Summers: The Global Consensus on Trade is Unravelling

Larry Summers says international economic policy is receiving too little attention in the presidential election. The success of the next administration and the fate of the US economy may depend upon the next administration's abilities abilities in this area:

The global consensus on trade is unravelling, by Lawrence Summers, Commentary, Financial Times: ...US international economic policy is receiving less attention in this presidential election year than usual. ... That is unfortunate. The next administration faces the prospect of having to make the most consequential international economic policy choices in a generation at a time when the confidence ... in free markets is being increasingly questioned.

The current distribution of regional economic power is unlike anything that was predicted even a decade ago. The rise of the developing world ... is ... a ... surprise... [W]ith almost all the industrial world in or near recession, much of the momentum in the global economy is coming from countries with authoritarian governments that are pursuing economic strategies directed towards wealth accumulation and building up geopolitical strength rather than improving living standards for their populations. China, where household consumption has now fallen below 40 per cent of its gross domestic product – which must be some kind of peacetime record – is the most extreme example. Similar tendencies, however, can be seen in other parts of Asia, Russia and other oil exporting countries. ...

For all the disagreements over the past decades, there has been a shared premise behind international economic policy discussions – the goal of increased economic integration, the spread of market institutions and more rapid growth for all nations. While companies may compete, the premise has been that nations co-operate to build a stronger economy in the interests of all.

It is no longer clear that this premise remains valid. Nations are increasingly preoccupied with their relative economic standing, not the living standards of citizens. Issues of strategic leverage and vulnerability now play a bigger role in economic policy discussions.

At the same time, it is unclear which underlying driver of global growth will replace the one in place for the past decade – the US as importer of last resort. Global growth has depended on US growth, which has depended on the US consumer; and the US consumer has depended on rising asset values first of stocks and more recently of real estate. With falling house prices and a challenged financial system, US consumer spending is falling. The US is no longer in a position to be a net source of demand for the rest of the world. ... Already, Europe and Japan are in or are very close to being in recession.

The current global policy debate is a cacophony. It is all very well to advocate increased US saving and a cut in the US current account deficit but the process for bringing it about will mean less US demand for foreign products. That will put pressure on jobs and output growth in other countries if no countervailing measures are put in place. Conversely, the return of a stronger dollar without other policy changes will raise US demand for exports but at the price of cutting demand for domestically produced goods and compounding the recession.

These problems ... may not be at the top of anyone’s agenda right now. But the success of the next administration could depend on its ability to engage with a wider range of global economic stakeholders, on a broader agenda, at a time when disagreements are increasing not just about means but also about ultimate ends.

Comments

[wjd123]

US international economic policy is receiving less attention in this presidential election year than usual.--Lawrence Summers

It seems to me that ever since NAFTA the elites in both political parties tried their best to dummy-up over free trade. This consensus of silence by elites is probably the reason the Democrats lost so many elections.

Democrats turned into small case republican where stakeholder were given short shrift to stockholders. For years elite democrats have been dealing with stakeholders with platitudes. Their base has been treated like dogs which you pat on the head because they're unsettled by the knock at the door. The dog knows that a stranger is on its territory, the elites did their best to assure the dog that the stranger meant no harm.

The elites held the dog at bay and opened the door to the stranger while the gains labor had made through the years were walked over.

[Redistribution via Inflation]

Since inflation redistributes all trade gains to the lucky few who are first in line to receive newly created money, why should any other group care whether there are trade gains?

If trade gains meant the CPI fell, then all consumers would benefit equally from trade gains.

[save_the_rustbelt]

The economists were so busy improving the economy of China they forgot they economy of the center of the US.

People in Michigan get to vote here, people in China do not.

Egghead theory meets reality.

