Where are the biggest “imbalances?”

There are a couple important principles in international economics:

1.  National boundaries are not necessarily meaningful when evaluating the influence of a particular regional economy.  The GDP of Czechoslovakia did not suddenly change when the country split in two–nor did the impact of its economy on the rest of the world.

2.  When a country’s economy impacts the US, it usually doesn’t matter whether the impact is “natural” or “artificial.”  For instance, suppose we had been gladly importing Ecuadorean bananas for decades, naively thinking that any country named after the equator must be warm.  Then we found out that the weather in Ecuador was actually quite cool (due to high altitude), and that bananas could only be grown there because the government was heavily subsidizing production in greenhouses.  Of course most red-blooded Americans would be outraged by this discovery, as it would indicate that we were a bunch of patsies who had been victimized by the Ecuadorean “dumping” of subsidized goods.  A few economists might argue, however, that if cheap bananas are good for the US, it doesn’t really matter why they are cheap.

With these concepts in mind, I decided to investigate where these so-called international “imbalances” are actually located.  Keep in mind that I don’t think imbalances are of any importance.  But others clearly do—so at least we ought to be aware of the stylized facts being discussed.  I used data from the back page of The Economist, and divided the world up into key regions:

1.  Nordic region:  Population 125 m.  CA surplus = $397.3 b.   (Of which Germany is nearly 2/3 the population, but less than 1/2 the surplus.)

2.  China:  Population 1350 m.  CA surplus =$289.1 b.

3.  Japan:  Population 127 m.  CA surplus = $180.9 b.

4.  Five dragons:  Population 110 m.  CA surplus = $153.3 b.

5.  Russia:  Population 145 m.   CA surplus = $84.2 b.

6.  Club Med:  Population 255 m.   CA deficit = $266.3 b.

7.  Anglo bloc:  Population 420 m.   CA deficit = $556.0 b.  (Of which the US is roughly 3/4s of both categories.)

[The Nordic bloc includes Norway, Sweden, Denmark, Holland, Germany and Switzerland.  Perhaps “Protestant” might be a better term.  Club Med includes France, Spain, Italy, Greece and Turkey.  The five dragons are Korea, Taiwan, Malaysia, Singapore and HK.  The Anglo bloc includes the US, Canada, Britain and Australia.  The Economist did not list small countries like Ireland and New Zealand.  CA is ‘current account.’]

So if CA surpluses are to be viewed as a problem, then there is no one more villainous that the Norwegians and the Swiss.  Both countries have CA surpluses of roughly $10,000 per capita.  That’s about $40,000 for the average family of four in each country.  There are lots of countries where average incomes aren’t even that high.  China has a surplus of about $215/person.  The average Norwegian and Swiss worker is nearly 50 times as destructive of US jobs as the average Chinese worker.   All those xenophobic campaign commercials should be depicting blue-eyed blonds making skis and cuckoo clocks.  That’s where our jobs are going!

I know what you are thinking; “The Nordic countries play by the rules; they don’t have their governments buy lots of foreign financial assets in order to run up massive CA surpluses.”  Ever heard of Norway’s Sovereign Wealth Fund?  Note that the 5 little Nordic countries combine for a $220 billion surplus, with a combined population smaller than South Korea.

Do any of these “imbalances” actually hurt the US?  Of course not, the Fed determines our NGDP.  But I thought it would be interesting to identify the villains, in case you do think it is a problem.  BTW, the other countries on The Economist list tend to have much smaller imbalances.  These are the big ones.

PS.  I used the CA balance.  Some might argue that it is the trade balance that really matters, as it correlates with jobs.  The CA includes income from investments.  If so, China shrinks to a $182.9 b. surplus and Germany rises to $208.2 b. while Russia soars to $151.6 b.  China is just another big country in trade balance terms.

HT:  Bastiat


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52 Responses to “Where are the biggest “imbalances?””

  1. Gravatar of malavel malavel
    25. October 2010 at 20:10

    I’ve been trying to understand China’s currency manipulation. Would it be equivalent to the following?

    China confiscates some amount of goods produced in China and sends them to USA in exchange for treasury notes. This would be the same as a reduction in real output, Y (in China). With constant M and V, P has to increase. So this policy would cause inflation. Did I miss anything?

  2. Gravatar of Greg Ransom Greg Ransom
    25. October 2010 at 22:08

    The fact that there is no capital in your “model” is the only thing that allows you to think like this.

