Should Economists Make Moral Judgments?


May 26, 2018

Should Economists Make Moral Judgments?

At least since the days of John Maynard Keynes, professional economists have not had to worry too much about the moral implications of their technical work. But that is quickly changing with the global march of illiberalism, and economists now must ask themselves hard ethical questions before dispensing policy advice.

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BUDAPEST – I recently attended a PhD seminar in labor economics at the Central European University in Budapest. In it, we considered whether the Hungarian government’s scheme to focus on long-term unemployment is working efficiently, and we raised a host of technical problems for the doctoral candidate to address.

But I came away disturbed by the experience, wondering whether professional economists (particularly in the West) need to reassess the moral and political context in which they conduct their work. Shouldn’t economists ask themselves whether it is morally justifiable to provide even strictly technical advice to self-dealing, corrupt, or undemocratic governments?

To be sure, reducing long-term unemployment would alleviate a social evil, and possibly ensure a more efficient use of public resources. Yet improved economic performance can shore up a bad government. This is precisely the dilemma confronting economists across a range of countries, from China, Russia, and Turkey to Hungary and Poland. And there is no reason to think that economists in the “democratic heartland” of Western Europe and North America won’t face a similar dilemma in the future.

 

Over time, economists have offered three different moral or political justifications for their technical work. The first, and simplest, justification simply assumes that the “powers that be” (the ultimate recipients of their work) are “benevolent despots” in the mold that John Maynard Keynes described (though Keynes did not consider the British bureaucrats of his time to be despots).

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In the 1970s, this defense was challenged by economists at the other end of the Western political spectrum, who pointed out that bureaucrats were a supplier lobby like any other. As such, they will always have an interest in expanding their own individual and collective importance, regardless of whether it maximizes social benefits. This assumption led economists to become “intervention skeptics” who preferred market-based solutions for any problem where the need for regulation was not obvious.

Between these two positions, most economists have been content to ply their trade on the assumption that, however self-interested bureaucrats might be, they are subject to oversight from democratic politicians whose own self-interest is to get re-elected by keeping voters satisfied. So long as the economist’s technical solutions to policy problems are offered to officials with democratic legitimacy, according to this view, there is no cause for political or moral concern.

In fact, even economists in communist dictatorships could proffer their best technical advice with a comparatively clean conscience, because they were convinced that introducing more market-mediated outcomes would inject efficiency into planned economies and increase the sphere of individual freedom. This was true even in the Soviet Union, at least after Nikita Khrushchev’s accession to power in the 1950s.

But now, for the first time in many decades, economists must consider the moral implications of giving good advice to bad people. They are no longer exempt from the moral quandaries that many other professionals must face – a classic example being the engineers who design missiles or other weapons systems.

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The new moral dilemma facing economists is perhaps most stark within international financial institutions (IFIs) such as the International Monetary Fund, the World Bank, and the World Trade Organization, where economic mandarins with significant influence over public policy earn their living.

After the fall of Soviet-style communism, the IFIs admitted Russia and the other former Soviet republics (as well as China) on the assumption that they were each on a path to embracing democracy and a rules-based market economy. But now that democratic backsliding is widespread, economists need to ask if what is good for authoritarian states is also good for humanity. This question is particularly pertinent with respect to China and Russia, each of which is large enough to help shift the balance of world power against democracy.

That being the case, it stands to reason that democratic countries should try to limit the influence of authoritarian regimes within the IFIs – if not exclude them altogether in extreme cases. But it is worth distinguishing between two kinds of international institution in this context: rule-setting bodies that make it easier for countries with hostile ideological or national interests to co-exist; and organizations that create a strong community of interest, meaning that economic and political benefits for some members “spill over” and are felt more widely.

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Among the IFIs, the WTO is an example of the first type, as is the United Nations among international political institutions. The European Union, on the other hand, is the preeminent example of a true community of interests. And the IMF, the World Bank, and many UN agencies lie somewhere in between.

From this categorization, we can derive guidelines for economists to follow when advising authoritarian regimes. Advice or scholarship that allows authoritarian governments to avoid conflict with other countries would be morally acceptable in most cases. After all, as Winston Churchill famously observed, “jaw-jaw” is better than “war-war”. A good example would be research into how best to share scarce freshwater among Middle Eastern countries.

