Carnegie Endowment for International Peace
There is increasingly a consensus in Beijing that China’s excessive reliance on surging debt in recent years has made the country’s growth model unsustainable. Aside from the economy’s current path, there are only four other paths China can follow, each with its own requirements and constraints.
Giving up use of the U.S. dollar for global trade and reserve accumulation would be very difficult for U.S. adversaries and would require major economic adjustments, though it would be in the best long-term interests of the United States for the global use of the dollar to be more constrained.
Most economists have trouble understanding why too much debt may harm an economy, let alone how much debt counts as too much. To make matters worse, the common practice of comparing vastly different countries’ debt-to-GDP levels is not a useful tool for gauging how a particular economy is likely to manage its debt burden.
A recent study on U.S.-China trade concludes that Trump’s trade policies cost the U.S. economy nearly a quarter million jobs. But its obsolete understanding of trade flows ends up pointing trade policymakers in the wrong direction.
The idea that trade imbalances are more likely to be the result of credit imbalances than of savings imbalances ignores the role of savings imbalances in creating credit imbalances. When a surplus country demands to be paid for its trade surplus with claims on American assets, the U.S. economy must adjust to create these assets—and one of the most common ways it does so is by expanding credit.
The debate about whether it is U.S. consumers or Chinese businesses that pay for American tariffs on Chinese-produced goods reveals absolutely nothing about whether the tariffs harm or benefit the U.S. economy.
Facebook seems to think its new digital currency Libra will be used mainly for purchasing goods and services and for current account transactions. But it will probably be used mainly for capital account transactions. Do we really want to eliminate frictional costs on the capital account?
A number of recent articles suggest that Chinese officials may reduce their purchases of U.S. government bonds. It is very unlikely that China can do so in any meaningful way because doing so would almost certainly be costly for Beijing. And even if China took this step, it would have either no impact or a positive impact on the U.S. economy.
Although standard trade theory predicts that highly advanced economies with sophisticated financial sectors, like the United States, should generally run trade surpluses, the country has run persistent, and often large, trade deficits for five decades. This can only be a consequence of significant global economic distortions.
A recent article by Joseph Stiglitz suggests that the United States runs a current account deficit because its people save too little to fund domestic investment. In fact, he may have it backwards: Americans may save too little precisely because the United States runs a current account deficit.
Democracies will increasingly have to choose between raising wages and redistributing income or maintaining free trade and capital flows. Because they are likely to choose the former, the world may face a long-term reversal of globalization.
A January 2018 Bloomberg article suggests that Chinese officials may reduce their purchases of U.S. government bonds. It is very unlikely that China can do so in any meaningful way because doing so would almost certainly be costly for Beijing. And even if China took this step, it would have either no impact or a positive impact on the U.S. economy.
In a recent much-remarked-upon and very short op-ed, George P. Shultz and Martin Feldstein argue that the only way, or at least the best way, to cut the U.S. trade deficit is for Washington to cut the U.S. fiscal deficit. It is at least as likely, however, that cutting the fiscal deficit will simply increase debt or increase unemployment.
Contrary to what one might first expect, Mexico’s role in global trade is actually beneficial to the United States. While restricting Mexican imports will reduce the American deficit with Mexico, it will increase the overall American deficit.
Whether the U.S. current account deficit is harmful or not to the U.S. economy depends on the assumptions we make about capital scarcity. In a world awash with excess capital and insufficient demand, the U.S. current account deficit is a drag on growth.
Rejecting the Trans-Pacific Partnership should not mean the rejection altogether by Washington of the very idea of a stable, rules-based trading system. The world is better off with such a regime.
A deep grounding in economic and financial history is important for modern economic analysis.
A slowing Chinese economy might be good or bad for the world, depending on domestic savings and domestic investment.
The role of the U.S. dollar as the world’s global reserve currency has been regarded as a great advantage to the United States but actually it is a destabilizing burden rather than an “exorbitant privilege.”
The next few years could see a break-up of the current monetary and trading regime and a U.S. turn inward toward isolation.