that a depreciation of the dollar reduces the real value of current household income, it only reduces household income overall if you assume it has no employment effect.
But why make that assumption? I am pretty sure Paul Krugman, who recently had a spat with Roach on the subject of RMB revaluation, would agree 100% with both Roach and Ikenson that dollar depreciation, or RMB appreciation, would have no beneficial effects for the US if he also believed that it would have no impact on reducing US unemployment.
But of course he doesn’t believe that. Nor does Beijing, for that matter. For Krugman, and most trade economists, including those in China, an undervalued currency shifts domestic demand away from imported goods to domestically-produced goods, and so increases domestic employment, although in the case of the RMB appreciation this will not occur as a simple substitution of Chinese-produced goods for US-produced goods, as I argued in last week’s posting. The way to think of it, as Krugman points out, is simply to focus the relationship (an accounting identity, and so inviolable in both practice and theory) between net capital exports and the current account surplus. Forced capital exports are a way of forcing domestic absorption of foreign net demand, and of course it is through currency intervention that China forcibly exports capital to the US, which shifts demand from US producers to Chinese producers.
In the US, with its high unemployment rate, if this shift in demand causes unemployment to fall, it will cause nominal US household income to rise. If the positive impact on overall household income of depreciation (the rise in employment) is greater than the negative impact (higher prices for imported goods), which is very likely, the net effect will be a real increase in household income, not a reduction.
But there is a second, perhaps more important, reason to wonder whether concern about the adverse effect on consumers of dollar depreciation is relevant. Almost everyone agrees that the US saves too little and consumes too much and conversely almost everyone agrees that China consumes too little and saves too much. And how could they not agree? These countries probably have the highest and lowest consumption rates, respectively, ever recorded.
An important part of the reason for both problems is that Chinese consumers are effectively subsidizing American consumers. An undervalued exchange rate and repressed interest rates mean that Chinese households have transferred part of their income to Chinese producers to lower the cost of production. This cheap cost is transferred via exports to American and other consumers. This effect is magnified by the stupendous ease with which the American financial system can convert recycled capital inflows into incredibly foolish consumer lending.
Given the magnitude of the effective subsidy for American consumers, and the even greater magnitude of the penalty for Chinese consumers, it is perhaps not so surprising that US households are consuming too much and Chinese households too little. Now here comes the politically tricky part. If you want US savings rates to rise, it is a waste of time pleading for it. The only way the savings rate can rise is, by definition, if production growth exceeds consumption growth – after all savings is just production minus consumption.
So like it or not, if you want Americans to save more you must agree that either it must make production relatively easier, or consumption relatively more difficult, or both, and as it does this, as long as investment rises more slowly than the increase in savings, the aggregate impact will be a decline in the US trade deficit and, forcibly, a decline in the rest of the world’s trade surplus. A depreciation of the dollar does both.
But of course it is not painless. When people argue that the US savings rate must rise, and at the same time argue that it is unfair to penalize US consumers (which in this context mean removing foreign subsides for consumption), I am always seized with a sense of unreality. We are saying that we must correct the imbalances but it must be done at no cost to the consumer.
I am not sure that is going to be easy. If we subsidize producers to make them produce more, it will be done at someone’s expense – either US taxpayers or foreigners. If we penalize consumers (by removing the existing implicit subsides), clearly they are bearing the cost directly. By eliminating sub-prime lending, we penalized American consumers, and willingly or unwillingly we are going to continue doing so until consumption returns to a more reasonable level. One way or the other, rebalancing the US economy means tilting away from consumption and towards production, and although we can theorize about painless ways of doing it (Get Washington to stop wasting money! Improve education and infrastructure investment!) the fact is that in the short run it will be very hard to do so without penalizing consumption.
By the way China faces the obverse problem. For years Beijing has insisted that it wants consumption to rise as a share of national income, and instead it has declined. Why? Because Beijing wants to tilt the balance towards consumption without having producers pay the cost. In other words it wants producers to continue benefiting from excessively low interest rates and an undervalued currency while exhorting consumers, who pay for the low interest rates and undervalued currency, to buck up and consume more.
That seems to me why this whole rebalancing process is going to be a lot more difficult for both countries than we currently expect. Both countries are eager to rebalance, and even more eager to avoid the price of rebalancing – or better yet, to shift it onto someone else. Perhaps there is a realistic way to achieve both, but it isn’t obvious to me.
Dr. Pettis
Your argument is somewhat dependent on seeing equivalnecy between USA and China.
Jane jacob’s argument that cities and the “city region” were the economic drivers comes to mind. While her thesis can be challenged to some degree in the USA, given the mobility of labor and capital and “power” in the USA (USA figured out regional power over federal power about 150 years ago), in China doesnt the reginonal dialogue trump the international considerations?
Can China consider from a national poit of view policy that impacts all of China production or consumption. Has there been a Jane Jacobs’ “transaction of decline” ongoing in China which at the expense of hollowing out one region as another region prospers. Jacobs used this model with great success to predict the demise of the USSR and Japan. She developed this regional economic geography model in the 70s and stated it her book in the 80s, well before the crash of both countries.
Is the regional questions a more important driver in China than how most assume it is one federal economic unit? Therefore does China have far greater inability to negotiate and respond and plan than folks think?
“Unless the US and China, with the involvement of Japan, Germany, and deficit Europe, don’t work out very quickly a real agreement, in which surplus countries make serious efforts to create domestic demand over the next several years, and to reduce their surpluses, in exchange for which the deficit countries agree to slow down their domestic adjustments”
I have been to Carrefour, our local Wal-mart-like shopping center and bought beyond my means extensively. I am now deep in debt. But of course this their fault. First they proposed compelling offers I could not refuse. Then they offered compelling credit I could not resist either.
It’s so much easier to spend one’s time producing electronic stuff or foreign cars than taking the pain it takes to move around shopping centers at length!
The ants should be ashamed for. Shame on them for accepting my purchases. I made my efforts at being a robust consumer (in the way the US treasury like them). Shame on them for trusting me when I said that I would pay back. They should not have accepted my word.
I appreciate the great re-definition of economics by post-keynesian neo-libs. But they would have their grand-parents laugh. Count me with the grandpa and grandma:)
One simple way to stop Asian mercantilism … Just put OECD public finances straight back in order and stop flooding the international markets with sovereign bond issues. Especially when your signature is getting into question.
