Good guys and bad guys
Here’s a list of the 15 biggest current account surpluses, at least for countries listed in the back of the Economist magazine:
Country CA surplus (share of GDP)
Saudi Arabia 25.5%
Singapore 15.5%
Norway 12.9%
Malaysia 12.3%
Switzerland 12.2%
Taiwan 8.4%
Venezuela 8.0%
Netherlands 7.3%
Hong Kong 6.6%
Sweden 6.4%
Denmark 5.4%
Germany 5.0%
Russia 4.9%
Thailand 4.1%
China 4.0%
Now let’s discuss how “we” think about the surpluses for Norway and China. (Of course by “we” I mean us white people):
1. Norway: What’s not to like? Finally there’s a country that isn’t blowing all its oil wealth like those more “backward countries.” By backward, I mean cultures that don’t have that enviable Nordic patience, whose governments don’t have the ability to defer instant gratification. The Norwegians are smart; they are socking away hundreds of billions of dollars in a sovereign wealth fund, which they will be able to draw on when the money runs out. What an inspiring model for the world!
2. China: You just can’t trust those inscrutable Chinese. Their government doesn’t play fair, they are socking away hundreds of billions in international reserves. Look at those huge trade surpluses (no less than 4% of GDP!!) Don’t believe me? Paul Krugman sees what the real problem is:
And this in turn means that the savings glut possibly making the natural real rate negative is actually originating abroad, not at home.
Do you sort of see why I’m a hawk on China policy?
Krugman is one of the few China-bashers who sees the real problem with crystal clarity. It’s not about exchange rates; after all, fixing the nominal rate has no effect on the real exchange rate. No, the real problem is countries that save.
And don’t tell me that the Northern European countries (in aggregate) have a vastly bigger CA surplus than China. What difference does that make? After all, any jobs “we” lose will be offset by jobs that “we” gain. Remember who “we” are. We are white people.
PS. For those readers who are new to the blog, any bigotry was meant to be sarcastic. My grandmother was Norwegian and my wife is Chinese.
PPS. Michael Pettis points to the absurdity of the Europeans asking for a loan from China, when the Northern European countries already have massive CA surpluses.
PPPS. By “Northern European,” I mean the 6 countries on the list above that lie between Switzerland and Norway. They have a $455 billion surplus, as compared to China’s $303 billion.
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9. November 2011 at 06:33
There are a lot more investment opportunities in China than among its trading partners, so China ought to have a large trade deficit. Instead it has a (very large, in absolute terms, though only moderately large as a share of GDP) trade surplus. Norway (and most of the other countries at the top of the list) don’t have such attractive investment opportunities, so we would expect that a high saving rate (even a moderately high one) in those countries would result in a large trade deficit. The problem really is with over-saving, rather than with trade deficits per se. The world as a whole is trying to save too much (relative to the opportunities for investment that the world as a whole can find that are considered profitable in risk-adjusted terms at a zero nominal interest rate), and any country whose policies promote excessive saving deserves criticism. I’d say that’s particularly true for policies that involve government intervention on a large scale, and obviously it’s more important when the country we’re talking about is a large one rather than a small one. Yes, China, I’m looking at you.
Germany is also a big country, I will note, and its high saving rate is also a big problem. But at least the German government isn’t going out of its way to promote a high saving rate.
9. November 2011 at 06:52
Andy, I understand that China’s bigger than Norway, and thus gets more attention. But the attention that Norway does get is PRAISE. Indeed I think if you asked most western economists they’d be much more upset about the trade surpluses of the small Asian countries than they would be about the trade surpluses of the small European countries. I see double standards everywhere
It’s not clear that China should not be saving a lot. They face a massive demographic time bomb. When they see what happened to the East Asian countries without big reserves in 1997, or to the PIGS with their big deficits, I can’t blame them for wanting to save.
It’s also not clear that the huge Nordic surpluses are not due to government policies. Their governemnts tend to tax consumption more than saving, relative to the US.
And finally, I strongly disagree with the notion that the world saves too much. I think it saves too little, but rather monetary policy in the developed world is way too tight.
9. November 2011 at 07:35
Alright, I admit it. Your blog sucked me in again.
I think it’s important to remind people that countries are incapable of saving. Any amount of money a country’s government professes to save is money that would have otherwise been spent or saved by real human beings, as opposed to being sucked out of the economy and deposited into some mysterious government slush-fund designed to redistribute investment into government-sanctioned business activities.
