A slightly off-center perspective on monetary problems.
Many people believe that the Chinese steal lots of American jobs because they have low wages, low environmental standards, and various unfair subsidies. As far as I know no serious economist holds that view. But there are very serious economists who believe Chinese policies are costing many American jobs. For instance, Paul Krugman has argued that China’s large current account surplus ($201.1 billion) effectively steals jobs from American workers. As anyone who has read Pop Internationalism knows, Krugman doesn’t buy into the vulgar protectionist argument that low wages/government subsidies/weak environmental protections, etc, give countries an unfair advantage. Indeed he believes that the Chinese current account surplus only costs jobs when US interest rates are at zero, not otherwise.
The Swiss current account surplus ($95.7 billion) is nearly half as large as the Chinese CA surplus, suggesting that the Swiss are stealing about half as many American jobs as the Chinese. (By the way, bi-lateral imbalances don’t matter in the Krugman model.) I’ve mentioned this fact before, but today I’d like to address it from a different direction. What is the intuition here? When most people visualize the Chinese stealing our jobs, they picture tens of millions of low paid workers slaving away in sweatshops. But Switzerland has a tiny population, most of whom aren’t even employed in export industries. The few who are earn wages much higher than those of American factory workers. So how can Swiss workers be stealing nearly half as many jobs as Chinese workers?
The answer is simple; Chinese workers aren’t stealing jobs for the reasons most Americans imagine. The real problem with large current account surpluses (in the Krugman model) is that they add a big blob of savings to the global economy, just when we need more “spending,” and less saving. In other words, they worsen the liquidity trap. That’s why the Swiss steal so many American jobs. As do the Norwegians, with their $70.7 billion CA surplus. And let’s not even talk about Germany ($188.1 billion), they are already being blamed for nearly every problem in Europe.
Now as we all know, this model is wrong. It predicts that core inflation will plummet steadily lower when in a liquidity trap. If the Fed is targeting inflation, then there is no liquidity trap, no paradox of thrift, no paradox of toil, no fiscal multiplier, no “Depression economics.” And as we saw in 2010, when the Fed observes core inflation fall below their 2% target they do policies like QE, and extended promises of low interest rates, in order to raise core inflation back up near 2%.
So the good news (for world peace, love and understanding) is that the Chinese and Swiss workers aren’t stealing any American jobs at all! We are all in this together, and we all benefit from policies that boost economic growth in any one country.
Planet Earth: it’s a positive sum game.
PS. The CA data is from the most recent issue of The Economist. They also report that the consensus forecast for RGDP growth in the US is 2.1% in 2012 and 2.2% in 2013. Because we are in a recovery, that’s obviously higher than the consensus forecast of trend growth. In other words, most economists now see the US trend rate of RGDP growth as being something like 1.5%. After 150 years of 3% trend, that’s a startling downshift. Tyler Cowen is no longer a contrarian; The Great Stagnation is now conventional wisdom.
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25 Responses to “How are Swiss workers able to steal so many American jobs?”
“In other words, most economists now see the US trend rate of RGDP growth as being something like 1.5%. After 150 years of 3% trend, that's a startling downshift.”
Scott, consider world population growth…
http://www.vhemt.org/worldgr.gif
That’s a startling downshift, yes, and it explains a large chunk of the decline in real GDP growth.
Further adjust by population age distribution, and you see that the growth in the productive population (supply) is even slower than the growth in total population (demand).
http://wisdom.unu.edu/wp-content/uploads/2008/08/big-population-age-group.gif
Since the markets are forward looking, expected supply impacts present demand.
unfortunately i think some of this is simple xenophobia.
Statsguy– do those charts really mean that? It looks like the fraction of “productive” population (relative to total population) is rising, not falling.
My guess is that the consensus forecast is much too pessimistic, both in terms of forecasting a recovery and long term economic growth.
Unless NGDP growth slows, I would be shocked if RGDP growth was less than 3% over the next two years. I also wouldn’t be surprised if GDP numbers were revised upwards. I think many economists are assuming the recovery will be slow (trend growth) because we had a financial crisis.
As far as long term growth, I think statsguy is right. Productivity growth was terrible in the 70s and 80’s, but looks normal since (2%). Why assume it will fall now?
We’ve been through this before, I think, but I don’t see how your position is consistent. On the one hand, you say there is nothing special about being at the zero lower bound. On the other hand, you say that central banks are much too tight. But why are central banks so tight? Presumably because they’re at the zero lower bound. Call it a stupidity trap instead of a liquidity trap if you like: the zero lower bound makes central banks stupid and causes them to tighten monetary policy inappropriately.
If there is a stupidity trap, here’s what I see in the international context of this post. If we could get China, Switzerland, Norway, and Germany to stop running large trade surpluses, the US capital account surplus would disappear. This would put upward pressure on US interest rates, causing the Fed to come off the ZLB. The Fed would then stop being stupid and start a normal monetary policy, which would result in more jobs for Americans. So in that sense, those countries are stealing American jobs.