I find it pitiful that the US is calling for China to stop buying their Treasuries… The responsibility for a credit lies first with the debtor. Especially when one is a sovereign.
No need to call for action on the Chinese side, ie a yuan re-eval. Just put our own “houses” in order. When that requires tough action, just do it.
What and excellent blog (as usual)! I am on the “front lines” of economic and financial literacy education in the greater Chicago area. I have always thought myself a free market guy and thus prefer as little goverment intervention as possible. However, after fruitless efforts in consumer education perhaps it is time to develop tested methods of penalizing US consumers.
Indeed it will be painful…
I’m confused. What if the US consumer lowers consumption and uses that savings to pay down debt instead of increase the savings rate for investment/production. How does this make “production relatively easier” when de-leveraging is occurring?
Professor Pettis
Another excellent post. Your facts and logic appear impeccable; however, in common with most of the press and commentators I read I believe you overemphasize the perceived problem of excessive consumption in the US. A couple of examples
“How will US savings rates rise if you don’t penalize consumption?”
“Almost everyone agrees that the US saves too little and consumes too much…”
While consumption (and investment) were excessive during the housing boom, I think the current primary problem in the US is low production. The US desperately needs to increase savings and investment, primarily by increasing production as opposed to reducing consumption. I would re-title the post as:
“How will US savings rates rise if there is no incentive to increase production?”
Of course the answers are the same as found in the current post, but perhaps a little easier for some people to grasp. Business will not increase production (in the US at least) unless they expect to make a profit. If competition from imports drives the market price below the cost of production in the US, business will not invest or increase US production. There is likely some room for reducing production costs by increasing efficiency, reducing government regulations, reducing wage rates and other labor costs, etc.; however, realistically for US production to increase much, realized prices for US producers will need to increase. It’s hard to see how this can happen without adjustment of exchange rates, reduction of subsidies for foreign producers, and/or increased tariffs on imports.
Bringing China into the WTO was never about low prices for consumers. It was about establishing a stable manufacturing platform for outsourcing. Lowering American wages and a debt boom were part of the plan. Now we are getting the long term consequences.
The truth is, the rationale for free trade either changes to include higher wages, or it will be fatally eroded by failing to deliver a good economy for most workers.
It’s a pathetic stalemate situation that there will be no winners but losers. The Chinese consumption pattern is vastly different from the US’s, or even compared with those in Taiwan and HKG. It’s wishful thinking to make the Chinese to consume, say, 50% like the Americans, with or without social safety net. It won’t work either in Taiwan or HKG.
“This time is different” is best to describe China phenomenon. The economy is largely corruption driven, whereby substantial part of consumption is linked to corruption related social and entertainment activities. Business freedom index ranked China 140th, in the world, while Hong Kong is ranked number 1 . However, the rating is based on all prevailing business laws. Hong Kong businessmen agreed that mainland China has the most freedom in the world to ignore laws. It is a lawlessness environment, that people have been given unprecedented freedom to make money by working hard, otherwise with all means of by hook or by crook, as long as not challenging CCP’s legitimacy to rule. Thereby, people become highly innovative in Machiavellian behavior to make short cuts, to cheat, to pirate, to fake, to scam, to glorify rags to riches stories, which incidentally is endorsed by the government still bearing the official name of communist party.
Every country in Asia is a currency “manipulator” from US$ pegged to limited trading band. However, the RMB had appreciated from 8.2 to 6.8 US$ from 2005 to the present day.
Pointing a finger to China’s trade surplus due to currency manipulation that caused US to lose jobs is only partially correct. Besides, US can no long produce the real “stuff” in terms of skill, incentive, and manufacturing environment. If merchandises on Wal-Mart shelves not made in China, they would have been made in Vietnam, India, Bangladesh and South America. Chinese manufacturing exporters are making very thin margin ranging from 1%-3.5%. Any appreciation movement of the RMB would result inflation export back to US. The higher RMB would not make Chinese to buy more US goods because there is virtually NOTHING US can offer to the Chinese consumers, except for raw commodities, and high tech defense hardware which is doubtful the US government would lift the export bang. China is not an open market economy, it is not a market of 1.3 billion potential customers, there is only ONE customer, that is the government.
The root of the cause is globalization and the naivety of MNCs in droves to pursue cheaper labor in search of next drop of profit. Unlike Japan, which barred MNC entry outright from day one to the present, the Chinese welcome all fish to come in to a trap with no exit. Once investment and technology come into the country, they can be counted as Chinese’s and will be lost forever. The patriotic overseas Chinese contributed the first batch of loots to the motherland.
Years gone by, with overwhelming economic success, hardly by intention but more by accident, the country is full of paradox as what is the next step. China becomes an unwilling suicidal bomber that bundled up with the rest of the world. Every unsustainable economic development or political situation is like dynamite with a timer ticking mercilessly. However, one thing is very clear that the reluctant suicidal bomber’s only wish is that CCP to rule forever. Any accidental wrong move would detonate the bomb causing massive damage worldwide, such as: collapse of commodities, hyperinflation, deflation due to over capacity, sudden demographic change, trade war, currency manipulation, economic depression, real war.
It will be in the best interest for the international community to work with China in defusing the dynamite of “China problem”.
About “an undervalued currency shifts domestic demand away from imported goods to domestically-produced goods, and so increases domestic employment”:
Is it really that simple?
So how many jobs in US have been “created” when RMB was appreciated 20% from 2005 to 2008? If Mr. Krugman is going to advocate something like a trade war, it seems that the least he can do is to provide this piece of data to support his argument.
Of course, it would also be nice for the Chinese government to publish how many jobs were lost due to the RMB appreciation if they truly believe that, but they are not the ones who are talking about initiating drastic actions.
Professor,
After the dot com bubble burst, the impact on US unemployment was mitigated not by growth in the manufacturing sector, but in spin-offs from the credit and housing bubbles: employment grew in construction, finance, insurance, government, the service sector, etc. Now that these bubbles, too, had burst, where is job growth going to come from?
Want to bring manufacturing back to the US? Sure, if US corporations are willing to accept lower profit margins and US workers are willing to accept lower wages and standards of living.
Let’s face it: No amount of fancy ivory tower theorizing about international trade is going to win an argument with the good/bad old bottom line.
