I was thinking of doing my column for the magazine this week on something I’ve blogged about a couple of times already–whether the U.S. needs a recession to straighten out some of the imbalances in the economy. Mainstream American economists all seem to think this argument is nonsense, but lately a few perfectly serious economists who don’t happen to live here or at least weren’t born here have been saying maybe it’s not so crazy. I sent out e-mails to a couple of those outsiders or semi-outsiders asking why they thought there was such a difference of opinion.
I’ve since changed column topics, for now, but I don’t want the responses I got to go stale. So here’s the e-mail I received from Willem Buiter of the London School of Economics, author of the Maverecon blog at FT.com (who, just to get his allegiances straight–or not–has dual U.S./U.K. citizenship and was born in the Netherlands):
I think part of the difference in perspective comes from the fact that
Europeans and other non-Americans view the US as an open economy that
has been/continues to live beyond its means and has managed to do so up
till now by borrowing abroad. They believe that the external constraint
on the US consumption frenzy is likely to become binding soon.
Americans still tend to do much of their thinking about the US economy
as if it were a closed economy. This is a pretty bad assumption when it
comes to trade, where the US now accounts for only about 30 percent of
world GDP. I think it is a worse assumption in the financial field. As
the world’s largest debtor nation, US monetary policy is increasingly
constrained by international financial markets. The (to my mind)
reckless interest rate cuts by the Fed risk spooking domestic and
international holders of US$-denominated securities who do have
alternative investment opportunities. The risk of a sharp sell-off of
US dollar-denominated securities and an associated increase in
long-term interest rates could easily turn the US slowdown into a
recession, even a prologued one.
But even if the US were a closed economy, I still believe that the kind
of sustained increase in the national saving rate (by at least 3 percent
of GDP to restore external sustainability, and by at least 6 percent of
GDP to give US citizens hope of a diginified retirement) cannot in
practice be achieved without passing through a slowdown, and possibly a
Higher saving means lower consumption or higher income without a
commensurate increase in consumption. I am sufficiently Keynesian to
believe that a reduction in consumption will lead to (at least) a
temporary slowdown in activity. The kind of supply-side miracle that
would produce an increase in income without an equal increase in private
and public consumption is hard to visualise for the US. It’s hardly
China, after all.
For the past couple of decades, the US consumer has been saved from the
consequences of undersaving by capital gains. Unfortunately these
capital gains were to a significant extent bubble-manufactured and have
now imploded. After the tech bubble and bust and the housing boom and
bust, I cannot see another asset bubble coming to the rescue of the
improvident US consumer. So save you must. To get to a higher saving
trajectory you will first have to pass through the vale of excess
capacity and deficient effective demand. Postponing the necessary
adjustment will just make the eventual pain that much greater.
I especially like that line about “the vale of excess capacity and deficient effective demand.” Don’t you?
Tomorrow, I’ll post the response from Gilles Saint-Paul of the Université des Sciences Sociales de Toulouse.