Meet Team Surplus
Along the lines of this morning’s post on global imbalances, on some level it seems to me that if any countries are going to manage to muster the additional demand necessary to pull the world out of recession, it’s more likely to be the current account surplus countries than a huge deficit country such as the USA. Perhaps that’s wrong. But I thought I would look up the current account numbers and make a chart of the top ten surplus countries:
I don’t really know what follows from this. But Germany and Japan have spent the past 60 years playing a very passive role on the world stage in order to avoid ruffling feathers. But I think it might be better for the rest of us if they started thinking of themselves as forgiven and thinking about what kind of leadership role they can play in this situation.
36 Responses to “Meet Team Surplus”
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December 18th, 2008 at 3:39 pm
What? I don’t think that Germany and Japan running surpluses has anything to do with not ruffling any feathers.
It has everything to do with being export-oriented economies however. Duh!
December 18th, 2008 at 3:43 pm
“What? I don’t think that Germany and Japan running surpluses has anything to do with not ruffling any feathers.”
That’s not what Yglesias is saying. He’s saying that these two countries both have large account surpluses; that countries with large surpluses are best equipped to create demand to counter the global recession; that Germany and Japan might be reluctant to take such a leadership role because of historical reasons; but that it’s been a long time since WWII and they should now step up to the plate.
December 18th, 2008 at 3:50 pm
To further expound on this.
The chart shows that current account surpluses are associated with three things:
1. Export-oriented economies.
2. Natural resource extractors. (who are also exporting, but not finished goods)
3. Small open economies.
Also, the idea of countries “assuming leadership” is flawed in the sense that it’s not like the US decided one day to be an importer for the good of the world. The US became a service oriented economy which benefited from goods imports; its financial sector in particular benefited from having a strong dollar and attracting global investment. I think the same is true of the UK where the City was behind the British policy of a strong pound.
December 18th, 2008 at 3:57 pm
Keith,
No one would complain if Japan and Germany lowered their account deficits and I doubt they re shy because of their historical aversion to ruffling feathers.
The reason they would be loath to follow the policy Matt is advocating is that in doing so they would be undermining the export-oriented orientation of their political economy regimes.
You just don’t follow policy for the good of the world or out of enlightened self-interest; free riding is a very strong force. It has to be in your direct self-interest to do so.
December 18th, 2008 at 4:14 pm
…the idea of countries “assuming leadership” is flawed in the sense that it’s not like the US decided one day to be an importer for the good of the world.
Nick: are you seriously suggesting that conscious policy decisions (say, the decision in Beijing to keep the Renminbi low; or the decision in Washington to run massive deficits even during periods of growth; etc.) on the part of governments don’t play a major role in capital flows?
December 18th, 2008 at 4:17 pm
The reason they would be loath to follow the policy Matt is advocating is that in doing so they would be undermining the export-oriented orientation of their political economy regimes.
Nick: nobody is suggesting that export-oriented states are likely to be eager to follow a different path; yet China, at least, must adjust its policies at some point because its massive capital surpluses aren’t sustainable. The evidence of this is all around us.
December 18th, 2008 at 4:23 pm
1. No, I am not suggesting that. Of course policy decisions affect capital flows. I am suggesting that these decisions are made for reasons of self-interest.
2. To be honest, I haven’t followed Chinese policy as well as I should. Yes, probably they would have to adjust. I suspect that that the reasons for the status quo are pretty powerful however.
December 18th, 2008 at 4:35 pm
Maybe I’ve been reading too much Fallows, but I’m quickly warming to China. The Olympics helped. Hong Kong makes me reconsider my support of Tibet, Taiwan, and Korea. I think we should enthusiastically support China’s leadership role at the UN Security Council with regard to the pirates. The United States cannot be responsible for every terrorist, warlord, and pirate around the world. I think Germany and Japan should be on the UN Security Council and take some of this responsibility as well. I’d also add the remaining G8 members plus add countries like India, Mexico, Brazil, maybe Egypt. Diluting the power of the victors of WWII would be a great show of forgiveness. The desire to control the world is insane.
December 18th, 2008 at 4:41 pm
Nick, what do you mean by
1. Export-oriented economies.
2. Natural resource extractors. (who are also exporting, but not finished goods)
3. Small open economies.
1. is sort of self explanatory, but in what way is Germany’s export orientation similar to China?
2. In what way is Japan a resource extractor?
3. In what way are China, Japan, Russia, Saudi Arabia, and Norway small open markets?
December 18th, 2008 at 4:42 pm
You have this exactly backwards, Matt. China, Russia and Saudi Arabia need to examine what they are doing (as do the US, the UK, and the other developed importers). Germany and Japan are doing what they are supposed to do – they are capital rich countries so they export capital. China should be *importing* capital, and in a free market would. China’s decision to export it’s capital surplus to the US (which is offering negative rates of return on that investment – even if we ignore the fact that it *will* default on it’s debt) is not something a rational actor does. If you’re going to write about trade, you may way to take an intro econ class or something – you seem to be completely unfamiliar with Ohlin Samuelson.
December 18th, 2008 at 4:59 pm
Japan has a big trade surplus, but an absolutely enormous public debt – the highest in the developed world. Their government isn’t going to be able to spend enough to create a significant amount of global aggregate demand. Nor are Japanese consumers likely to pick up the slack, since Japan is experiencing an export bust, with falling wages and rising unemployment.
I don’t really know about Germany, but I think they also have a pretty big public debt…
December 18th, 2008 at 5:09 pm
Also, I’m with Nick Kaufman here. It’s not clear why losing WW2 would induce Japan and Germany to run big surpluses. The legacy of fascist-era industrial policy might be responsible for the surpluses, but that doesn’t necessarily signal a “lack of leadership.” Japan floats its currency, and Germany doesn’t even have its own currency – that’s a lot more “leadership” than China shows. Japan does have some non-tariff barriers to trade (especially in food), but Germany harmonizes its trade policy with the EU. What more “leadership” could they show?