[bakho]

STR- Don't look at economists for improving the economy of China while forgetting the US economy. We can place that blame squarely on the MBA CEOs that run our national and international companies who were more than willing to go after short term gains to pad their current quarter. Don't forget the fiscal policies of Bush and the GOP Congress, who in the face of a recession refused to fund new infrastructure projects here in the US and refused to help out the states with their infrastructure projects and instead ran huge deficits so they could gave huge tax cuts to wealthy investors who were investing much of their wealth in foreign countries and not enough in the US. Investors expect their management to get them the best deal and that deal may not be in the US. If that is the case, we need to put the money to work here at home instead of giving tax breaks to people who are sending the money overseas.

Trade is good if you have comparative advantage. On factor in comparative advantage is an educated, healthy and well trained work force. Have we been investing in education? Or have we been wasting our money or high price testing schemes that benefit relatives of Bush?

http://www.businessweek.com/magazine/content/06_42/b4005059.htm

What about infrastructure in the US? NewOrleans drowns and the US buys formaldehyde contaminated trailers and prays that enough church kids will take work holidays to do the job.

There is plenty of work that needs to be done in the US. There is plenty of money to pay for it. Do wealthy people like John and Cindy McCain really need tax breaks so they can pay workers a quarter million to maintain their 7 estates? (That works out to less than $40,00 per house, so you can imagine what kind of wages they pay.). Or should we collect a share of the profits from the trade winners to build infrastructure and keep America competitive here at home?

[hari]

Larry Summers - *Issues of strategic leverage and vulnerability now play a bigger role in economic policy discussions.*

In a way, Larry is right. Might doesn't (any longer) mean right! The US is forced to admit its exposed vulnerabilities with deficits mounting into trillions....and hardly any national savings to bridge the widening gap in strategic leverage. Means and ends are being confused principally because there is a tendency to perceive the world from a US-Centric perspective.

What Larry is trying to dissuade or persuade policy makers from overcoming or refocussing on the pre-requisite demand for international economic cooperation in monetary and also fiscal policy. The engine of growth is not going to work like before, he's apparently arguing, because of the historic paradigm shift to emerging markets...not only for good and services but also credit.

[Barry]

bakho says...
"STR- Don't look at economists for improving the economy of China while forgetting the US economy. We can place that blame squarely on the MBA CEOs that run our national and international companies who were more than willing to go after short term gains to pad their current quarter. Don't forget the fiscal policies of Bush and the GOP Congress..."

I'd add "don't forget the voting of most of your clients (you do work in Ohio, the 'State that Gave US Four More Bush Years') who either voted for their own ill-gotten gains, or were so stupid that they voted to be f*cked over yet again.

[ken melvin]

Summers:

“…. China, where household consumption has now fallen below 40 per cent of its gross domestic product – which must be some kind of peacetime record – is the most extreme example. Similar tendencies, however, can be seen in other parts of Asia, Russia and other oil exporting countries. ...

“…. Global growth has depended on US growth, which has depended on the US consumer; and the US consumer has depended on rising asset values first of stocks and more recently of real estate. With falling house prices and a challenged financial system, US consumer spending is falling.

“… But the success of the next administration could depend on its ability to engage with a wider range of global economic stakeholders, on a broader agenda, at a time when disagreements are increasing not just about means but also about ultimate ends.

I’ve no doubt that Summers is brilliant. I don’t think he has an idea in the world what is going on. Can he not extend “China, where household consumption has now fallen below 40 per cent of its gross domestic product”? Does he really believe that “…rising asset values first of stocks and more recently of real estate.” constitutes growth? “… But the success of the next administration could depend on its ability to engage with a wider range of global economic stakeholders,” and I thought McCain and Obama were clueless.

[save_the_rustbelt]

Barry:

Lots of states voted for Bush, Ohio just happened to put him over the top.

Kerry could have won Ohio with a better campaign coordinated with unions (gee, Democrats working with unions, who forgot to tell Kerry).

And CEO/MBAs deserve a great deal of the blame for what has been happening, but economists were cheerleading trade at all cost agendas.

[John V]

Summers' whole point hinges on this passage:

"It is no longer clear that this premise remains valid. Nations are increasingly preoccupied with their relative economic standing, not the living standards of citizens. Issues of strategic leverage and vulnerability now play a bigger role in economic policy discussions."