Here is another Gull-up Huang, Beida CCER (NSD) Bimba professor Yiping Huang’s rebuttal to Krugman’s US job loss accusation, and argument on behalf of Chinese currency regime.
In English:
http://www.voxeu.org/index.php?q=node/4801
In Chinese:
http://www.bimba.edu.cn/article.asp?articleid=9652
Not every teaching staff is a mouthpiece of the government since the government doesn’t know what to do, other than legitimacy to rule. Readers should not be sidetracked that he is biased.
Net savings turned negative in Q2 2008. Where is the $300B or so going to come from now that QE is over (supposedly)?
This article seems to imply that the US will gain jobs if the RMB appreciates. That is simply not true. What will Apple do with their Chinese jobs if the cost of production increases? They will ship them to Vietnam. These jobs aren’t coming back to the states. This is the fatal assumption that you and Krugman make.
Thanks Michael…the potential for your reduced US consumption and increased savings thesis to succeed will be interesting to watch when viewed in the context of the current administrations tax and spend policies…the potential for higher taxes in the coming quarters and years is a done deal with health care reform and the sunsetting Bush tax cuts next year…this will no doubt have an negative impact on consumption…but I don’t know about savings increasing from their current low rates as most astute economists attribute the recent drop to consumers dipping in to buy essentials…clothing, food etc…with the Fed telling us to expect below trend growth and the Treasury Secretary warning that unemployment will remain hi for some time to come…this may be a great environment for reduced consumption but not for increased savings
It will be especially important to hear what POTUS’s tax commission comes up with after the midterm elections….many are speculating that a VAT/GST is in the cards to pay for healthcare reform and other all of the other items on the presidents activist agenda….how does a consumption tax fit into the overall savings scenario?…not good by my reckoning
Reserve Tax!
Michael, a couple of weeks ago Commerce Minister Chen Deming noted that China would record a trade deficit in March – the first since April 2004. This statement seems to have been ignored by the market, but what are the implications if we were to start seeing China printing trade deficits (or at least shrinking surpluses). Certainly it makes the case for RMB appreciation a little tougher on the US.
George, I haven’t read Jacob’s book, and I think most people would argue that there are serious impediments to domestic integration (I saw one study, by someone at CASS, if I remember right, that argued that monetary policy is transmitted very irregularly within China because of huge internal restrictions on trade, capital flow, and labor), but China has a more-or-less closed financial and trading system and clearly Chinese policies can work in the aggregate at the national level. Certainly with limited capital mobility, a policy of exporting capital through currency intervention must automatically lead to a current account surplus. A lot of people find this hard to grasp because they don’t understand how current account surpluses and capital account deficits are one and the same thing, but if you have one you must have the other.
Daniel, the tough action you call for automatically requires among other things a diversion of trade, which you seem to oppose. If the OECD stop borrowing, the collapse in consumption will cause a huge surge in unemployment. Countries will try to export that unemployment with beggar-thy-neighbor trade policies, and we come right back to the currency or its alternative, tariffs. It would be very surprising if countries with overvalued currencies, who were effectively importing unemployment through the trade account, would not demand that countries with undervalued currencies, especially countries whose currencies were undervalued because of massive intervention, allow their currencies to appreciate. After all, the purpose of the intervention is to export unemployment, and it is unlikely that the countries importing the unemployment would be too stupid to see that. This is not about humble hard working savers and profligate spenders. Chinese household savings have not increased as a share of household income over the past decade, even though total Chinese savings has surged. Why? Because the combination of several policies, including repressed interest rates and an undervalued currency, have forced up national savings, most of which has occurred at the corporate and government level. Individual Chinese are increasing their consumption as fast as their household income growth allows them to.
DR, paying down debt is the same as increasing savings.
G Stegen, you are right and thanks for pointing it out. It is always useful to remind people of accounting identities because they necessarily constrain everything, although it is pretty disheartening to see people violate them so flagrantly in nearly all the debates — even otherwise sophisticated economists and research analysts. if production grows faster than consumption, whether both rise, both fall, or one rises and the other falls, the savings rate by definition will rise. If investment exceeds saving, the country must run a current account deficit. from those two identities you can gain a lot of clarity.
GUN, you say it is wishful thinking to make the Chinese consume more. I think that is a very widespread and very mistaken myth. The high savings of the Chinese and other Asian countries have only really occurred since those countries embraced the Japanese development model, one of whose consequences was a repression of consumption. In fact, as I pointed out to Daniel above, the rise in Chinese savings in the past decade has not occurred because of the frugality of Chinese households, but because of the amassing of corporate and government savings that is the automatic consequence of polices that repress private consumption growth. twenty years ago it was argued that the Japanese would never stop saving, but as the country has been forced into a rebalancing the private savings rate has plunged.
ATP, but the bottom line is itself affected by policies that privilege consumption or production. For example, to use a controversial example, if the US were able to force down the value of the dollar by 20% or more against all other currencies, it would become far more profitable to produce cars domestically, it would revive the aluminum and chemical industries, and it might cause a significant divergence of electronics assembly to the US. the idea that relative costs are totally independent of the value of the currency is pretty bizarre to me. You can only compare costs in two countries by converting them at the prevailing exchange rate. Change the currency value and relative costs automatically change. That is why countries seeking to grow rapidly like undervalued exchange rates.
Allen, it will come from the funding of the current account. But be careful. This is an accounting identity. It is no more meaningful to say we need foreign financing because our domestic savings is less than our domestic investment than to say we need to save less than we invest because foreigners are running a trade surplus with us. This may sound counter intuitive, but you cannot imply causality here.
MarkS, this “problem” has been dealt with so many times that I can only ask you to look at previous posts, or read the various trade theorists, including Krugman. What you are saying is simply not true. If it were, China would not be intervening in the currency markets because it would only have a negative monetary effect and absolutely no employment effect. Nor would Japan and every other fast-growing Asian development model country.
Blake, the expected deficit in March is almost certainly a consequence of commodity stockpiling and a very temporary distortion in the timing. Actually this statement has not been ignored by the market. It has just been dismissed because it is likely to be pretty meaningless. Of course if China starts running monthly deficits, net of commodity stockpiling, from here on, it would be a very different story, but I don’t think that is highly likely.