On the other hand, economists need to take great care when providing advice or conducting research with clear policy implications for authoritarian governments. Economists should not be in the business of helping authoritarian regimes advance nefarious ends on the back of stronger economic growth or resources saved. That probably means not giving advice to Hungarian Prime Minister Viktor Orbán on how to reduce long-term unemployment.

Needless to say, every case will be unique, and economists will have to decide for themselves. As in the past, some may even embrace authoritarianism. But for the profession as a whole, the moral consequences of translating economic analysis into practice can no longer be ignored.

Looking In On The Real Paul Ryan–The Retiring Speaker of House


April 19, 2016

Looking In On The Real Paul Ryan–The Retiring Speaker of  House

he mistake about Paul Ryan, the one that both friends and foes made over the years between his Obama-era ascent and his just-announced departure from the House speakership, was to imagine him as a potential protagonist for our politics, a lead actor in the drama of conservatism, a visionary or a villain poised to put his stamp upon the era.

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Paul Ryan, Party Man

 

This Ryan-of-the-imagination existed among conservatives who portrayed his budgetary blueprints as the G.O.P.’s answer to the New Deal, among centrist deficit hawks who looked to him to hash out their pined-for grand bargain, and among liberals for whom Ryan was the most sinister of far-right operators, part fanatic and part huckster — a Lyle Lanley with “Atlas Shrugged” in his back pocket, playing everyone for suckers while he marched the country into a libertarian dystopia.

It existed among the donors who wanted him to run for President, the pundits who encouraged Mitt Romney to choose him as a running mate, the big names who pressured him into the speakership. And it existed among anti-Trump conservatives, finally, who looked to Ryan to be the Republican of principle standing athwart Trumpism yelling stop.

But the real Ryan was never suited for these roles. He was miscast as a visionary when he was fundamentally a party man — a diligent and policy-oriented champion for whatever the institutional G.O.P. appeared to want, a pilot who ultimately let the party choose the vessel’s course. And because the institutional G.O.P. during his years was like a bayou airboat with a fire in its propeller and several alligators wrestling midship, an unhappy end for his career was all-but-foreordained.

This is not to say that he lacked principles. The frequent descriptions of Ryan as a Jack Kemp acolyte — a supply-side tax cutter and entitlement reformer and free trader who imagined a more immigrant-welcoming and minority-friendly G.O.P. — were accurate enough; there was no question that the more a policy reflected Ryan’s deepest preferences, the more Kempist it would be.

But even there, he came to those principles at a time when they were ascendant within the party — in the period between the supply-side ’80s and the late-1990s window when centrist liberals seemed open to entitlement reform. And then as Republicans moved away from them, tacking now more compassionate-conservative, now more libertarian, now more Trumpist, his resistance to the drift was always gentle, eclipsed by his willingness to turn.

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Thus the Ryan of the George W. Bush era cast votes for the pillars of compassionate conservatism, No Child Left Behind and Medicare Part D. Then the Ryan of the Tea Party era championed austerity, talking about “makers and takers” and tossing out the Ayn Rand references that persuaded many liberals that he was an ideological fanatic. But that Ryan gave way to Ryan the dutiful running mate, which gave way in turn to the more moderate Ryan of Obama’s second term, who negotiated a budget deal with Democrats and moved toward so-called “reform conservatism” in his policy proposals at a time when that seemed like that might be the party’s future.

Then came the 2016 election, in which Ryan temporarily resisted Trump and then surrendered lest he break the party (which a party man could never do), and after that the Trump administration, in which Ryan has obviously steered Trump toward standard Republican policies — but has just as obviously been steered as well. Most of Ryan’s past big-picture goals (entitlement reform, free trade, minority outreach) are compromised or gone, and while he attempted Obamacare repeal and achieved a butchered version of corporate tax reform, he’s accepted spending policies that make a mockery of any sort of libertarian or limited-government goal.