What I mean is that there is literally no difference between the Saudis and the Norwegians when it comes to capital reallocation (destruction, really). I *think* that was also your point, but I’m not sure…
9. November 2011 at 07:58
I should have said, “Norway (and most of the other countries at the top of the list) don’t have such attractive investment opportunities, so we would expect that a high saving rate (even a moderately high one) in those countries would result in a large trade surplus” (not “deficit”). It’s not just a matter of Norway’s being small, but there’s nowhere for its savings to go except out. What makes China so shocking is that, despite its huge internal investment opportunities, it still manages to have net capital outflows.
9. November 2011 at 08:07
it seems you wanted to say ‘the six countries between Norway and Germany’? The only one between Norway and Switzerland is Malaysia
9. November 2011 at 08:20
@Nichol,
I guess he means geographically between switzerland and norway
9. November 2011 at 08:26
It is absolutely ridiculous to say that the world saves too much.
1. Current low interest rates are a symptom of monetary policy being too tight. A blogger named Scott Sumner has been trying to tell this to people for years. If the economy were in better shape, we would see that the “natural” real rate of interest is actually much higher, and that -1% is actually an unnatural artifact of tight monetary policy.
2. In non-recessionary times, when Bernanke first talked about the “savings glut,” real rate of interest on US treasuries was 2%. I suspect that the real rate of interest will return to that once the world economy recovers.
3. Investments usually come with substantial default risk premium or risk premium. Even at our -1% real rate of interest, new investments will have a positive expected return.
4. Who are you to say that people are saving too much? Maybe a 2% risk-free rate of return in 2006 wasn’t enough for you, but it was enough for other people. If you have saved sometime in the last five years, did anyone question whether your saving was valid?
5. Even if, at some point, we do reach a naturally negative real risk-free rate, it’s no big deal. It just means that wealthy people who have run out of things to consume have to risk their capital to get investment income – or pay a little bit more for the privilege of being able to consume in the future.
9. November 2011 at 08:42
The race card? Come on. You didn’t NEED to go there.
9. November 2011 at 09:02
Too late;
http://stuffwhitepeoplelike.com/
9. November 2011 at 09:11
More excellent commentary by Scott Sumner. I also enjoyed his report from NYC, echoing my sentiments exactly. Someday I will find something to disagree about with Sumner.
9. November 2011 at 09:32
Occasionally the good guys win one;
http://seattletimes.nwsource.com/html/localnews/2016720231_elexliquor09m.html
—————-quote——————-
The campaign was a battle of corporate interests, with Costco contributing the vast majority of the money for the pro-1183 campaign.
….
The coalition against I-1183 was financed mostly by wine and liquor distributors [and state unionized employees who are now out of jobs], who fear that liquor and wine deregulation in the measure will spread to other states.
Early on, the No campaign focused [exceedingly disingenuously] on the safety implications of the measure and was winning in phone surveys. Its lead diminished as the campaign turned to speculation about how many gas stations and minimarts might sell liquor, and to Costco.
….
Distributors particularly dislike that I-1183 allows retailers to buy liquor directly from distilleries. Since Prohibition ended, states have required retailers to go through distributors for liquor, and experts say Washington now might be the only state to tear down that law.
Small wineries, craft distilleries and neighborhood grocery-store owners also worry about how they will compete in a market that favors large players. I-1183 allows stores measuring at least 10,000 square feet to sell liquor, and makes it legal for retailers to get volume discounts on liquor and wine, and to warehouse those products themselves rather than using distributors.
….
In the coming weeks and months, the state Liquor Control Board will wind down its liquor business, including selling its inventory and Seattle distribution center, and auctioning off state-run liquor stores.
—————–endquote——————–
9. November 2011 at 09:53
Ryan, People usually mean that aggregate saving in the country exceeds aggregate investment. That’s what others mean, and that’s what I mean.
Andy, I understand that point, but I still don’t agree:
1. Whether it’s wise for China is an issue for the Chinese people. If foreign saving hurts us, it’s bad for whatever reason they save.
2. Even if you are right about Norway, the northern Europeans as a bloc could certainly adopt more anti-saving fiscal policies. Krugman would probably recommend they do.
3. And of course I don’t think foreign savings hurts us, as I indicated earlier.
Nichol, Poorly worded on my part–see Anders.
Tahtweasal, Good point.
DW, It was meant to be humorous. I certainly don’t think people like Krugman intentionally favor one race over another. But it’s ironic how these things work out.
Ask people whether South Korea ran big trade surpluses or big deficits during its high growth years. I bet 90% say surpluses (it was deficits) because “everyone knows” the East Asians got rich with mercantilism.