Hi, I think a crucial intuition behind currency dispute, if still not a war, is the imbalance: China is making itself an imbalanced economy and is contributing significantly to America’s own imbalance. And the degree of imbalance matters here, in terms of international politics/diplomatic moves as well as in each country’s domestic economic policy. Among all aspects of imbalance, the consumption rate is a very prominent one. However, the folklore’s perception of China’s consumption rate could be wrong, due to China’s different GDP accounting system and statistical precision from those of America. I am not sure about how this difference would change the comparably equivalent consumption rate, but it does affect other benchmark in important ways, for example a paper by Professor Bai Chong’en (Tsinghua Uni.) on labor’s income: “Factor Income Share in China : The Story behind the Statistics”.
The issue with achieving meaningful consumption growth in China is also somewhat political, as it implicitly requires that wealth be more evenly distributed among the people. The marginal propensity to consume that incremental yuan is different for a Shanghai real estate man and that migrant labor. Providing some sort of social safety net for the workers would also be a step in that direction. But how that cost is going to be born in the society could get quite political. If you make the labor pay through some sort of self insurance scheme, then you haven’t achieved much at all, since they effectively have to take it from consumption elsewhere. Would the businesses be willing to absorb the cost? Do the local governments have to sell some more high priced real estate? Seem to me that encouraging consumption through the provision of some level of social safety net is not going to come without disturbing some level of existing orders.
Michael, a question re: “Given the magnitude of the effective subsidy for American consumers, and the even greater magnitude of the penalty for Chinese consumers, it is perhaps not so surprising that US households are consuming too much and Chinese households too little.”
I don’t understand how a subsidy leads to too much overall consumption in *money* terms (although it leads to too much consumption in *material* terms). If the savings rate is the proportion of the income dollar left over after consumption, how does the presence or absence of a subsidy necessarily affect that? If I spend 75 cents of every dollar on consumption, subsidies on some goods might affect which goods I purchase, but I don’t see how eliminating it would necessary cause me to spend less than 75 cents per dollar on consumption. It might in fact make me spend more, if I wanted to continue consuming the same level of goods and services.
To GUH,
I read the article by Huang Yinping.
Aside from repeating what Professor Pettis has said correctly (in my view) repeatedly on this blog for many months, it seems that the most obvious response is a quote by 19th Century economist John Mills:
“Panics do not destroy capital; they merely reveal the extent to which it has previously been destroyed by its betrayal in hopelessly unproductive works.”
If the unwinding of Chimerica reveals the extent to which there has been a massive misallocation of capital, manifesting itself in the US through excessive leverage and consumption and China through excessive overcapacity and forced (appropriated) savings, blowing that bubble larger (which is what Mr Huang is advocating) is not going to do anyone any favours.
To suggest that once the recovery is firmly in place, we can fix the problem (i.e. it is a matter of timing) is wishful thinking in the extreme.
The best time to take away the alcohol at a party is before everyone gets drunk enough to cause a sever hangover.
Unfortunately that time was years ago. The assumption that we can lessen the pain by getting everyone drunker is misguided and dangerous.
Professor Huang is correct, and Professor Pettis agrees with his assessment, that the RMB is just one issue. There are other structural issues on both sides that must be addressed.
Professor,
Thanks for your response. Based on your example, my question is: Will consumers be willing or able to pay more for your cars?
I grew up in Hong Kong during a time when it had a strong garment and electronics manufacturing base. Once the mainland opened its labor market, the base disintegrated. At that time the HKD was worth more than the RMB, a situation that has since gone in reverse. Is manufacturing returning to Hong Kong now that the RMB is worth more than the HKD? I’ll let the fact speak for itself.
I agree that relative costs are not totally independent of the value of the currency. I just think its role is minor in comparison with the multitude of factors that determine the cost (hence choice of location) of production such as wage and benefit structure, government and tax policies, land price, cost of living, skill and attitude and work ethic of the workers … the list goes on.
I left Canada for the US at a time when the CAD to USD rate was around 0.76 and at one point it even went below 0.70. Did that result in a significant shift in manufacturing from the US to Canada? If not, why not?
For the record, subprime lending is alive and well in the U.S. Now, it’s all government insured via the FHA. In 2009 30% of mortgages were FHA insured. I believe that share is close to what FHA and subprime lending combined were in 2005-6.
FHA loans can now be as large as $700,000 and as little as 3.5% down (most are close to that minimum.) There are fees, but they are rolled into the loan, just like subprime. And currently, there is an $8,000 tax credit that can be used to cover costs and downpayment.
Michael,
I have a question, too. Have you done any kind of back of the envelope calculations on possible rebalancing scenarios? For instance, it seems to me that most people who see a relative benign scenario in the U.S. are predicting that incomes will quickly enough to allow for a more modest increase in consumption and dramatic increase in savings.
For China, the benign scenario seems to be that internal consumption increases so much that a further decline in net incomes is easily overcome.
CLSA makes that forecast and provides some figures:
https://www.clsa.com/assets/files/reports/CLSA-EoAE-1Q10-091216.pdf
…but I don’t think I’ve seen anyone in the U.S. provide the numbers for their forecast.
Don, I will try to anwer your question:
“I don’t understand how a subsidy leads to too much overall consumption in *money* terms (although it leads to too much consumption in *material* terms). If the savings rate is the proportion of the income dollar left over after consumption, how does the presence or absence of a subsidy necessarily affect that?”
Here are a few examples:
1. Assume a worker in the US is initially doing productive work valued at $1000 per month and is spending $900 per month. His savings rate is $100/month or 10%. Now assume that due to subsidized import the price of his expeditures drops to $450 per month. But due to the lower prices his company can no longer make a profit so they shut down, reducing his productive work to zero. Now his net savings drops to -$450 per month or -100%. If the government gives him the $450, his savings rate goes to zero, but now the goverment savings rate (deficit) absorbes the -$450 per month. See also my earlier comment above on concerning too much emphasis on consumption versus production.
2. The excess savings of China and other surplus countries are forced into the US, reducing interest rates and increasing money available for lending, which tends to stimulate debt based consumption.
3. In many cases very low prices will induce people to buy things that they otherwise would not buy.
4. In China it appears quite different. Because of low wages, low controlled deposit rates, manufacturing subsidies, etc. much of the subsidy never makes it to the potential consumer, but rather is diverted to SOEs and well connected members of the “elite.” The price and availabilty of imports is also constrained to reduce the potential for use of imports.
“So like it or not, if you want Americans to save more you must agree that either it must make production relatively easier, or consumption relatively more difficult, or both…”
What do you think of the approach of a VAT to make consumption more difficult…
Michael Pettis.
