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September 12, 2007
Bernanke on global imbalances
The financial analysts (and press) generally blew off the Fed Chairman's speech yesterday (for example see A Warning From Bernanke, but No Hint of a Rate Cut - New York Times and Bernanke Cites a Rise in Risk Aversion - WSJ.com). But Mr. Bernanke had some interesting things to say about our current account balance (FRB: Speech--Bernanke, Global Imbalances: Recent Developments and Prospects--September 11, 2007):
the large U.S. current account deficit cannot persist indefinitely because the ability of the United States to make debt service payments and the willingness of foreigners to hold U.S. assets in their portfolios are both limited. Adjustment must eventually take place, and the process of adjustment will have both real and financial consequences. For example, in the United States, the growth of export-oriented sectors such as manufacturing has been restrained by the shifts in relative prices and foreign demand associated with the U.S. trade deficit. Ultimately, the necessary reduction in the trade and current account deficits will entail shifting resources out of sectors producing nontraded goods and services to those producing tradables. The greater the needed adjustment, the more potentially disruptive and costly these shifts may be. Similarly, external adjustment for China and other surplus countries will involve shifting resources out of the export sector and into industries geared toward meeting domestic consumption needs; that necessary shift, too, will likely be less disruptive if it occurs earlier and thus less rapidly and on a smaller scale.
Many economists and commentators treat the current account deficit as simply a macroeconomic event -- the impact of a deficit on GDP, exchange rates, etc. Bernanke points to the bottom financial line -- debt services payments. As the debt increases, we have to pay more and more just to stay even. The little secret that economist seem to gloss over in the discussions of the deficit is that you have to earn income (export) in order to buy (import). Everyone talks about the benefits of imports - without asking how they are paid for. That is like talking about the benefits of consumer spending without looking at the rising credit card debt (which, unfortunately is exactly what some macroeconomists do -- but that is another problem).
As Bernanke points out, reducing the current account deficit will require shifting resources from non-tradable sectors to tradable. But that is exactly the opposite of what others are saying is the only way to maintain worker incomes. For example, see Alan Blinder's comments about the safe jobs being in the non-traded sectors and Meyerson' Shoring Up the Middle - washingtonpost.com:
Rebuilding mass prosperity in America will require two epochal shifts in the way our nation does business. First, non-manufacturing jobs not subject to global competition -- in transportation, construction, health care, sales -- must be upgraded and upskilled the way many of their counterparts in manufacturing have.
In an age of global wage competition, shifting resources into tradable sectors may be necessary to correct the currant account deficit but may not be the path to general economic prosperity -- unless we can do a lot more to make those jobs and sectors much, much, much more competitive at the high end.
The Bernanke speech talked about other problems associated with the current account imbalance. If your are interested in the direction of the economy, as opposed to what the stock market is going to do today, I suggest you might want to read the entire speech.
Posted by Ken Jarboe at September 12, 2007 11:02 AM
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