China, on the other hand, could create a lot of import demand by floating its currency.
December 18th, 2008 at 5:11 pm
Benny,
I am sorry, I don’t mean that all countries have these three characteristics. I meant that all countries fall in one of those three categories. Though that was a bit redundant as the real common characteristic was that they all had robust exporting sectors.
Obviously, Japan is not a resource extractor and the countries you mention are not small open economies, the Netherlands are. China and Germany export goods, though the difference which doesn’t affect our problem is that Germany produces high-value added good and China low-value added goods.
December 18th, 2008 at 6:08 pm
China should be *importing* capital, and in a free market would. China’s decision to export it’s capital surplus to the US (which is offering negative rates of return on that investment – even if we ignore the fact that it *will* default on it’s debt) is not something a rational actor does.
China wants steady managed growth over the long-term. They are parking their capital in the US for the simple reason that we offer the lowest risk. That seems pretty rational to me. Their scale is unbelievable. They can’t do it all overnight.
December 18th, 2008 at 6:34 pm
Just Karl -
Parking capital in a market where interest rates are lower than inflation and that will never be able to pay it back at current exchange rates seems rational to you? You’re using a different definition of “rational” than is typical in economics.
December 18th, 2008 at 6:47 pm
Considering the denial the Japanese are in about WW2 and that seems to be growing worse as the years go by…. eh no thanks. I like their Atomic Bomb focused anime.
December 18th, 2008 at 7:01 pm
Parking capital in a market where interest rates are lower than inflation and that will never be able to pay it back at current exchange rates seems rational to you? You’re using a different definition of “rational” than is typical in economics.
Perhaps the Chinese have a different definition of long-term than you have. The reason they invest when interest rates are lower than inflation is because there is NO RISK! Am I supposed to believe you when you say that the US will never pay it back or should I believe the free market?
December 18th, 2008 at 7:15 pm
that’s wrong
We have an account surplus because we have excess demand – this can’t be turned around by fiat. If our demand collapses, the economies of the exporting countries collapse. They may have to develop internal demand to survive, but that doesn’t help us.
December 18th, 2008 at 8:04 pm
Indeed, we commonly think that capital should flow from capital-rich to capital-poor countries because the return of the marginal unit of investment will be much higher if there is little capital. However, it seems that this is not true.
http://personal.lse.ac.uk/casellif/papers/MPK.pdf
This paper argues that the rate of return on capital is approximately equalized around the world. (Caselli is a very respected researcher, by the way.) He argues that capital-poor countries lack other factors (such as human capital) that are necessary to take advantage of investment.
So it might be rational to park excess capital abroad while you develop the conditions for successful investment at home.
December 18th, 2008 at 8:25 pm
Investments with returns lower than inflation are, I suppose, “NO RISK”, in that they are *guaranteed* to lose money. And if you’re equating the investments made by the BOC with “the free market”, you’re using a different definition of “the free market” than is typical in economics. You’re a bit of an idiot, aren’t you Just Karl.
There are certainly less-developed markets in which surpluses can’t be invested. I don’t remember anyone arguing that, say, China was one of them.
December 18th, 2008 at 9:18 pm
I get that you are a one trick pony with your “investments with lower returns” bullshit, but try to follow me. We don’t issue debt to countries. We offer bonds on the open market. No one is forced to buy them. If we offer bonds with a return that is too low, nobody will buy them. The market sets the rate.
Worries about inflation are very short sighted. What are you suggesting? That it’s best for China to pull their 2 trillion dollars out of the US economy and let it ride with whoever offers them the highest rate? Or perhaps you think there should be a Bush style tax-rebate in China?
December 18th, 2008 at 9:22 pm
If we offer bonds with a return that is too low, nobody will buy them.
Demonstrably false – check the above chart.
The market sets the rate.
Again, you seem to be confusing an entity called the Bank of China with “the market.”
December 18th, 2008 at 9:43 pm
As for my “bullshit” – Chinese inflation runs around 7%. The 10 year treasury is under 4%. I suppose that’s “short sighted” – sure, they lose money every year, but they make it up in duration.
Yglesias’s doesn’t get the first class trolls, does he?
December 18th, 2008 at 9:49 pm
So no one is concerned about Germany and Japan exerting leadership? That worked so well last century; I’m sure their neighbors would be excited to hear about it. Especially Poland, the Czechs and Slovaks, Ukraine, China, and the list goes on.
December 18th, 2008 at 9:54 pm
Ok dude, whatever. You’ve got it all figured out. I’m done.
December 19th, 2008 at 6:03 am
Shorter MY:
We’ve been throwing money around like a drunken sailor for decades and now that the bill has come I urge everybody to spend like a drunken sailor just so that things even out and I can hold on to my privileged spot at the top of the food chain.
Ain’t gonna happen dude.
December 19th, 2008 at 11:46 am
What the Chinese can do with their money:
Invest in industrial production capacity – their industrial production capacity is already growing faster than their GDP. They are significantly displacing foreign competitors. if it continues, there will be diplomatic repurcussions.
Invest in consumer good capacity – the world is already complaining about trade imbalance, creating more production capacity will exacerbate that situation.
Invest in foreign industries – while an individual investor would do this, China does not want to invest in creating competition.
Invest in the well being of its citizens (pay workers more and provide more social services) – It would be the right thing to do, but it does not enter into the amoral business decision making process.
Park the money in a safe haven. – They’re doing that. The bonds they buy have the additional benefit of freeing up the cash of their best customer.
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