I also question whether manufacturing jobs would come back in a significant way to the US. If one looks at Japan as an example jobs continue to leave despite the claim that they have already begun restructuring. As an example Nissan recently announced one of the best selling cars will be made in Thailand and be imported back into Japan.
IMO the enemy here is technology/automation and it threatens every manufacturing job in the world
Thanks
Bob in MA “Subprime never left…” +1
From Michael Pettis in response to ATP:
“…to use a controversial example, if the US were able to force up the value of the dollar by 20% or more against all other currencies, it would become far more profitable to produce cars domestically, it would revive the aluminum and chemical industries, and it might cause a significant divergence of electronics assembly to the US.”
Michael, if that is the case, then it would appear the solution to the trade imbalance is for a stronger dollar not a weaker one. Yet nearly everyone except China is clamoring for a weaker dollar, Krugman so much so that he wants massive tariffs if China will not oblige.
Looking At Solutions In Isolation Is A Mistake
One problem I see is that everyone looks at all of these “solutions” in isolation.
The Fed and many others want a weaker dollar in belief it will stimulate exports. However, the Fed and weak dollar proponents ignore the fact that a weaker dollar might stimulate more speculation than exports, just as it did from 2002-2007.
If the US wants to encourage savings, a higher interest rate and stronger dollar would sure do it. Yet the Fed is certainly not about to raise rates with unemployment so high.
In regards to manufacturing: Wages certainly enter into play, so much so, that wages (not currency exchange rates) are likely the determining factor as to where manufacturing takes place.
In regards to agricultural exports: weather, soil, rainfall, and land are likely to be the determining factors.
In theory, energy prices could rise so high on account of peak oil that shipping costs could become a major determining factor for all goods and services.
In regards to the RMB: Given that 99% of economists think the RMB would soar if China floated it, I am not convinced it would.
When have 99% of economists ever been right? Bear in mind, I am making up a number, but sentiment is overwhelming for sure.
What if the RMB fell? Heck what if it just stayed flat? Or what if it rose and then hot hedge-fund money rapidly exited China, profit in hand?
Note too, the recession did more to reduce US trade deficits than a collapsing dollar did.
That is just a start of this intertwined mess. Thus, things are sure a lot more complicated than Krugman makes them out to be.
Let’s back up a second and ask a seemingly simple question: Exactly what problem are we trying to solve?
Major Global Problems
* Trade Imbalances
* Massive consumer debt and leverage
* Unfunded liabilities such as Social Security
* Unsustainable pension promises in the US, Europe, and Canada.
* High US unemployment
* Commercial Real Estate Bubble in the US
* Real estate bubbles in China, Canada, Australia, and the UK that have not popped but most assuredly will
* Demographic nightmare in Japan
* Interest rates artificially low in the US, UK, and EU
* The PIIGS
* Stock market bubbles reinflated
* Carry trade speculation
I am certainly in favor of letting the free market solve all of those. Indeed many of them are so intertwined, that only the free market has a chance in hell of solving them.
Central bankers are sure clueless as to what needs to be done. Proof of that statement is easy enough to find.
Example number one: What does Japan have to show for fighting deflation for 20 years but the largest debt to GDP ratio in the world.
Example number two: The US produced a massive housing bubble attempting to stimulate its way out of the 2001 recession. Was it worth it? I think not, yet we are attempting to do so again.
What about Tax Policy and Tariffs?
US corporate tax policy certainly encourages corporations to produce and hold profits overseas. What if tax policy allowed deferral of profits in the US instead of overseas?
If the US imposed tariffs, what if China were to say in response “OK we will buy planes from Airbus instead of Boeing”?
Indeed, it would not surprise me one bit if a threat like that from China (or fear of a threat like that from China) is the reason we have not yet seen the Treasury department label China a currency manipulator.
Through China’s Eyes
Looking at things from China’s point of view, what happens if China slows and there is social unrest?
I believe China needs to float the RMB. However, the US and the rest of the world also need to let the market set interest rates.
Furthermore, bad banks need to fail instead of being propped up, and housing prices need to fall to where they are affordable. The property bubbles in Canada, Australia, and China have reached spectacular heights.
Please see Email from a Chinese on China’s Real Estate Bubble for one person’s view.
No Way To Avoid Pain
Attempting to solve global trade imbalances by forcing China to repeg the Renminbi is like attempting to put out a house fire by turning on the air conditioner.
If there is a perfect number, only the free market can find it, as the number will constantly be changing.
Likewise, no central banker knows what short term interest rates should be, yet they all try, often with conflicting goals!
Insane stimulus needs to stop across the board, and that especially includes China and the US. Indeed, it was massive stimulus and excessively low interest rates following the 2001 recession that fueled the global debt and housing bubbles. Excessive stimulus is fueling commodity speculation and the property bubbles in China, Canada, and Australia right now.
The irony is no country wants to give the free market a chance, even though regulation (Fannie, Freddie, and the rating agencies) together with preposterously low interest rates from the Fed and central bankers in general is exactly what created this mess.
Mish
One major problem with the argument that we can “inflate” out of the mess we are in is history. From 1970 through 1980 the U.S. dollar lost somewhere between 80 and 90 percent of it’s value. Based on the argument above we should of turned into exporting power house beyond compare.
But the opposite happened! It became a race to the basement. Thats why many foreign exporters buy dollars to keep their currency under valued.
It’s more than just China.
Professor,
good post.
It seems that in the coming years most of the dominant export countries (asia dominantly ) and germany will have to rebalance along with the US.(Although I don’t right now neither has been fully prepared for /performed any rebalancing , just talk/rhetoric. ) However there be a couple of countries(rather regions) that are “immune” to the painful rebalancing.
The Middle east oil producers have been surplus countries for almost their modern existence(give or take a few exceptions). In the short distance future, It seems rebalancing would never be achieve due to their excess oil. How would rebalancing look like for them (perphaps dubai world is not best example of rebalancing) and how can they have recycle their surpluses for a long time without any economic disturbance?
In clarification, they are places around the world that don’t need to/ hasn’t rebalance yet continue on without making any economic disturbances or distortions (singapore and hong kong …. way too deeply in the service sector )(hong kong has pegged its currency to dollars for almost 30 years for stablity before handover) ( I think it was also singapore that created or thought about basket multi currency peg that china did use prior to financial crisis ) how is that also possible?