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If you look at all this and see an obsessive ideologue working tirelessly for Randian ends, I think you’re being daft. But it’s equally daft to see this as the story of a great visionary brought low by Trump. The truth is that Ryan probably could have thrived as a legislator in a variety of dispensations: As a Reaganite if he’d been born early enough; as a Kempian or compassionate conservative if the late-1990s boom had continued; as a bipartisan dealmaker in a world where his base supported compromises (the blueprints he drew up with Democrats like Ron Wyden were usually interesting); as some sort of reform-conservative-inflected figure under a President Rubio or Kasich.

But in a dispensation where the G.O.P. was leaderless, rudderless, yawing between libertarian and populist extremes, he was never the kind of figure who could impose a vision on the party — nor would he would break with the party when it seemed to go insane.

Instead, he only knew how to work within the system, which because the system had turned into a madhouse meant that his career could only end where it ended this past week: in a record of failure on policy and principle that he chose for himself, believing — as party men always do — that there wasn’t any choice.

Nicholas Kristof is off today.

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Inequality in the 21st Century


March 19, 2018

Inequality in the 21st Century

by Kaushik Basu

https://www.project-syndicate.org/commentary/profit-sharing-basic-income-by-kaushik-basu-2017-12

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As inequality continues to deepen worldwide, we do not have the luxury of sticking to the status quo. Unless we confront the inequality challenge head on – as we have just begun to do with another existential threat, climate change – social cohesion, and especially democracy, will come under growing threat.

At the end of a low and dishonest year, reminiscent of the “low, dishonest decade” about which W.H. Auden wrote in his poem “September 1, 1939,” the world’s “clever hopes” are giving way to recognition that many severe problems must be tackled. And, among the severest, with the gravest long-term and even existential implications, is economic inequality.

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The alarming level of economic inequality globally has been well documented by prominent economists, including Thomas Piketty, François Bourguignon, Branko Milanović, and Joseph E. Stiglitz, and well-known institutions, including OXFAM and the World Bank. And it is obvious even from a casual stroll through the streets of New York, New Delhi, Beijing, or Berlin.

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Voices on the right often claim that this inequality is not only justifiable, but also appropriate: wealth is a just reward for hard work, while poverty is an earned punishment for laziness. This is a myth. The reality is that the poor, more often than not, must work extremely hard, often in difficult conditions, just to survive.

Moreover, if a wealthy person does have a particularly strong work ethic, it is likely attributable not just to their genetic predisposition, but also to their upbringing, including whatever privileges, values, and opportunities their background may have afforded them. So there is no real moral argument for outsize wealth amid widespread poverty.

This is not to say that there is no justification for any amount of inequality. After all, inequality can reflect differences in preferences: some people might consider the pursuit of material wealth more worthwhile than others. Moreover, differential rewards do indeed create incentives for people to learn, work, and innovate, activities that promote overall growth and advance poverty reduction.

But, at a certain point, inequality becomes so severe that it has the opposite effect. And we are far beyond that point.

Plenty of people – including many of the world’s wealthy – recognize how unacceptable severe inequality is, both morally and economically. But if the rich speak out against it, they are often shut down and labeled hypocrites. Apparently, the desire to lessen inequality can be considered credible or genuine only by first sacrificing one’s own wealth.

The truth, of course, is that the decision not to renounce, unilaterally, one’s wealth does not discredit a preference for a more equitable society. To label a wealthy critic of extreme inequality as a hypocrite amounts to an ad hominem attack and a logical fallacy, intended to silence those whose voices could make a difference.

Fortunately, this tactic seems to be losing some of its potency. It is heartening to see wealthy individuals defying these attacks, not only by openly acknowledging the economic and social damage caused by extreme inequality, but also by criticizing a system that, despite enabling them to prosper, has left too many without opportunities.

In particular, some wealthy Americans are condemning the current tax legislation being pushed by Congressional Republicans and President Donald Trump’s administration, which offers outsize cuts to the highest earners – people like them. As Jack Bogle, the founder of Vanguard Group and a certain beneficiary of the proposed cuts, put it, the plan – which is all but guaranteed to exacerbate inequality – is a “moral abomination.”

Yet recognizing the flaws in current structures is just the beginning. The greater challenge is to create a viable blueprint for an equitable society. (It is the absence of such a blueprint that has led so many well-meaning movements in history to end in failure.) In this case, the focus must be on expanding profit-sharing arrangements, without stifling or centralizing market incentives that are crucial to drive growth.