    The U.S. is consuming capital and it is consuming future wealth on an installment plan.

    And what happens when the sovereign debt crisis hits?

  3. Gravatar of Mattias Mattias
    25. October 2010 at 22:54

    Well, as I think you have said before, China is only exceptional in it’s size. But what happened to the Opec countries? Don’t Norway have more in common with them?

  4. Gravatar of Mike Sandifer Mike Sandifer
    25. October 2010 at 23:19

    Scott,

    Though I am among the least sophisticated commenters, for what it’s worth, I’ve felt Krugman’s been very wrong in his analysis vis-a-vis China and falls into an old, even obvious fallacy. Now, as you point out, China isn’t even nearly the biggest CA surplus economy. It seems Krugman’s really left the planet on this one.

    As I’ve stated once previously, I see the Chinese as simply looking to supply us with cheap servants just to give enough of their people jobs to prevent serious political turmoil. Of course, they want to avoid too much inflation at the same time.

    This obviously good for us, as it increases our real incomes. Do you think Krugman makes another mistake and underweights this fact?

  5. Gravatar of W. Peden W. Peden
    26. October 2010 at 02:49

    As Milton Friedman pointed out, the Chinese (or the Japanese, as the Yellow Peril was back in the 1970s) can do two things with their dollars: they can use them, or they can decide to not use them.

    If they use them, they slosh about in the world trading system, which benefits us all.

    If they don’t use them, then consider the deal that Americans have got out of the transaction: exporting green paper in return for goods & services.

    If the Chinese government wants to subsidise the US consumer at the cost of the Chinese citizenry, then perhaps the citizenry have grounds to complain, but why should Americans complain about getting foreign aid?

    By the way, Professor Sumner, the comparison with Norway is brilliant. I struggle to think of one person who has ever criticised the Norweigian government for their anti-Dutch Disease policy, but the complains about the Japanese or the Chinese go right back. Is it just that Norway is a small country, and therefore not such a provocative/attractive target for protectionists?

  6. Gravatar of Lorenzo from Oz Lorenzo from Oz
    26. October 2010 at 02:59

    Really nicely put.

    Greg: read more economic history. The US has spent most of his history having a CA deficit. People like exporting capital to the US, and for good reasons, and have for a long time.

  7. Gravatar of Lorenzo from Oz Lorenzo from Oz
    26. October 2010 at 03:04

    What fascinates me is watching a repeat of the Japan Peril of the 1970s/80s becoming the China Peril of the 1990s/00s. Folk have astonishingly short memories. True, when the Chinese bubble economy bursts, they have nuclear weapons to add to the mix: they also have an ageing population (also shades of Japan) – admittedly one with a surplus of young males, thanks to the one-child policy “she-baby cull”, as the Economist brutally called it.

  8. Gravatar of W. Peden W. Peden
    26. October 2010 at 03:16

    Re: Germany.

    Professor Sumner, you might not have read this yet-

    http://www.standpointmag.co.uk/node/3418

    Tim Congdon makes the case that this crisis has produced empirical data that is disastrous for Keynesianism, but excellent for “boneheaded” monetarists like Congdon and Steinbrück.

  9. Gravatar of scott sumner scott sumner
    26. October 2010 at 05:06

    malavel, I don’t see how it relates to confiscating goods. The Chinese governments saves a lot. This causes China to save more than it invests. In that case you have a CA surplus–which is defined as saving more than you invest. I don’t see any direct impact on growth, but the composition of growth shifts toward exports and away from domestic goods.

    Greg, I agree that America saves too little, and I support fiscal policies here that would encourage more saving.

    Mattias, The Economist only lists a few of them:

    Venezuela and Saudi Arabia have surpluses around 20b, less than half of Norway, and Mexico has a small deficit. I listed all the big regional imbalances on The Economist’s list.

    Mike, He seems to wants trade barriers on China for all sorts of reasons; these include their large CA surplus, and also their environmental policies. It seems to me that he is very intolerant of countries that make policy choices that he doesn’t agree with. I think starting a trade war is a very counterproductive way to deal with disputes.

    To answer your question, I think Krugman understands the advantages of trade pretty well at a theoretical level, but puts too much weight on hypothetical theoretical objections to free trade, which don’t work well in the real world.