Bob_in_Ma:
Thanks for the reference to the CLSA’s forecasts for China and Asia in 2010.
CLSA suggest that China’s current account could soon swing into deficit owing to booming domestic demand, boosted by huge rises in demand for consumer durables. CLSA also project that private consumption and private investment (mostly SMEs) are ALREADY replacing Government investment as the drivers of the economy — and hence that the recovery is becoming more balanced and sustainable — with spillover effects on Asia.
Against this backdrop, the predicted swing of China’s trade accounts into deficit (March) might be the start of a ‘structural’rebalancing of the economy.
This is in sharp contrast to Prof. Pettis’ view that the expected trade”deficit” basically reflects “stockpiling of primary commodities and a distortion in timing”. To date the pessimists views of China’s capacity to “adjust” have tended to be incorrect. But, as the proof of the pudding is in the eating lets see what the March data bring us — while recalling the warning: “beware the ides of March”. regards James
in my humble view, this subject of balancing global trade is taken at a very high level: imports vs exports with total disregard of the mix in bilateral trade.
what is that vietnam/the philipines/china need to buy more of in exchange for the apparel and toys they produce? more u.s. made place so they could jet to their $100 a month jobs??? does the u.s. as well provide vendor financing as china does?
we are talking here about raising trade barriers, because this is exactly what krugman is advocating: forcing businesses to buy goods they dont need from countries that are not competitive at producing them. isnt this a brewing disaster?
I meant u.s. planes, not place in the previous post.
GUH,
You are speaking the truth: this is one heck of a mess that cannot be fixed simply because it was never engineered by anyone but a byproduct of pursuing narrow interests.
Professor,
Why are you saying that Chinese consumers can increase their consumption and thus balance global trade? From personal observation I can say the the shopping basket of a $300 a month earner is quite different than that of a $3,000 one. You wouldn’t find the french and swiss cheese in the former. Poor folks do not buy movie tickets, high end cosmetics, gas guzzling cars etc. Damn it, even Americans dont buy any of those unless they get approved for another credit card.
And the affluent Chinese GUH described, they are already doing one heck of a job at balancing global trade shopping at only high end stores.
How do you see global trade balance out?
Could you please put an example of what adjustments the average chinese has to make and whay the average american in order to balance trade?
And some readers mentioned it quite a few times already: we dont live in a two country world.
I’m not sure the US savings rate is increasing that much. And there seems to be a sizable ‘grey’ market economy that is showing up in some numbers, but not others.
Michael, given that the US seems to be in a liquidity trap, wouldn’t forcing up it’s saving rate (via RMB appreciation) put it in a paradox of thrift world?
Prof Pettis,
Please, one more thing.
NAFTA basically makes all of North America a free trade zone. Why would companies choose the US over cheaper labor in Mexico for manufacturing?
How will the US Savings rate rise when Federal Reserve monetary policy penalizes middle class American savers? Currently the annual 0% yield of a typical US money market fund is well below the real rate of inflation. Clearly, the Federal Reserve panders exclusively to the narrow economic interests of Wall Street speculators. The $180 billion taxpayer bailout of AIG was wired straight into the bank accounts of Goldman Sachs executives. It’s more of the same; privatize the profits to the politically connected and socialize the losses to the US taxpayer. Notwithstanding the crony capitalism policies at the Federal Reserve and US Treasury Dept, Neo-liberal Economist Paul Krugman scapegoats and slanders the Chinese for dysfunctional US monetary policies. Give me a break! Does the China PBoC really regulate the US financial market of fraudulent junk securities or is that the responsibility of US financial regulators sleeping on the job? Given rampant criminal fraudulant practices amounting in the trillions of dollars, not a single Wall Street executive has faced prison. It’s an open secret across the world today that Goldman Sachs de facto regulates and controls the US Treasury Dept and the Federal Reserve for its economic benefit, not the other way around. Karl Marx correctly predicted that capitalist economies would eventually collapse due to regulatory capture of governments by criminal elements of society.
Why Repegging the Yuan and Other Non-Free-Market Solutions to Trade Imbalances With China Will Fail …
http://globaleconomicanalysis.blogspot.com/2010/04/why-repegging-yuan-and-other-non-free.html
Hello Michael
That link replaces and supersedes my above lengthy comment.
Mish
Mish, sorry, I meant force “down”, not up. The point is that if the dollar were devalued by 20%, the immediate impact would that US manufacturers would become much more profitable and foreign much less so. That would shift US and foreign consumption of cars from foreign producers to US producers, and would of course have a positive impact on US employment.
Now over the longer term that advantage would disappear as inflationary pressures in the US eroded the initial price advantage, but assume that the US closed its capital account and engaged in very heavy sterilization and financial repression — as China and the other “Asian development model” countries do and did. This would permit the relative price advantage of US cars to persist indefinitely, until enough capital misallocation in the US eventually created its own distortions.
MIchael,
I do not know what to with this post. Is this just trivial (i e playing with a well known accounting identity), or has it too do with policy. Or is this something which lacks policy answers? What can the US do unilaterally (and which China -if that country is the only problem- cannot frustrate) and to what extent it whatever that is feasible given present levels of domestic economic regulation (including financial system regulation), taxation and transfer payments? The only thing I can imagine would be one or more pigovian taxes (one on energy for certain)on tradables that would be used exclusively to reduce the deficit or to top up the social security fund. But the most affceted foreign countries of such a tax would probably be in the Americas…
James and Bob in MA, a number of people have been excitedly predicting the rise of Chinese consumption since at least 2003-04, and consumption has only declined since then as a share of GDP. The problem is they have the wrong model for consumption. They assume it is a psychological or social issue, or one that can be resolved by aggressive pleading on the part of the government, or firm resolutions from Beijing that in the future consumption will rise as a share of GDP.
It hasn’t worked before and won’t work in the future, in spite of the fillip of hope given by the small rise in consumption as a share of GDP that might have occurred in 2009. But not only is this rise too small — at this rate it will take us well over a decade merely to return to the bad old days of 2004′s 40% of GDP, but the evidence suggests that this “surge” in investment was caused by a surge in government subsidized investment. This is no good. It simply represents anticipated investment since the subsidies must be paid for out of future household income.