Summers is saying it no longer seems clear...not because it's not true but rather because of government influence in authoritarian nations and people's perceptions based on relativity rather than any measurable absolute.

This distinction matters. Under the veneer of uncertainty from Summers is nothing more than an observation of what can hinder or threaten the results from trade that we can easily see from separating different factors.

But he seems to saying that what can hinder trade...myopia, nationalism, authoritarianism...puts the consensus of the results from trade in question. This is wrong-headed.

[Jon]

What I find the most fascinating is that so many economists thought that you can develop China by using the U.S. consumer. Wealth creation from international trade comes from the more efficient utilization of natural resources.

Simply moving a factory from a high wage region to a low wage region + transportation costs simply shifts the wealth from one group of people (Middle income Americans who create things) to another group (Chinese peasants and Americans who consume things).

It hasn't been the productivity of the U.S. consumer who has developed China, it is the willingness of U.S. voters to take on incredible amounts of debt. Now that the debt has been maxed out, the U.S. consumer is finding himself in a low-wage position, unable to pay his debt, nor purchase Chinese goods.

Isn't that glaringly obvious?

And in the end what have you done? Destroyed the U.S. manufacturing base. Reduced the disposable income of American workers. And handed over the skills & know-how that are the real wealth to an authoritarian country with such a gigantic population that the U.S. worker cannot possibly compete with.

[paine]

it amazzzzzzzes me sometimes 'round here

paul k
does a fairly silly bit on
obama strikes back..
blah blah ....
and
comments pile up like ....oyster shells at
a tide water elks club

meanwhile one post belower

professor larry summers jr
gets nothin but drip drip drip...

hark

the porcine tribune of angelic neoliberalism
usually so over thr brim filled " cold command "
here
pulls what ??
an aleatory mush mouth meandor ???

a hand wringer no less
from el duce de macro !!!!!!

prima facie
evidence
of stymie time up in harvard yard

if so if the policy options feel like a wedgey
then its prolly
deeper shit we all is in
then larry dareth admit... even to self

whither the dream called
marketplace earth ?????

we have entered
a new era

and
larry gets it
the era of
' not to worry world...amerika's got binge '
am over hoss

and to boot
rising nations are looking
only to their own.... national prospects..

and dearest uncle hegemon
but drifts ...headlessly ....

hell citizens
our realistic choices for potus nextus
gabble over who cast the first of the latest
mad cap mud pies


and this even as ...

"The next administration faces ... the most consequential international economic policy choices in a generation "

and yikes
---for larry's
pay pals in the stateless elite---

"at a time when the confidence ...
in free markets..." here at home "... is ..."

wait for it

".. increasingly questioned "

yup
by the likes of who ??

by the likes of
me et u

we much too put apon
hoi ho poloixxxx

there's no time for a foolkrieg
here in the insecured homeland

[John V]

Paine,

That's because "politics"
is simple clap trap and
and incites easy
gratuitous opinions
that
don't require much other
than the simple
desire for
one man to
beat
another.

Issues require
a
little
more.

[paine]

john v

"because of government influence in authoritarian nations and people's perceptions based on relativity rather than any measurable absolute"

you reel here
like an amateur drunk

nothing in the piece suggests any of this

larry is sly ---if squeamish ---
he hardly draws out
the contradictions in his claims
read symtomatically

i see a mandarin of uncle's empire
here worry worting
about the stability of pax americana
vis a vis
the han-rus menace

and even if he'd like you to swallow
his kool aide
about ...'ultimately
its anti little people's welfare
to oppose run away job fests '

anti globalists here at home
pose a greater challenge then myopia

larry 's rightfully worried
that some asshole innocent
american votin majority
might just start votin for
their own better jobs and wages
not for
the best laid plans
of wall street inc

avoid
i'm a middle of the rogue type thinker
induced
pink elephants johnny

[anne]

Paine, I do not find the point here. What am I missing?