    W, Peden, All good points. I can’t say why Norway and Switzerland are often excluded from criticism. Their combined CA surplus is roughly half as big as China’s, but their combined population is less than 1/100th the population of China. I’d say that’s punching above one’s weight.

    Lorenzo, Good points. I’ve argued that the anti-female baby bias is the largest single problem facing China–worse than the environment.

    As I recall, your country has also done fine running CA deficits (as large as ours as a percentage of GDP.)

    W. Peden, Yes, that’s a good Congdon article.

  10. Gravatar of malavel malavel
    26. October 2010 at 05:17

    “I don’t see how it relates to confiscating goods. The Chinese governments saves a lot.”

    And how does the government save? By taxing the people. And that’s the same as confiscating goods. I just tried to make the example simple enough for my poor brain to understand it.

  11. Gravatar of Rafael Rafael
    26. October 2010 at 05:49

    Hey Scott,

    via Brad DeLong, great news from the FT:

    http://delong.typepad.com/sdj/2010/10/w00t-w00t-w00t.html

    “Investors who believe the Fed will succeed in its efforts – which would lead to higher inflation – accepted a yield of minus 0.55 per cent on $10bn of Treasury Inflation Protected Securities – or Tips – which compensate holders if the consumer price index rises. At the same time, retail investors looking for higher yields in the current low interest-rate environment were targeted by Goldman, which prepared to sell $250m of 50-year bonds that are expected to pay interest of up to 6.25 per cent.”

  12. Gravatar of ssumner ssumner
    26. October 2010 at 06:08

    malavel, Now I see your point. But don’t you mean CONSUMPTION in China would fall, not production? Or are you considering the supply-side effects of higher taxes.

    Thanks Rafael, That’s pretty interesting. I wonder how risky those 6.25% bonds are?

  13. Gravatar of malavel malavel
    26. October 2010 at 06:33

    Scott, I was trying to figure out if China’s manipulation would cause inflation. I assumed the taxation wasn’t enough to cause any change in production. But the Y in MV=PY would still change, right? Let’s say all of a sudden every second item produced would magically disappear. This would cut Y in half, as long as production wasn’t affected. So we would get 100% instant inflation.

    Wouldn’t China’s currency manipulation do the same? And if so, wouldn’t it be the same as printing up new money to buy the US treasury notes?

  14. Gravatar of Indy Indy
    26. October 2010 at 06:40

    The Saudi Arabia case is not an accurate reflection of the OPEC “imbalances”. From 2006 thru 2009, their average CA was over $100 Billion. Also, see here.

    2010 is a uniquely low year because of massive special purchases (largely military, as I understand it, perhaps Iran and/or Recession related) which are all accounted for in a single year. At $100B, that would be $4,000 per Saudi.

    Of course, it’s a big-population OPEC country. Using the Wik’s numbers, Kuwait outdoes Norway at almost $18K CAB per person.

    I think it would be fairer to do the CAB “imbalances” this way (Again, using Wikipedia’s numbers):

    Major Oil-and-Gas-Exporters (I include $20B of the Netherlands CAB because “the Netherlands is presently the world’s fifth largest natural gas exporter”: Saudi Arabia, Russia, Iran, Norway, Netherlands, Kuwait, UAE, Algeria, Libya, Qatar, Venezuela, Azerbaijan, Angola, Brunei, Trinidad, Uzbekistan, Turkmenistan, Nigeria, Oman, Bahrain. Combined CAB: $550 Billion. You could arguably throw in Canada for an extra $13B.

    East Asian Manufacturing Exporters: China, Japan, Singapore, Taiwan, Hong Kong, Thailand, South Korea. Combined CAB: $520 Billion.

    Northern/Central European Manufacturing Exporters: Germany, Remaining $33B of Netherlands, Sweden, Switzerland, Austria, Finland, Belgium, Luxembourg, Denmark: Combined CAB: $250 Billion.

    Other Global Raw Materials / Commodities Exporters: Malaysia, Indonesia, Philippines, Chile, Argentina, Botswana, Bolivia, Brazil, Peru, Timor-Leste, Ecuador. Combined CAB: $67B.

    If you want to combine everything above – you get $1.4 Trillion per year – over 3/4 due to East Asian Manufacturing and Oil. I suggest this is why people ten to overlook the rest when they talk about “imbalances” because they are talking about the 800-pound gorillas in the room. At least, they seem pretty big to me.