A first step would be to give all of a country’s residents the right to a certain share of the economy’s profits. This idea has been advanced in various forms by Marty Weitzman, Hillel Steiner, Richard Freeman, and, just last month, Matt Bruenig. But it is particularly vital today, as the share of wages in national income declines, and the share of profits and rents rises – a trend that technological progress is accelerating.

There is another dimension to profit-sharing that has received little attention, related to monopolies and competition. With modern digital technology, the returns to scale are so large that it no longer makes sense to demand that, say, 1,000 firms produce versions of the same good, each meeting one-thousandth of total demand.

A more efficient approach would have 1,000 firms each creating one part of that good. So, when it comes to automobiles, for example, one firm would produce all of the gears, another producing all of the brake pads, and so on.

Traditional antitrust and pro-competition legislation – which began in 1890 with the Sherman Act in the US – prevents such an efficient system from taking hold. But a monopoly of production need not mean a monopoly of income, as long as the shares in each company are widely held. It is thus time for a radical change, one that replaces traditional anti-monopoly laws with legislation mandating a wider dispersal of shareholding within each company.

These ideas are largely untested, so much work would need to be done before they could be made operational. But as the world lurches from one crisis to another, and inequality continues to deepen, we do not have the luxury of sticking to the status quo. Unless we confront the inequality challenge head on, social cohesion and democracy itself will come under growing threat.

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*Kaushik Basu, former Chief Economist of the World Bank, is Professor of Economics at Cornell University and Nonresident Senior Fellow at the Brookings Institution.

Jerome Powell’s Big Challenge at The Federal Reserve


March 1, 2018

Jerome Powell’s Big Challenge at The Federal Reserve

by John Cassidy@www.newyorker.com

https://www.newyorker.com/news/our-columnists/jerome-powells-big-challenge?mbid=nl_Daily 022818&CNDID=49438257&spMailingID

“…Powell has taken over the Fed at a delicate moment. With no reliable partner in the White House or on Capitol Hill, he has to finish the job that Yellen started: rolling back the extraordinary measures the Fed took in the wake of the Great Recession without causing a relapse. Even if he succeeds, the journey is unlikely to be without some turbulence.”–John Cassidy

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Dr Janet Yellen welcomes her successor Jerome ‘Jay’ Powell to The Fed

When Jerome Powell, the new head of the Federal Reserve, emerged from the Rayburn House Office Building on Tuesday at lunchtime, he may well have said to himself, “Mission accomplished.” During more than three hours of testimony before the House Financial Services Committee, Powell, who replaced Janet Yellen at the start of this month, didn’t say anything that was particularly unexpected or that raised doubts about his competence.

Still, the Dow fell by three hundred points after Powell’s appearance. Wall Street, which had been expecting the Fed to raise interest rates three times this year, cottoned onto his assertion that the economic outlook had strengthened recently, taking this to mean that four rate hikes, rather than three, could be on the way. Anticipating this possibility, traders sold stocks.

Despite the reaction in the markets, Powell was careful to leave himself plenty of flexibility. He emphasized that he “wouldn’t want to prejudge” the future course of rates, and he pointed out that inflation “remains below our two-per-cent longer-run objective.” In the future, he said, the Fed would “continue to strike a balance between avoiding an overheating economy and bringing . . . price inflation to two per cent on a sustained basis.”

Yellen could easily have spoken these same words. In fact, she did utter very similar ones. Addressing the National Association for Business Economics in September, she said, “Without further modest increases in the federal funds rate over time, there is a risk that the labor market could eventually become overheated, potentially creating an inflationary problem down the road that might be difficult to overcome without triggering a recession.”

Yellen’s response to the inflation risk she perceived was to raise the federal funds rate slowly. Since an initial move, in December, 2015, the Fed’s gradual policy tightening has taken the funds rate from zero to 1.5 per cent. By historical standards, this is still a very low level, and Powell expressly said that he was working toward “continuity in monetary policy.”