[paine]

jon

you seem to tilt away from the primus mobilus
corporate wage arbitrage profits

its all about the golden link
forged by the trans nats
between tech transfer -- the source of social progress---
and exports to advanced markets
not the largely adventitious
nation building schemes
of the politbureau

"Wealth creation from international trade comes from the more efficient utilization of natural resources "

that's h/o think
consider also production technique

but nothing in text books accounts for this :

a Han peasant today
by moving from rice paddy to toy plant
increases his/her "value added" per hour
by...maybe 1000%

--- its perhaps needless to add
thats measured using
a currency prolly forexing itself
at one third its "fair "value----

only the wildly complex structure
of our planet's 'real world 'markets
can produce such
globally irrational
pareto inferior
local outcomes

why do they persist ??

cause they turn a dandy profit
for the right folks

[Blissex]

«While companies may compete, the premise has been that nations co-operate to build a stronger economy in the interests of all.
It is no longer clear that this premise remains valid. Nations are increasingly preoccupied with their relative economic standing, not the living standards of citizens. Issues of strategic leverage and vulnerability now play a bigger role in economic policy discussions.»

But that's exactly what has been happening in the USA, with fixation on GDP and not GDP per head.

If GDP increases, the elites, which are largely fixed, benefit, because their assets and their power become more valuable. If you own a good brand or a prime shopping location, more shoppers is good news, even if each shopper's purchasing power does not increase.

Any increase in GDP makes capital more valuable; and an increase in population that is faster than that in GDP weakens the power or labourers, as it make the capital/labor ratio better for asset owners.

In a plantation economy, more serfs is good news for a small and static elite who own most of the assets (the plantations).

[paine]

anne

think of larry
as a mine-shaft canary
for the corporate cross border hi fi "in crowd "

he just started to croak
on the toxic exhaust
from the international harvester
wall street's been running across vast patches
of our brownishing planet
these last 30 years

[Blissex]

«If GDP increases, the elites, which are largely fixed, benefit, because their assets and their power become more valuable.»

A simple example: would you rather be the president of the USA for 1 or 2 terms, or the king (or the prime minister) of Norway for life? Norway's GDP per head is pretty good, but the king (or the prime minister) of Norway is a well meaning nobody.

The president of the USA can throw one or two countries against the wall and beat them up and get away with it. This is all because the GDP of the USA is bigger than that of Norway, not because the GDP per head of the USA is bigger than that of Norway.

If you have a Dixie mindset, lots of miserable cannon fodder and serfs is much better than fewer of them who are doing well.

[paine]

"an authoritarian country with such a gigantic population that the U.S. worker cannot possibly compete with.'

not so jon

given the right forex rate
we could trade
with a mutual benefit

[anne]

"For all the disagreements over the past decades, there has been a shared premise behind international economic policy discussions – the goal of increased economic integration, the spread of market institutions and more rapid growth for all nations. While companies may compete, the premise has been that nations co-operate to build a stronger economy in the interests of all."

This strikes me as so much nonsense, with the possibility that are developing nations strengthen, especially China and India and Brazil, the possibility of a mutually stronger economy becomes reasonable.

[anne]

Paine:

given the right forex rate
we could trade
with a mutual benefit

We could even explore multiple rates, for that matter.

[Blissex]

«Global growth has depended on US growth, which has depended on the US consumer; and the US consumer has depended on rising asset values first of stocks and more recently of real estate. With falling house prices and a challenged financial system, US consumer spending is falling. The US is no longer in a position to be a net source of demand for the rest of the world.»

That is one of the best bits of euphemistic disingenuousness I have recently seen.

* "US consumer has depended on rising asset values first of stocks and more recently of real estate" really means "US consumer [ has been buying on credit because their real income has stagnated ]".

* "a net source of demand for the rest of the world" really means "a net [ debtor via gigantic trade deficits ]" because that demand has been financed largely by exports of IOUs.

What Larry Summers should have said is that via circuitous ways first dotcom companies and then developing nations have engaged in a colossal form of vendor financing, preferring volume to profitability.