    And the “imbalances” argument isn’t about current prices or competitiveness per se, it’s about long-term effects of these imbalances being continued over a long duration. The issue is that these imbalances are persistent and being enabled by an enormous expansion in new issuance and accumulation in foreign-holdings of US Treasuries which must all be paid back by our posterity.

    If we’re deficit financing high real-growth rates (or “higher than the counter-factual scenrio”, I suppose), we can argue that posterity gets the benefit of the bargain. If we’re not – then we can’t. With the Great Recession, the average US real growth rate over the last 5 years is only 1%. Per capita, that’s 0%. That negative TIPS rate and some EMH-magic indicates the market thinks it will be also be low in the future.

    Can this go on forever? What happens when and if it reverses? With what speed? Should we use the precautionary principle to avoid a low-probability high-cost scenario, as is argued with global warming?

  15. Gravatar of Phil Perspective Phil Perspective
    26. October 2010 at 07:13

    This obviously good for us, as it increases our real incomes.

    Obviously you aren’t middle class.

  16. Gravatar of Jon Jon
    26. October 2010 at 07:23

    Scott: Do the Norwegians have the same capital controls as the Chinese do?

    When I brought up the issue of the PBOC ‘creating’ demand for American financial assets which in turn could justify approximately the trade imbalance, Bill Woolsey’s challenge in response was why American’s harmonize the trade by buy goods not making investments in China.

    Indeed, even though some avenues of investment exist–I contribute my part to the Chinese stock market bubble–the rules against foreign control of companies and the general political risk factor, and the demarcation of foreign investment only within the SEZ, all impair investment into China.

    Furthermore China is a scarcely developed country. Investment should be flowing in, not out and the trade balance should be negative not positive. Conversely, it makes sense for the Nordic countries to be running the other way.

  17. Gravatar of TequilaKid TequilaKid
    26. October 2010 at 07:35

    Perfectly logical argument, but it suffers from the typical flaw of arguments propounded by economists bottle-fed on Neoclassical economics. In other words, you are merely taking into account the ALLOCATIVE efficiency of the international division of labour. You are not considering the DYNAMIC effects of linkages and whatnot and other types of efficiency.

    By the way, I am terribly intrigued by the fact that David Ricardo’s theory of the supposed mutual benefits accruing from international trade was utterly and flatly contradicted by Friedrich List, the patron saint of protectionists and prominent member of the German Historical School. It’s exquisitely comical that List — In his magnum opus, whatever it’s called — analyses Ricardo’s Exhibit A, i.e. the allegedly “natural” division of labour between Portugal, which sold wine to England, and England, which sold cloth to Portugal. List marshals impressive historical evidence to the effect that the division of labor that Ricardo deemed so “natural” was ACTUALLY THE RESULT OF ENGLAND PURPOSELY WRECKING THE FLOURISHING PORTUGUESE TEXTILE MANUFACTURES though various devious means, including trade treaties, in the 18th century.

  18. Gravatar of ssumner ssumner
    26. October 2010 at 08:25

    Malavel, Y is usually defined as Real GDP. If you define it as domestic consumption, then it might appear that prices would rise. In reality that wouldn’t happen, as the PBOC would simply reduce the money supply.

    Indy, I relied on data from The Economist, which appears to be more recent than the figures you cite. For instance, just Germany and Switzerland have a surplus of $250 billion, add in the others and it’s well over $300 billion even excluding energy exports. But I can’t imagine any reason why one would exclude energy exports. The complaint made by people like Krugman is that the high saving rate in these countries creates a global paradox of thrift. That’s equally true of exporters of oil and cuckoo clocks.

    So I continue to believe that if this really is a problem, the Nordic countries are far worse than China.

    Yes, you could lump together all of East Asia, but then it’d be no surprise their surplus is larger than the Nordic bloc, they have a vastly larger population. Pound for pound the Nordic countries, and a few Perisan Gulf states, are by far the “worst” offenders.

    I do agree with you on one point—the US needs to save a lot more. If we had sound fiscal policies our savings rates would rise, and our CA deficits would probably get smaller.

    Jon, No the Norwegians probably don’t have capital controls, but that’s not the issue. It makes no difference to US welfare what causes the surplus; as in the case of Ecuadorean bananas, all that matters is the fact that CA surpluses exist. If surpluses hurt us, the Norwegian surplus is just as bad, and is also artificially created by government policy, BTW.