Patrick, Thanks for the reminder about white folks. And great news about booze.
Ben, When NGDP picks up at some point our views may diverge. But not yet.
9. November 2011 at 11:35
Scott
I think people are more upset about the jobs perceived to have gone to China than the CA surplus/deficit. Most of the people who are upset don’t even know what a CA surplus is, but they do know someone whose job was “shipped overseas.” That’s why people are more upset with China than Norway. When’s the last time you heard of a US manufacturer closing a plant here so it could build its products in Norway?
I too think playing the race card is unnecessary, and, more to the point, a red herring that distracts from the real problem both perceived and actual.
9. November 2011 at 11:50
In the Netherlands tax-policy is already quite anti-saving, with a 30% tax on a fictituous rate of return of 4% (so effective a 1,2% wealth tax). After inflation, there is no savings account that can keep up.
9. November 2011 at 12:34
“Krugman is one of the few China-bashers who sees the real problem with crystal clarity. It’s not about exchange rates; after all, fixing the nominal rate has no effect on the real exchange rate.”
Presumably you’re just being facetious. Maybe you think that fixing the nominal rate has no effect on the real exchange rate, but Krugman certainly doesn’t agree.
9. November 2011 at 15:05
Scott,
You’re absolutly right that it’s about which countries save and which ones don’t. The extension of that is that a trade deficit is nothing to worry about so long as the individuals in a deficit country have any concern for their personal finances. There’s no danger of running out of money. Plus the Fed can print up more anyway and hypothetically fuel trade deficits indefinitely.
I wish no one had ever invented the concept of the trade deficit though. All trade generates a surplus both for the two parties involved and for society by promoting efficiency. I thought Bastiat crushed the idea of mercantilism back in the 1850s but Krugman wants to keep bringing it back.
It’s good that they don’t keep track of trade deficits in the US. If they did, Manhattan might have to put up huge protective tariffs, kick out all the bankers, entertainers, and chefs, and start building a manufacturing based economy.
9. November 2011 at 15:33
“1. Whether it’s wise for China is an issue for the Chinese people. If foreign saving hurts us, it’s bad for whatever reason they save.”
I agree with Harless and Krugman.
The US government should say fine do what you want. We can do what we want also – fair’s fair – and the U.S. could then not allow China to buy any U.S. Treasuries. It’s called capital controls. China employs them.
China would then buy secondary countries’ currencies as a backdoor way to manipulate their currency. We’d say say to those countries, if you deal with China, you’re banned too. How do you like them apples?
9. November 2011 at 18:38
Andy Harless: the notion that China needs even more investment in building and infrastructure does not sit well with the voices crying doom and gloom on its massive asset price surges and “empty cities”. Consumption is only 35% of Chinese GDP according to the IMF. It already looks like a high investment economy. And, as Scott points out, the demographics are such as to encourage saving. There is no state-guaranteed old age pension, so its demographics are not the public debt disaster that much of Europe and Japan potentially faces (I agree with Niall Ferguson, a lot of poor old people is not such an issue for the regime), but must surely be motivating a lot of the household saving.
Also, if you were Chinese, would you prefer to invest solely in China (with its corruption, authoritarian politics and dubious rule of law) or hedge your bets by investing in places Western?
Of course, the Oz economy runs a considerable trade surplus with China, so we may see things a bit more calmly 🙂
But I can remember all these tired arguments about Japan in the 1980s. (We ran a trade surplus with them too: indeed, one Japanese Trade Minister told an Australian audience that we should feel free to run an even higher bilateral surplus if we could.)
Meanwhile, the US continues to run its traditional trade surplus with Australia (which is even bigger if you add in services). You bastards! [irony marker]
(Previous versions seem to have been caught in the spam filter, so this version has no links.)
9. November 2011 at 19:41
Dr Jim, You said;
“I think people are more upset about the jobs perceived to have gone to China than the CA surplus/deficit. Most of the people who are upset don’t even know what a CA surplus is, but they do know someone whose job was “shipped overseas.” That’s why people are more upset with China than Norway. When’s the last time you heard of a US manufacturer closing a plant here so it could build its products in Norway?”
This post was addressed to people I disagree with (like Krugman) but who also understand the basic principles of economics.
Jaap, It’s even worse here. The tax code is highly complex, one example doesn’t prove anything. Why does the Netherlands have a huge CA surplus?
Kevin, You said;
“Presumably you’re just being facetious. Maybe you think that fixing the nominal rate has no effect on the real exchange rate, but Krugman certainly doesn’t agree.”