The Chinese elites keep the exchange rate of the dollar artificially high to in effect provide more if lower paid jobs to their desperately poor masses. This worked well for Japan in the 60s-70s -- low wages in dollars.

The USA elites gratefully accept vendor financing because Wall Street makes a lot of money on the associated leveraging transactions, and CEOs make a lot of money on labor arbitrage and subsidized capital investments.

[paine]

We could even explore multiple rates, for that matter.

relative prices oughta work fairly well if we got the exchange rate more or less right
ie
trade in balance

[Winslow R.]

Perhaps it is just time to unravel it a bit.

http://www.storyofstuff.com/

[BJ Feng]

As I've posted elsewhere, I've just returned from a trip to China and the relative prices are equalizing. A small watermelon (personal watermelon) costs around $1.50 in China. Oranges sell for $1.20 a pound (500g to be precise), fish is priced similarly to US prices while Salmon sells for a ridiculous $13 a pound (500g). A lot of stuff just isn't all that cheap anymore, a large bowl of beef noodles now cost around $1.20! Good meals for under $1 are hard to find. Oh, Starbucks is more expensive in China. A Venti Drip Coffee costs $3 vs $1.95 here. A piece of KFC chicken costs around $1.

What have we done? Well we've helped to enrich a whole new nation and created a middle class. Soon, hundreds of millions will be rich enough to start buying American goods. I was picked up by a wealthy business associate in a Cadillac. Everyone uses Microsoft Windows powered mostly by Intel chips. The richer they get, the more likely they'll actually purchase a legitimate version of Windows XP. And there were a lot of people going to see KungFu Panda, even some for Speedracer. There's a reason GM and Ford are increasing capacity in China even as they decrease capacity here. I haven't even mentioned the fertilizer and GM-food revolution in the countryside. Farmers can finally begin to "modernize" and purchase our synthetic fertilizer and specialty seeds. All we need is patience.

[don]

Larry is just coming around to recognizing the old 'devalue your currency to gain growth or export unemployment' game being played in Asia. The important trade issue today is currency manipulation, which dwarfs all other trade distortions. It's just a surprise it hasn't garnered much attention so far, with trade economists concentrating on the much less important distortions that are under the purview of the WTO.

[ken melvin]

Ah - the many ways of fleecing the rube.

[Invisible Hand]

The Global "Censensus" on Trade had a 60-year run but the party is ending and the hangover will not be fun. GATT/WTO was a basically a US-sponsored system that allowed much of the rest of the world to build up its industrial capacity and American consumers to get cheap stuff. In the meanwhile we degraded our manufacturing base and acquired a mountain of debt.
America is too weak to buy global consensus any longer. The EU has passed the US as China's largest market, and China has passed the US as Japan's largest market. They need us less and less, and once they tire of our dollars they will need us like they need Brazil.
There are plenty of groups to blame for our sorry situation, but mainstream economists deserve their share of the blame, notably the Panglossians who worship at the altar of free trade. Our Chinese competitors have no such delusions, and they will determine the next "global consensus".

[cm]

BJ Feng: "Soon, hundreds of millions will be rich enough to start buying American goods."

With some exceptions, that will mean "American brand" goods manufactured in China itself, and Chinese "knockoffs" (if that term is appropriate considering that a number of knockoffs are produced by the same industries, or even the same people moonlighting, that are making the genuine items).

I'm coming from an ex-communist country, and I'm familiar with the concept of producing stuff on foreign equipment, from foreign raw materials, on foreign spec, under foreign supervision/quality control, and being "paid" with part of the production, and/or being allowed to use the equipment or a quota of the raw material for your own purposes.

The products you mention are largely reserved for the upper crust (expensive cars, brand-name garments and fashion accessories, and other status symbols, the defining feature of which is being expensive and/or "imported" -- i.e. exclusivity).