    If China removed all capital controls, huge sums of Chinese savings might pour out into foreign investments. It’s possible the yuan would depreciate. Malaysia is also a developing country, and their CA surplus is much bigger than China’s relative to the size of the country.

    I agree that some of China’s policies are not in the interest of China’s citizens, but that’s no reason to put up trade barriers. I favor free trade with Cuba, but that doesn’t mean I approve of their policies.

  19. Gravatar of scott sumner scott sumner
    26. October 2010 at 08:32

    TequilaKid, I’m not quite sure how the devious English wrecking the Portuguese textile industry relates to either comparative advantage or CA surpluses. But perhaps if I studied the “dynamic” effect of linkages it would all make sense.

  20. Gravatar of Virgule Virgule
    26. October 2010 at 09:22

    It’s interesting that all of Germanic Europe (not counting the UK) are running trade surplus even though it doesn’t seem like they have any particularly mercantilist policies in place. Yet these are high-cost countries, what makes their exports so competitive? Norway has oil of course, but that doesn’t explain the rest.

  21. Gravatar of Paul Paul
    26. October 2010 at 09:55

    If the conversation isn’t over already, I would like to ask a question; why are the distributional impacts within the U.S. so rarely taken into account when discussing trade imbalances? If it is true that an increasing share of income is going to profits, not labor, then it seems incredibly important as to who owns the capital. Also, if as Phil has suggested, that the negative impact of trade imbalances falls almost entirely on households in the bottom four income quartiles, shouldn’t we attempt to measure the extent and cost of the increase in family disruption, crime, and other expenses to the government and society at large?

  22. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. October 2010 at 10:06

    Scott,
    I don’t want to disagree with your larger point but I do have to quibble with one of your labels: “Nordic”.

    As you yourself imply this is probably not a good label since the majority of the inhabitants of that block of countries do not even live in Nordic countries. However, “Protestant” is not really a good label either since both Germany and Switzerland have slightly more Catholics than Protestants.

    How about “Germanic” as that largely is true in the language family sense for the block of countries that you selected.

  23. Gravatar of ssumner ssumner
    26. October 2010 at 10:21

    Virgule, Very good point–almost worth a post in and of itself. It’s because “trade imbalances” have nothing to do with trade, or exchange rates. They are caused by countries saving more than they invest. Perhaps Nordics and Germans are taught to save a lot. Or perhaps they elect governments that enact fiscal policies that encourage saving. Whatever the reason, any country that saves more than it invests will run a surplus.

    Paul, The conversation is never over at themoneyillusion. I think your argument applies more to trade, than to trade imbalances. If certain segments of society are hurt by low wage competition, that’s going to be equally true in surplus and deficit countries.

    I do favor policies that would encourage more saving. Those would reduce the CA deficit as a side effect. But that’s not the reason I favor them. I think a higher rate of saving would make our economy much more productive for all sorts of reasons–and would help all segments of society. Trade barriers might help a few workers, but I think most broad classes, even the working class, would be worse off with trade barriers.

    Mark, Yes, I suppose ‘Germanic’ is probably better. I didn’t know how the smaller countries would feel about that term (given the unpleasantness of the early 40s) so I thought Nordic was safer. But heh, what’s the point of having a blog if you can’t offend people! I’m told Holland is the wrong term, but I insist on continuing to use it until my fellow bloggers start calling Germany by it’s correct name–Deutschland.

  24. Gravatar of Meg Meg
    26. October 2010 at 10:55

    Perhaps Americans are less bitter about the Nordic countries because they were never expecting to get those jobs anyway?

    Switzerland exports socialist attitudes to places that despise socialism. Then they take that CA and use it to make their teachers the best-paid in the world, offer public health care and more (new mothers have someone come by to do their shopping for them) and generally support the culture that allows them to export socialism. (They also take advantage of a guest worker program to export unemployment to other countries and limit the benefits of that socialist state.)

    Americans who think like Swiss bankers would never get promoted in the US financial industry. As soon as you begin talking about mandatory recycling and mandatory public schooling and mandatory public health insurance Americans flip out, and so we will never be able to compete with them. The attitude seems to be, “if that’s what it takes to provide those services, let ’em do it.”
    Competitive advantage in manufacturing has more to do with “what level of poverty are workers willing to live in?” (along with transportation costs, but average workers don’t seem to be aware of those.) In the US the answer is, “not that much”, in part because the middle-class standard of living is so high. Given our already-extensive inequality, I think many people are bitter that someone else is willing to go further than us. We don’t like loosing, even if it is a race to the bottom.