Yellen could easily have spoken these same words. In fact, she did utter very similar ones. Addressing the National Association for Business Economics in September, she said, “Without further modest increases in the federal funds rate over time, there is a risk that the labor market could eventually become overheated, potentially creating an inflationary problem down the road that might be difficult to overcome without triggering a recession.”

Yellen’s response to the inflation risk she perceived was to raise the federal funds rate slowly. Since an initial move, in December, 2015, the Fed’s gradual policy tightening has taken the funds rate from zero to 1.5 per cent. By historical standards, this is still a very low level, and Powell expressly said that he was working toward “continuity in monetary policy.”

As I noted a few weeks ago, this policy move was the opposite of what most economics textbooks would recommend, partly because it raised the risk of the economy running into capacity constraints. Even before Powell’s testimony, investors had started fretting that Congress’s recent actions would prompt the Fed to raise rates more rapidly, and these worries contributed to the recent wild swings in the stock market.

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Powell, a Republican investment banker who served in the Bush Administration, didn’t openly criticize the policy priorities of President Trump and the G.O.P. But he did point out that “some of the headwinds the U.S. economy faced in previous years have turned into tailwinds,” and he specifically mentioned the recent change in fiscal policy. Asked about the rising national debt, he said, “I think we are not on a sustainable fiscal path.”

Powell also noted that he and his colleagues were still in a “process of discovering” how low the jobless rate could go before inflation started rising. For now, there is no reason to suppose that he will abort this process, which has allowed employment and incomes to grow steadily in the past few years. Inflation remains quiescent, and, despite the G.O.P. fiscal stimulus, it may well remain that way.

Even today, there could be some hidden slack left in the economy, which, in any case, may be less inflation-prone than it once was, thanks to structural shifts such as digitization and globalization. As the Fed watcher Tim Duy, an economist at the University of Oregon, pointed out on Twitter during Powell’s testimony, “our inflation concerns over the past two decades have been much ado about nothing.”

The fact remains, however, that Powell has taken over the Fed at a delicate moment. With no reliable partner in the White House or on Capitol Hill, he has to finish the job that Yellen started: rolling back the extraordinary measures the Fed took in the wake of the Great Recession without causing a relapse. Even if he succeeds, the journey is unlikely to be without some turbulence.

John Cassidy has been a staff writer at The New Yorker since 1995. He also writes a column about politics, economics, and more for newyorker.com.

Why There Is No “Beijing Consensus”


March 1, 2018

Why There Is No “Beijing Consensus”

 by Andrew Sheng and Xiao Geng

https://www.project-syndicate.org/commentary/china-development-beijing-consensus-by-andrew-sheng-and-xiao-geng-2018-02

China observers can’t seem to agree on the underlying logic of the country’s development model. But, with faith in the West’s long-dominant Washington Consensus breaking down, both sides may be in a similar position – a reality that could facilitate cooperation to deliver global public goods.

 

HONG KONG – Four decades would seem to be plenty of time to identify the underlying logic of China’s development model. Yet, 40 years after Deng Xiaoping initiated the country’s “reform and opening up,” a “Beijing Consensus” – that is, a Chinese rival to the Western neoliberal Washington Consensus – has yet to be articulated.

Over the years, China has worked to transform its closed, planned economy into a more open, market-based system. Industry and, increasingly, services have replaced agriculture as the main drivers of growth, and the country has gone from technological copycat to global innovator. Meanwhile, China has tackled several difficult challenges, from excessive debt and overcapacity to severe pollution and official corruption.

This has been a highly complex process. According to China Academy of Social Sciences economist Cai Fang, it can be understood only in the context of the country’s unique history, demography, and geography, not to mention broader technological and global trends. All of these factors have, after all, helped to shape China’s governance and institutions.

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Yet the veteran China watcher Bill Overholt – one of the first to predict China’s rise – argues in his latest book, China’s Crisis of Success, that the country’s reforms were driven by “fear and simplicity.” The same factors, he asserts, drove East Asia’s post-1945 development.

Other observers – including the World Bank, the OECD, and think tanks like Harvard’s Fairbank Center for China studies – can’t seem to agree on who is right. They are not accustomed to assessing an economy whose primary influences – including historical legacies, values and ideologies, and institutional and governance traditions – differ so profoundly from those of the West.