Without an increase in the household share of national GDP, I believe there will be no sustainable increase in household consumption, and as long as the employment costs of raising interest rates, the RMB, and wages are so dire in the short term, the household share of national income will not rise.
“Rien, I would call this post “trivial” in the sense that you mean — it is nothing more than elaborating on accounting identities. Unfortunately I think most of the debate flagrantly violates these identities, so think of this as a feeble attempt to re-introduce them. In a week or so I will have another posting even more limited to simply working out the implications of just these two identities.
Capital Account + Current Account = 0
Domestic Savings – Domestic Investment = Current Account Surplus
It may seem trivial but it also seems impossibly mysterious to many who should know better.
Michael,
I like this:
Without an increase in the household share of national GDP, I believe there will be no sustainable increase in household consumption, and as long as the employment costs of raising interest rates, the RMB, and wages are so dire in the short term, the household share of national income will not rise.
Maybe that’s the message Mr Geithner should bring in his most eloquent Chinese. “socialism in chinese characters?” You are entirely right that is is the most effective remedy yet unlikely to be applied. Laobaixing needs better Comrades perhaps.
Michael,
You said to Mish: The point is that if the dollar were devalued by 20%, the immediate impact would that US manufacturers would become much more profitable and foreign much less so. That would shift US and foreign consumption of cars from foreign producers to US producers, and would of course have a positive impact on US employment.
Might be missing the fact that most of the production by big US companies (chemicals, textile, apparel, – DuPont, Dow, Nike, etc. etc) is done ouside of US. A 20% deevaluation will do wonders on their profit numbers when they factor the exchange rates, a lot of harm on their US employees paycheck – so saving will go down in US – people with some savings/income might try to roll the $ faster so they do not get worthless.
Do you agree on that?
Michael,
I am an American based in Kyoto and read your blog daily. I just got back from Beijing today. Why is your blog blocked in much of China?
The US is blocking potential sources of rebalancing by preventing exports of military equipment to China, but I found that I could not access twitter, facebook, youtube, much of google, calculated risk blog, the Washington Post, Scribd, and many articles on Bloomberg over the past week.
I wonder if this is part of an ongoing stealth trade war.
regards,
Nick
“Why would companies choose the US over cheaper labor in Mexico for manufacturing?”
Labour isn’t the only cost. Consider the costs of (and ease of) things like transport, communication and other infrastructure.
Also consider that while labour may be cheaper in Mexico, labour in the US will be higher skilled.
Michael,
Michael
You make somne excellent points that should be obvious, but unfortunatley seem to escape many commentators. But just to be clear on one point, with the current global deficiency in AD, the cessation of official capital outflows from China will most probably harm China’s economy and help those of its trading partners in the short term. That is because the immediate effect of the change in the current account balances will be to shift AD from China to the ROW. So, we shouldn’t expect even an enlightened China to agree readily to the change. The problem is, as you and others have pointed out, the current trade pattern is unsustainable and will lead to greater misallocations of capital the longer they are allowed to continue.
Mr. Pettis:
Nearly every commentary I have read to date about the imbalance in trade between the U.S. and China fail to address the fact that some 40 percent to 60 percent of the products that come into the U.S. as imports are actually American brands that have been outsourced. This commentary seems to be no exception.
You stated:
“For Krugman, and most trade economists, including those in China, an undervalued currency shifts domestic demand away from imported goods to domestically-produced goods, and so increases domestic employment”
And this thinking seems to reflex an outdated economic paradigm that no longer applies or applies in a limited degree in today’s global economy were we have U.S manufacturers that have outsourced their products to be made in China or elsewhere and shipped back to the U.S. markets as “imports.”
Will Americans stop buying American brands like Apple, HP and the hundreds of other products that are foreign produced and what impact will a devalued dollar have under this scenario? Given this is it conceivable that some trade imbalance will always exist?
Please explain how by what you stated below applies to U.S. firms that have outsourced the manufacturing of their products to China and elsewhere:
“The point is that if the dollar were devalued by 20%, the immediate impact would that US manufacturers would become much more profitable and foreign much less so. That would shift US and foreign consumption of cars from foreign producers to US producers, and would of course have a positive impact on US employment…”
Even if more foreign markets buy American brands what positive impact on U.S employment or our national economy will this have if the products are not even made in the U.S?
High Tech Research Moves from U.S. to China:
http://justanothercoverup.com/?p=1001
Thank you
Chris, perhaps I am misunderstanding you, I think there is a tendency to look at the current status of trade and production and to assume that it represents some sort of timeless and essential state of being in trade. You may be right that “most of the production by big US companies (chemicals, textile, apparel, – DuPont, Dow, Nike, etc. etc) is done outside of US”, but this isn’t necessarily a law of nature. It could just as easily be a consequence of policies that made it more profitable to locate factories outside the US. One such set of policies may be currency related. I am not sure it makes sense to place the value of US policy concerning trade in a context which assumes that there is nothing that can be done to affect US trade and the trade deficit because what exists now cannot be changed.
Nick R, access to information has always been strictly controlled in China, and there are a lot of sites that are blocked. I don’t think this is about trade so much as about politics.
Don, I think you are right. In a world of declining demand, the purpose of trade policies is to shift a greater share of that demand away from other cuntreis and to yourself in order to get the employment benefits. I would add that in this battle over shfting demand, the deficit countries have nearly all the cards.
Mitch, actually this fact has been brought up any times by non-economists, and probably the main reason it isn’t much addressed is because it is largely irrelevant. It doesn’t matter whether a factory is owned by an American or a Chinese. Its location determines where the employment occurs and where the vast bulk of economic value is added. It is true that an American owned factory will distribute its profits to American and foreign shareholders, while a Chinese-owned factory will distribute profits mainly to its Chinese owners, but the total economic value of profits is a small share of the economic value, including externalities. As I discussed with Chris, above, the geographic location of factories is not based on any fundamental law of nature. It represents business assessment of relative profitability, and that assessment is not immutable. It depends, among other things, on the relationship between wages and productivity, on the cost of land and capital, and on the exchange value of the currency. All of these things are themselves affected by the exchange rate and by a number of other, manipulable, factors.
quote: “For years Beijing has insisted that it wants consumption to rise as a share of national income, and instead it has declined. Why? Because Beijing wants to tilt the balance towards consumption without having producers pay the cost. In other words it wants producers to continue benefiting from excessively low interest rates and an undervalued currency while exhorting consumers, who pay for the low interest rates and undervalued currency, to buck up and consume more.”