  25. Gravatar of Doc Merlin Doc Merlin
    26. October 2010 at 11:10

    @Virguile
    ‘It’s interesting that all of Germanic Europe (not counting the UK) are running trade surplus even though it doesn’t seem like they have any particularly mercantilist policies in place’

    They are quite mercantilist. They heavily subsidize various industries and have a very low corporate tax rate. They also don’t tend to run government fiscal deficits.

  26. Gravatar of Greg Ransom Greg Ransom
    26. October 2010 at 11:58

    I just don’t see American 2010 as comparable to America, 1880 or America 1840, etc.

    “Greg: read more economic history. The US has spent most of his history having a CA deficit. People like exporting capital to the US, and for good reasons, and have for a long time.”

  27. Gravatar of FT Alphaville » Further, further reading FT Alphaville » Further, further reading
    26. October 2010 at 12:00

    […] – Where are the biggest imbalances? […]

  28. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. October 2010 at 13:24

    Scott wrote:
    “Mark, Yes, I suppose ‘Germanic’ is probably better. I didn’t know how the smaller countries would feel about that term (given the unpleasantness of the early 40s) so I thought Nordic was safer. But heh, what’s the point of having a blog if you can’t offend people! I’m told Holland is the wrong term, but I insist on continuing to use it until my fellow bloggers start calling Germany by it’s correct name-Deutschland.”

    I agree, Netherlands and Deutschland are both the correct names for those countries. But then I believe so is the term Germanic for the language family that the speakers of those countries are part of. I guess it’s the great missfortune of those smaller countries to be speaking a language that’s so similar to a relatively larger neighboring country with such a nefarious past.

    On the other hand, I’ll not use Deutschland until the Germans take to using WrocÅ‚aw instead of Breslau.

    On the subject of correct names for countries, I was instructed recently by a native of the country that the correct term for India is in fact Bhārat. As you have forecast that it will be the number one country in GDP before the end of the century perhaps we should all learn its actual name.

  29. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. October 2010 at 13:36

    Oh, and on the subject of being gratuitously offensive, the old Polish word for “a German” is “Niemetski”. Literally it means “non-speaker”. But to most Poles it carries the additional implication of “dumb-one”.

  30. Gravatar of 123 123
    26. October 2010 at 13:39

    I don’t get this trade warmongering at all. It is a sad day when Krugman feels it is more effective for him to threaten trade war in order to reduce dollar hoarding, instead of telling the Democratic party to print more dollars.

  31. Gravatar of Torgeir Høien Torgeir Høien
    26. October 2010 at 13:43

    Excellent point about Norway. Here’s another perspective: According to IMF numers Norway’s current account surplus in absolute terms is almost exactely equal to India’s current account deficit. That is, Norway finances all of India’s net capital import. Now, would the world have been a better place if this capital was put to work in Norway instead of India?

  32. Gravatar of Wonks Anonymous Wonks Anonymous
    26. October 2010 at 13:45

    Good to know Poles their own version of the dumb ethnic archetype.

    I don’t have access to Cochrane’s latest, but seems like he may agree with Sumner on China:
    http://newmonetarism.blogspot.com/2010/10/john-cochrane-on-geithner.html

  33. Gravatar of Celc Celc
    26. October 2010 at 14:19

    @Mark A. Sadowski – As a Swede I know that none of my fellow Scandinavians would be the least bit insulted by being called Germanic, there is no stigma to it. In fact the Germanic language probably originated in southern Sweden and Denmark, and not in Germany.

    On the other hand it is bit insulting to group the Nordic countries with non-nordic countries. It’s a bit like grouping Canada with various American states and calling it the Canadian region.

  34. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. October 2010 at 14:31

    Wonks Anonymous,
    You wrote:
    “Good to know Poles [have] their own version of the dumb ethnic archetype.”

    Yes, I suppose, and moreover, some of these archetypes are well earned.

  35. Gravatar of Jim Glass Jim Glass
    26. October 2010 at 18:42

    Re imbalances, Cochrane calls out Geithner and the “strange marriage of Keynesianism and mercantilism”.

  36. Gravatar of Jim Glass Jim Glass
    26. October 2010 at 18:47

    Hmmm, I somehow overlooked the indirect link to Cochrane’s piece above. Well, there’s the direct link.