Consider governance. Western economic dogma holds that the state should intervene in markets as little as possible. Yet, for China’s leaders, it is not clear whether the state can even be separated, conceptually or operationally, from the market.

For thousands of years, state control was China’s default governance strategy, with a strong central government overseeing stability and preventing regional and factional rivalries from causing chaos. So when China wanted to increase its leaders’ accountability, for example, it focused not on creating a market-based, much less democratic, system, but rather on introducing regulations to curb abuses of power and facilitate the flow of products, capital, people, and information.

Within the constraints of this paternalistic approach, the experimentation and adaptation that have been so crucial to China’s growth had to be carried out by local governments, which have enjoyed considerable, albeit uncertain, authority to do so. The idea was that, by using local-government (and market) expertise, China could generate growth without disturbing social cohesion or compromising national integrity.

Yet Chinese governance has not exactly been beyond reproach. When it comes to the quality of market competition, questions about the state sector’s dominance, as well as the effectiveness of regulations and adherence to international laws, standards, and practices, have persisted. And while China’s government has proved adept at providing “hard” infrastructure, such as highways, railroads, and airports, it has far to go in developing soft infrastructure, such as that related to education, health care, energy, the environment, and finance.

So China continues to grapple with the question of how to balance the state and the market, in order to ensure accountability, market competition, and adequate provision of public goods for one-fifth of the world’s population. Compounding the challenge are rapid technological change, globalization (and the backlash against it), and geopolitical considerations.

But it is not as if the West has proved definitively that its free-market approach works. The state’s role – measured according to the public sector’s share of GDP, for example, and the depth and complexity of laws governing private activities – has been expanding in almost every economy since the beginning of the twentieth century.

The United States, in particular, provides a useful benchmark. Like China, it is a continental economy. But it also represents the global gold standard in many fields, including technology, defense, and research and development.

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Contrary to China’s statist legacy, America’s historical experience has instilled in citizens and leaders a devotion to liberty, including free markets, and local autonomy. The US federal government’s size and power grew only very slowly until the 1930s, when the New Deal – which included federal programs, public works projects, and financial reforms and regulations – was implemented in response to the Great Depression.

The US federal government expanded again during and after WWII, reflecting the country’s new global hegemony and the prosperity of its middle class (created in no small part by the New Deal’s support for unionization and home ownership). The government assumed a larger role in areas ranging from defense and foreign policy to health care and social security.

But even as the federal government increased regulation in some areas, the US remained highly reliant on the market, resulting in rising inequality, the deterioration of public infrastructure, and an unsustainable fiscal deficit and debt. The global recession triggered by the 2008 financial crisis intensified growing doubts about the Washington Consensus.

So some of America’s most fundamental challenges – such as reducing inequality, supporting stable fiscal and financial conditions, and ensuring environmental sustainability – are the same as China’s, and neither country has a clear and proven “consensus” to guide it. Against this background, cooperation to deliver global public goods – including peace – should be possible.

The key is for the two sides to work toward common goals, while agreeing to disagree on certain ideological tenets. Here, the US needs to recognize that global cooperation is not a zero-sum game, and that China’s rise need not be viewed as a threat. On the contrary, China – along with other emerging economies, such as India – can contribute to a global rebalancing that actually strengthens economic and geopolitical stability.

Andrew Sheng, Distinguished Fellow of the Asia Global Institute at the University of Hong Kong and a member of the UNEP Advisory Council on Sustainable Finance, is a former chairman of the Hong Kong Securities and Futures Commission, and is currently an Adjunct Professor at Tsinghua University in Beijing. His latest book is From Asian to Global Financial Crisis.

Xiao Geng

Xiao Geng

The Myth of Sound Fundamentals


February 26, 2018

The Myth of Sound Fundamentals

by Stephen S.Roach*

http://www.project-syndicate.com

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The recent correction in the US stock market is now being characterized as a fleeting aberration – a volatility shock – in what is still deemed to be a very accommodating investment climate. In fact, for a US economy that has a razor-thin cushion of saving, dependence on rising asset prices has never been more obvious.