Hi Michael,
I am confused with the economic mechanism of how producer is subsidised by consumers?
Say in a situation of norm interest rate (say 6% float) and 15% rise in RMB vs USD, then Chinese consumers would be able to consume more? (probably imported products).
With this interest rate (a lot higher than now), average consumer probably tend to save more than consume? FX reval probably cause a significant portion of exporters to re-direct its capital elsewhere, e.g. property market? The export-workers have lost their jobs, would reduce their consumption and look for other alternatives?
I struggle to find which class of the Chinese community is able to pick up the demand gap.
Both the title of the post and this bit:
“So like it or not, if you want Americans to save more you must agree that either it must make production relatively easier, or consumption relatively more difficult, or both,…”
offer the view that savings decisions are imposed from outside. Standard treatment of savings and spending decisions includes the influence of asset holdings – wealth. Is there not good reason to believe that, having lost vast amounts of wealth, US households will choose to save more over time, regardless of the US/China exchange rate?
Wouldn’t we also expect that the prospect of less certain household finances would lead to greater savings? In the sense that future income is a sort of “wealth” and that the largest disruption in earnings from employment in memory for most of us makes that source of “wealth” seem less certain?
I’m not saying that the thrust of this article is wrong. It just seems that you have mischaracterized our understanding of what drives savings in an effort to make your story seem stronger.
Mr. Pettis: Thank you for responding to my posting. While I am not an economist I do understand the profit potentials and other financial reasons US firms outsource the manufacturing of their products. I comprehend the profits realized by hiring tech related engineers in China at $730 per month versus $4500 per month here in the states for a company like Applied Materials which recently announced moving their operations from the US to China. See “China Drawing High-Tech Research from U.S:” http://www.nytimes.com/2010/03/18/business/global/18research.html?pagewanted=1
I understand the financial rewards for the corporations and their shareholders in this scenario. But that was not the crux of my question which you did not address in your reply. From whose perspective are you referring to in stating this issue is largely irrelevant? Is it largely irrelevant to the American engineer just laid off because their job got outsourced to China by their American employer? There appears to be two main perspectives in this debate; the one which you address and another that I am raising here but is going completely ignored by academia, corporate leaders, shareholders, and economist.
If I understand correctly the typical theory in all this trade imbalance debate holds that if the Chinese were to raise the value of their currency this would encourage more American products to be purchased thus increasing our exports and thereby creating job growth. I see how this theory might hold true when the products are actually made in the US and shipped from here. But setting aside the perspective in how corporations and shareholders benefit for a moment and looking at this from the US national economy and US employment perspective it does matter where the factory is located. With the loin share of American branded products no longer made in the U.S. how much growth can we really expect for US employment and our national economy?
Apple recently introduced the iPad…it apparently is selling well from all accounts. But how many new jobs to meet this new demand were created in the US versus in China where their products are made? I understand how Apple and their shareholders benefit, but what benefit do US workers and our national economy realize from this?
I agree with DCH. The Fed’s ZIRP policy has made it very difficult for average Americans to benefit from saving money. Savings accounts pay less than inflation and alternatives such as I-bonds are largely unknown, even to tellers at major banks. The government should encourage banks to set up __simple__ inflation-indexed savings accounts with a limit of perhaps $10K or a tax advantaged savings account similar to a British ISA. Otherwise “saving” money is only a way to, in real terms, lose money.
Another suggestion:
Mandate financial literacy classes for junior high and high school students that emphasize savings and discourage debt.
When I attended high school (late 1980s), I remember all students having to watch a series of videos featuring Professor Milton Friedman on economics. As a part of the class, all students were taught the benefits of saving money and how to open a bank account. The government should seriously consider encouraging schools to require students to learn the benefits of savings and the dangers of debt. Without a savings mentality, any type of VAT or currency adjustment would simply encourage consumers to take on more debt to pay for the now more expensive goods.
The following statement will be jarring to anyone watching the US economy: the US savings rate is NOT low.
The current measurement of the US savings rate is based on a British calculative model formed at the peak of the industrial age. It was appropriately formulated for an economy experiencing rapid technological change in which worn-out capital is frequently replaced by more technologically advanced infrastructure and equipment. However, in today’s information and knowledge-based economic age, merely making assessment of the depreciation of physical assets is no longer the most appropriate gauge by which to measure savings. As Richard N. Cooper, professor at Harvard University argues in his November, 2005 Policy Briefing for the Institute for International Economics, “the growth dynamic in a knowledge-based economy comes from teams of people creating new goods and services, not from the accumulation of physical capital.” (See: http://www.iie.com/publications/interstitial.cfm?ResearchID=576)
Drawing further on Cooper’s research, there are three items which in today’s day in age are indeed ‘saving’, but not entered as such into the national accounts. These items are consumer durables, education and expenditure on research and development. As it stands today, these are all punched in as ‘consumption’ in national accounts. However, upon quick assessment of logic, we can see that it would be far more accurate to classify these items as ‘saving’, as long as saving continues to be broadly defined as Economists define saving as income that is deferred from consumption today for the purpose
of achieving higher consumption in the future.
Firstly, consumer durables, such as a refrigerator or car is really an investment, due to the length of time of its functionality. Secondly, education at all levels, in contrast to the early American experience, is now a significant expenditure purchased with intent to augment one’s future salary. Ask any American paying for private schooling, university or graduate school, and they will tell you it is no small investment they are making in their or their child’s future. Thirdly, research and development, which was comparatively insignificant one century ago, is now a heavily-invested sector with strong trends of high future payoffs. However, R&D is not even accounted for in the national accounts, considered an intermediate business expense (except when sanctioned by the government, at which point it is calculated as ‘G’, a government expense).
If the abovementioned items are considered savings and added as such into the US national accounts, Cooper argues that Americans would show savings as one third of the GDP. That being said, Americans are not shy on saving, but the system for measurement of savings is due for reform not only in the US, but in changing economies around the world.
Hmm. The problem is that the majority of consumption for the majority of the population isn’t widgets from China. The Big Four are housing, health care, transportation and food. Taxing these will do little to reduce consumption of widgets, and the cost of these is, for most families, pretty much fixed. What a consumption tax does, though, is to shift the tax burden from the rich to the poorest 2/3 of the population.