  37. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. October 2010 at 19:44

    Celc,
    The idea that you might be offended by being called “Germanic” originated in Sumner’s head.

    On the other hand it might be more elucidating to you if you understood I am “Nordic” in the sense that my mother (part Norwegian) is partially Nordic. Thus I personally found the idea that “we” should be lumped together with the Germans to be offensive.

  38. Gravatar of Lorenzo from Oz Lorenzo from Oz
    26. October 2010 at 20:42

    Scott: yes, Oz is also a big importer of capital, with large CA deficits. We haven’t had a CA surplus since (briefly) in the mid-70s.

    Greg: just don’t see American 2010 as comparable to America, 1880 or America 1840, etc. In what way that makes any difference to the points in question? Is the US technologically dynamic? Is technological dynamism not a major source of capital growth? So why is it not sensible for the US to important capital? Is not capital simply flowing to where it has the greatest returns? What else do we expect?

  39. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. October 2010 at 20:47

    Let’s hear it for the big importers of capital (USA, Australia, etc. ). They are (were) the big drivers of global growth.

  40. Gravatar of Lorenzo from Oz Lorenzo from Oz
    26. October 2010 at 20:51

    Greg: That is not to say there might be reasons why US saving rates are suppressed and shouldn’t be. But that is a different, if related, question.

    Tequilakid: List is all about the right of authoritarian politics to allocate privileges. It is bad economics and worse politics. Australia conducted a long experiment in import-substitution tariff protection from about 1910 to about 1980: the results were, let us say, mediocre. Indeed, the dynamic effects of such policies are the worst things about them, since they encourage investment in rent-seeking politics over commercial dynamism.

    Attempts to “prove” they work always involve cherry-picking (and often simply misconstruing) examples. The developing world provides a vast array of examples: the evidence is pretty clear that import-substitution is not the path to efficient development.

  41. Gravatar of Doug Doug
    26. October 2010 at 21:45

    Personally I think your approach to talking about current account deficits to be beside the point. The real question is would the US economy be better off if our current account was balanced or positive? If the answer were that it would be then the next question should be is there a realistic way that we improve it.

    Currently it seems that many countries see a great advantage in running current account surpluses and their governments actively intervene to make sure they run these surpluses. Given that is there a realistic way for the US to reduce its deficit other than by the US Government actively intervening itself?

  42. Gravatar of Jon Jon
    26. October 2010 at 23:32

    Scott write:

    If China removed all capital controls, huge sums of Chinese savings might pour out into foreign investments. It’s possible the yuan would depreciate. Malaysia is also a developing country, and their CA surplus is much bigger than China’s relative to the size of the country.

    Sure maybe, but more likely swarms of capital would enter China from the outside. The ‘Chinese’ would save a lot but it would be in Yuan and it would be invested internally. All the evidence is that real returns are higher in China, which is part and parcel with why the Chinese individually save more. So, I think you have the capital flows all backward.

    Many of the Asian countries have adopted capital controls and to foreign asset purchases by their CB. So is your claim that Malaysia is not one those? If not, I don’t buy into your point as meaningful.

  43. Gravatar of scott sumner scott sumner
    27. October 2010 at 16:26

    Meg, I’m not sure I follow any of your comment, but I’d just point out that the world’s most successful exporters of manufactured goods are also the world’s highest wage economies–the Nordic/Germanic countries.

    Doc Merlin, You are not correct, they have significant corporate taxes (albeit lower than us) and budget deficits.

    Mark, Those are interesting facts–I learn something new everyday at this blog.

    Torgeir, Yes, it would be kind of silly to reverse that “imbalance.”

    Wonks Anonymous, That’s a very good Cochrane article.

    Sorry Celc, But I’m one of the few right-wingers that frequently has good things to say about Sweden.

    Jim Glass, Thanks, that was a good piece.

    123, I agree.

    Lorenzo and Mark, I also think that high rates of immigration and fast population growth tend to lead to CA deficits. It’s not the only factor, but new immigrants can borrow money from overseas based on expected future earnings in America–in order to immediately adopt an American (or Aussie) lifestyle.

    Doug, You don’t address the deficit, you address the problem that is causing the deficit. We need a fiscal policy that encourages saving–that’s the only sensible way to address the deficit.