Software and entertainment media (movies/music) can be copied at little cost and in many cases at merely the labor/time cost of the parties making the copy, and we can plausibly expect that pirated copies will be used at scale.

Heck, "Americans" are availing themselves if not of illegal then certainly "unofficial" or "recycled" copies of software, MP3s, DVD movies, etc. at large, privately and in businesses flying under the radar. And you are expecting the "Chinese" masses to pay for them?

[ken melvin]

Buy American? Hell they don't even bother to haul the empty containers back to China.

[Icarus]

The US comprised a ridiculously high percentage of Global GNP in the 20th century, and that rate will obviously decrease. The death of an empire is now witnessed by a slow, decaying, frazzled state of expectations.

The Populist reaction is predictable. Blame everyone, including those with MBA's for the demise of an low skilled labor force, who got used to the spoils of Empire.

Happy Days are over folks. No longer can a high school educated (if that) American expect a 'middle class' lifestlye. They just don't deserve it, despite the imagery of the 1950s. There are too many people around the globe who want to participate in the market economy, and the competition will have casualties.

I say we embrace this change. Let the casseroles and meatloaves die, enter the dustbin of history. Perhaps that kid in the midwest better learn chinese or hindi. And, perhaps those parents who consume so much have to learn how to cut back even more.

[John V]

the imagery of the 1950s

And, indeed, it was imagery. Selective history allows people to pick and choose what the 50s were like. They take a few quaint qualities of life in the 50s and then over-multiply into an omnipresent stereotype.

I say go ahead. Live like your "typical middle class family" in the 50s and stick to it in an apples to apples fashion. You'll live just as well but you probably won't be satisfied.

Take your 1200-1400 sq. ft ranch w/one bathroom and 3 bedrooms (maybe 2) and one car in the driveway, one TV and the basics and then match up your current income. They loved it. It was state of the art. Now match up current incomes with it and you won't know what to do with the disposable income...even with just one bread winner.

[Invisible Hand]

"Happy Days are over folks. No longer can a high school educated (if that) American expect a 'middle class' lifestlye. They just don't deserve it, despite the imagery of the 1950s. There are too many people around the globe who want to participate in the market economy, and the competition will have casualties."

Icarius,
There is some Darwinistic logic in this, but it is rejected by the American public and especially those of us who want a more egalitarian and stable country. I clearly remember the 1950s Levittown community I grew up in, where blue collar factory workers lived almost as well as white collar office workers. We had quite a few high school dropouts, but they went straight to work at unionized factories, and lived stable productive lives.
Those factories are nearly gone, and the gap between us is embarrassingly large. It's hard to find anything made in USA, and the trade deficit is an unsustainable $700 billion plus. Pretty soon American MBAs will be in trouble too, because there are plenty of educated foreigners out there. Eventually foreigners will quit taking our paper and nearly all Americans will be worse off. We will all be "casualties" if we follow your logic.

[Real Person from the Real World]

Sorry, but even college educated people can be under-employed. Go to some "staffing" company that deals with non-tech skills, and the first thing even a college grad is hit with, are commodity skills testing. They don't care that you got your degree, just that you can type x words a minute or use Excel.

IT staffing - well, half the companies do not do much more then talk to the consultant and verify they know something about the area of tech they are to be hired for. Problem there is that there are so many technologies, you cannot know them all in depth. It's hard to tell what someone knows. They have a lot of classes and certifications, and then after they are placed, the employer complains they don't know what they should, and then comes the hassles.

[Real Person from the Real World]

Ultimately, the vast majority of jobs, now that the manufacturing jobs have been offshored, are SALES. Doesn't take a degree to sell. Problem is, fewer and fewer people have the money to buy, and you can't have an economy on that, so there is backlash on trade.

[cm]

Invisible Hand: "We will all be "casualties" if we follow your logic."

I think that's his point.

[turner]

One thing that a lot of people have missed in this recent economic down turn is the fact that in-game money for all of the massive mutliplayer online role playing games has not been effected. I guess it just shows how strong and stable the computer game industry really is.
Virtual Currency