Perhaps your position is that there is a discontinuity just when you hit the ZLB, where a single lump of stupidity hits the central bank all at once, but that life within the ZLB is otherwise just like life above the ZLB. In that case, on the margin, the CSNG countries aren’t stealing US jobs, since we’re clearly not just about to rise above the ZLB. I’m not sure I have a logical counterargument, but that position just seems kind of silly. Is it really plausible that that central banks make a quantum shift in their target when they hit the ZLB and then continue with business as usual?
(I’m trying to come up with a better acronym. Maybe the C-SwiNG countires.)
“If we could get China, Switzerland, Norway, and Germany to stop running large trade surpluses…”
Read: If the dollar fell…
“They also report that the consensus forecast for RGDP growth in the US is 2.1% in 2012 and 2.2% in 2013. Because we are in a recovery, that's obviously higher than the consensus forecast of trend growth. In other words, most economists now see the US trend rate of RGDP growth as being something like 1.5%.”
This doesn’t make any sense. For the economy to be in recoverty, real GDP growth has to be greater than zero. It has nothing to do with trend real GDP growth. It is not the case that recovery means that real GDP is growing faster than trend. Recovery means it is growing and recovery generally lasts until it reaches the previous peak. (Which has been accomplished.)
Trend real GDP depends on the period over which you find the trend and I think it would take a good may years of less than 3% growth for the trend to fall much below 3%, and if it grows 2% forever, the trend would never go below 2%.
Of course, if instead of the “trend growth of real GDP” you mean the growth rate of potential output, then that could start growing 1.5%. If it did, then eventually, real GDP would grow 1.5%, and the trend over the last 150 years (or 25 years) would gradually fall to 1.5%.
Finally, if the real GDP is forcasted to grow 2% for an extended period of time, then the economy would be recovering even if productive capacity were growing 3%, it is just that the output gap would not close.
If the output gap is forecasted to close (the difference between the level of real GDP and potential GDP) and real GDP is forcasted to be growing 2%, then yes, potential real GDP must be growing less than 2%.
If you look at the CBO forecast of potential, it is growing closer to 2.5%, and so, we are not closing the gap.
So, what is this? Are you looking at high employment growth for the last two months? I would wait and see a bit longer. Real GPD has passed its previous peak and employment is way below its previous peak.
It looks like real GDP was able to grow quite a bit with much less increase in employment. Maybe employment needs to catch up?
statsguy, Nope, it doesn’t explain any of it. What matters is US population growth, not world population. Our growth is little changed from previous decades.
dwb, Yes.
Cameron, See my reply to statsguy.
Andy, It seems to me that you are arguing Krugman is wrong, but that they might cost jobs for other reasons. Krugman assumes that when core inflation falls to 0.6% in 2010, then the Fed won’t do QE2 and raise it back up to 2.2% today. But in fact the Fed did exactly that. So the theoretical model that his claim is based on is false.
You have another model, which I’ve dubbed the God of the Gaps argument, which I happen to find much more plausible that the Krugman model. We can explore its implications, and there might be an argument there. I still think Chinese currency revaluation right now would be bearish for the world economy, because the income effect of lower Chinese growth would dwarf any impact on US monetary policy by reducing the duration of the zero bound problem. But my point was that Krugman assumed that US monetary policy doesn’t respond at all. I think that might have been true for a few months in 2008-09, but since then the Fed has expected inflation about where they want it. Yes, they’d probably prefer slightly higher inflation, and as you say they might be willing to deliver it if they could do so through lower interest rates rather than QE3, but I see that as a very weak effect, more than offset by the negatives of a tariff war with China, or even the negatives of tighter monetary policy in China (currency revaluation.)
If Kurgman’s model was correct, the argument for a trade war with China would be much stronger.
DR, A lower dollar would help us even if it didn’t improve our CA deficit. FDR’s huge devaluation initially worsened the trade balance in 1933, but sharply boosted prices and output.
Bill, You said;
“This doesn't make any sense. For the economy to be in recoverty, real GDP growth has to be greater than zero. It has nothing to do with trend real GDP growth. It is not the case that recovery means that real GDP is growing faster than trend. Recovery means it is growing and recovery generally lasts until it reaches the previous peak. (Which has been accomplished.)”
I don’t agree, but I think we are just debating terminology, nothing substantive (base don the rest of your comment.) i think “recovery” means higher than trend growth, which I define as potential growth. So if we are recovering, potential or trend growth must be below 2.1%. Maybe my use of “trend” is wrong, but that’s what I meant.
Scott,
“Nope, it doesn't explain any of it. What matters is US population growth, not world population. Our growth is little changed from previous decades.”
Surely it explains at least SOME of the slowdown, as population growth has slowed slightly. More importantly, fewer people are working age as baby boomers retire.
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