    Jon, Fair point about Malaysia–I don’t recall how strict their capital controls are right now. I was relaying what other international economists have argued. Unfortunately I have a bad memory for names. But again, whether the Chinese surplus is good or bad for the US is completely unrelated to why they have a surplus. In 20 years China will probably run a massive surplus, even w/o any capital controls. I agree that right now it is more likely the savings would flow into China.

  44. Gravatar of Doug Doug
    27. October 2010 at 21:07

    Scott,
    I agree that if as a whole the US saved more then it spent, the current account would turn positive. However, if the Chinese, Norwegians and Swiss are intervening in the currency markets to buy dollars, won’t that have the effect of driving down interest rates which will have the effect of making savings less attractive and consumption more attractive? If you have a free market and no trade barriers, then others can intervene to distort your free market. Is it better to have your own government intervening to distorting your free market or to have foreign governments intervening to distort your free market?

  45. Gravatar of Frank Youell Frank Youell
    29. October 2010 at 20:15

    “Lorenzo and Mark, I also think that high rates of immigration and fast population growth tend to lead to CA deficits. It’s not the only factor, but new immigrants can borrow money from overseas based on expected future earnings in America-in order to immediately adopt an American (or Aussie) lifestyle.”

    To a material extent the housing bubble was driven by Ninja loans to immigrants so that they could enjoy the “American Dream”. How did that work out?

    By the way, it is simply not true that the U.S. was a large and consistent capital importer in the 19th century. Check out “Goods Imports, Exports, and Trade Balance” (http://bit.ly/cbzYOT) for the actual data. You will see that only in recent decades has the U.S. run large and ongoing trade deficits… How well has it all worked out?

    It shouldn’t be hard for anyone to understand that a nation that runs a trade (really CA) deficit accumulates debt (really foreign claims of some kind). Unless that debt is used to finance productive investment, the end game is going to be grim.

    This is not that complex. See “This Time Is Different: Eight Centuries of Financial Folly” for an interesting book on how folks have tried to pretend otherwise for a long, long, time.

  46. Gravatar of Frank Youell Frank Youell
    29. October 2010 at 20:28

    By the way, Martin Wolf has always been very clear in stating that China is only one of many offenders in the global trading system. Germany has been high on his list for a long time. It’s almost funny to see Sweden praised for its trade surplus. Sweden has never been shy about devaluing its currency to stay competitive. Heaven forbid the U.S. to do the same thing.

  47. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. October 2010 at 20:18

    Frank Youell,
    I’m not sure what preposterous data well you’re mining but I’ll have you know that according to the U.S. Census Bureau (the only credible source) that the the U.S. had more or less consistent CADs until about 1916.

    That was done without any adverse impact to the dollar or our ability to finance public debt.

  48. Gravatar of Doc Merlin Doc Merlin
    1. November 2010 at 00:25

    @ Frank Youell

    I don’t think it will help the US as much as you think it will, we are far too large, so a much larger fraction of our trade is internal.

  49. Gravatar of Frank Youell Frank Youell
    1. November 2010 at 13:31

    Mark A. Sadowski,

    Follow the link I provided. My source was (indirectly) the U.S. Census.

  50. Gravatar of scott sumner scott sumner
    4. November 2010 at 17:00

    Doug, We don’t have a free market here. Our government discourages saving in all sorts of ways. I favor a fiscal policy that returns saving to the level it would be in a free market. That would require large forced saving, as they do in Singapore.

    Frank, You said;

    “To a material extent the housing bubble was driven by Ninja loans to immigrants so that they could enjoy the “American Dream”. How did that work out?”

    Not well, and I have two suggestions:

    1. Ban Ninja loans with FDIC-insured money.
    2. Bring in more skilled immigrants.

    On the CA deficit, see my answer to Doug.

  51. Gravatar of TheMoneyIllusion » Sweden threatens the global economy TheMoneyIllusion » Sweden threatens the global economy
    12. November 2010 at 17:42

    […] Bastiat-style reductio ad absurdum arguments seems to get more difficult each day.  A few week ago I tried to satirize the view that China was the Great Satan of international imbalances, pointing […]

  52. Gravatar of TheMoneyIllusion » Krugman’s peculiar views on American nationalism and the Chinese yuan TheMoneyIllusion » Krugman’s peculiar views on American nationalism and the Chinese yuan
    3. October 2011 at 08:22

    […] But is their surplus actually all that large?  After all, China is a very big country.  As I pointed out earlier, the Germanic/Nordic current account surplus is vastly larger, despite the fact that the countries […]

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