NEW HAVEN – The spin is all too predictable. With the US stock market clawing its way back from the sharp correction of early February, the mindless mantra of the great bull market has returned. The recent correction is now being characterized as a fleeting aberration – a volatility shock – in what is still deemed to be a very accommodating investment climate. After all, the argument goes, economic fundamentals – not just in the United States, but worldwide – haven’t been this good in a long, long time.But are the fundamentals really that sound? For a US economy that has a razor-thin cushion of saving, nothing could be further from the truth. America’s net national saving rate – the sum of saving by businesses, households, and the government sector – stood at just 2.1% of national income in the third quarter of 2017. That is only one-third the 6.3% average that prevailed in the final three decades of the twentieth century.

It is important to think about saving in “net” terms, which excludes the depreciation of obsolete or worn-out capacity in order to assess how much the economy is putting aside to fund the expansion of productive capacity. Net saving represents today’s investment in the future, and the bottom line for America is that it is saving next to nothing.

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Alas, the story doesn’t end there. To finance consumption and growth, the US borrows surplus saving from abroad to compensate for the domestic shortfall. All that borrowing implies a large balance-of-payments deficit with the rest of the world, which spawns an equally large trade deficit. While President Donald Trump’s administration is hardly responsible for this sad state of affairs, its policies are about to make a tough situation far worse.

Under the guise of tax reform, late last year Trump signed legislation that will increase the federal budget deficit by $1.5 trillion over the next decade. And now the US Congress, in its infinite wisdom, has upped the ante by another $300 billion in the latest deal to avert a government shutdown. Never mind that deficit spending makes no sense when the economy is nearing full employment: this sharp widening of the federal deficit is enough, by itself, to push the already-low net national saving rate toward zero. And it’s not just the government’s red ink that is so troublesome. The personal saving rate fell to 2.4% of disposable (after-tax) income in December 2017, the lowest in 12 years and only about a quarter of the 9.3% average that prevailed over the final three decades of the twentieth century.

As domestic saving plunges, the US has two options – a reduction in investment and the economic growth it supports, or increased borrowing of surplus saving from abroad. Over the past 35 years, America has consistently opted for the latter, running balance-of-payments deficits every year since 1982 (with a minor exception in 1991, reflecting foreign contributions for US military expenses in the Gulf War). With these deficits, of course, come equally chronic trade deficits with a broad cross-section of America’s foreign partners. Astonishingly, in 2017, the US ran trade deficits with 102 countries.

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The multilateral foreign-trade deficits of a saving-short US economy set the stage for perhaps the most egregious policy blunder being committed by the Trump administration: a shift toward protectionism. Further compression of an already-weak domestic saving position spells growing current-account and trade deficits – a fundamental axiom of macroeconomics that the US never seems to appreciate.

Attempting to solve a multilateral imbalance with bilateral tariffs directed mainly at China, such as those just imposed on solar panels and washing machines in January, doesn’t add up. And, given the growing likelihood of additional trade barriers – as suggested by the US Commerce Department’s recent recommendations of high tariffs on aluminum and steel – the combination of protectionism and ever-widening trade imbalances becomes all the more problematic for a US economy set to become even more dependent on foreign capital. Far from sound, the fundamentals of a saving-short US economy look shakier than ever.

Lacking a cushion of solid support from income generation, the lack of saving also leaves the US far more beholden to fickle asset markets than might otherwise be the case. That’s especially true of American consumers who have relied on appreciation of equity holdings and home values to support over-extended lifestyles. It is also the case for the US Federal Reserve, which has turned to unconventional monetary policies to support the real economy via so-called wealth effects. And, of course, foreign investors are acutely sensitive to relative returns on assets – the US versus other markets – as well as the translation of those returns into their home currencies.

Driven by the momentum of trends in employment, industrial production, consumer sentiment, and corporate earnings, the case for sound fundamentals plays like a broken record during periods of financial market volatility. But momentum and fundamentals are two very different things. Momentum can be fleeting, especially for a saving-short US economy that is consuming the seed corn of future prosperity. With dysfunctional policies pointing to a further compression of saving in the years ahead, the myth of sound US fundamentals has never rung more hollow.

Stephen S. Roach

*Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. He is the author of Unbalanced: The Codependency of America and China.