Krugman said the real issue isn’t the exchange rate, it’s the purchase of securities by the Chinese government. Otherwise the real exchange rate would adjust and there’d be no problem.
In the short run they are linked, but the China bashers see a long run problem. And in the long run the real and nominal rates aren’t linked.
John, Excellent comment.
Peter, You said;
“The US government should say fine do what you want. We can do what we want also – fair’s fair – and the U.S. could then not allow China to buy any U.S. Treasuries. It’s called capital controls. China employs them.”
Let me guess, you only want to “get tough” with countries having huge CA surpluses that don’t have many white people.
I find the amount of hatred of China to be disgusting. It’s a great country, let’s leave it along and mind our own business. They US causes all kinds of problems for the rest of the world. How’d we feel if they started putting on trade barriers on us because they didn’t like our Iraq policy, or our global warming policy, or our tight money policy, or our banking policy that caused a recession which caused great pain for Chinese workers.
9. November 2011 at 21:08
in regards to the Dutch CA surplus… surprisingly pretty much all derives from the trade with Germany. the country does a lot of ‘through-porting’, getting products in from the ocean and passing those on to Germany, at a higher price of course & the greenhouse-economy, think flowers, fruit and vegetables.
with the countries outside of the EU, the Netherlands runs a deficit (roughly 10% of GDP), even with the US.
9. November 2011 at 21:32
“I find the amount of hatred of China to be disgusting.”
I don’t hate China at all. In fact I was impressed with the Chine Communist Party’s central planning-macroeconomic policies in the wake of the financial crisis. They performed better than the US with a huge Keynesian stimulus package.
As I see now they are dealing with the problem of inflation and fair way for them to deal with it would be to not manipulate their currency and allow the yuan to rise which would cool off their export sector. It would help the U.S. export sector help boost demand and NGDP in the U.S.
I also agree that it’s understandable that the Chinese have built up a current account surplus as insurance against ever having to go to the IMF. They’re not trying to screw the U.S. They need our consumer market to buy their exports.
But China has capital controls and manipulates its currency while Germany doesn’t.
9. November 2011 at 21:40
@Lorenzo for Oz
“Meanwhile, the US continues to run its traditional trade surplus with Australia (which is even bigger if you add in services). You bastards! [irony marker]”
Maybe I’m not understanding the issues at hand. Australia and the US don’t have capital controls nor manipulate each others currency besides trying to maintain price stability right? This is unlike China right which keeps its currency artificially low thereby effectively taxing its consumers and subsidizing its exporters giving them an advantage over foreign competitors. This is what the W.T.O. is for right?
10. November 2011 at 03:41
Maybe the tounge-sort-of-in-cheek tone is throwing me off here, but ascribing this to racism seems way off base. What country is at the top of thsi list? Saudi Arabia. Are the racists anti-Chinese but pro-Arab? Are they seeing the Saudis as just as white as the Norwegians? People don’t complain about the Saudi surplus (setting aside climate-change-type complaints about oil consumption); they complain about restricted supply.
Politically, as some people have already pointed out, it all comes down to jobs. Neither the Saudis nor the Norwegians are producing oil that could otherwise be produced in the US. China is producing stuff that could.
To the extent this is directed at Krugman and so (I guess) setting aside the jobs argument, what has he said about Saudi Arabia? And how does that fit in with the idea this is somehow a racial thing?
10. November 2011 at 07:30
Norway gets praise because their surplus arises from shipments of a valuable, unequally distributed commodity: oil.
Chine gets scorn because their surplus arises from manipulating capital flows and barriers to entry.
Why are you pig-headed about this? Its not the size of the surplus is about whether the country is playing by the ‘capitalist market rules’ or if instead they are pursuing a mercantilist policy that is building up an unsustainable valuations.
In the long run, real-rates cannot be pegged, but absolutely China has got them pegged today. That’s the imbalance that has people concerned. Its not sustainable, and like taut spring, the PBoC will eventually fail and the hammer will smash the global economy.
What’s not to like? Geez.
10. November 2011 at 08:20
[…] recent post on China elicited lots of […]
10. November 2011 at 11:30
Peter K: so, you are complaining that the Chinese are selling stuff to us cheaper than it otherwise would be? How awful of them! [irony marker]
10. November 2011 at 13:27
Scott, how about you look at which of those fifteen countries are also running a capital account surplus? In case there’s any confusion, I’m talking about capital account ex-reserves (so curr acct + cap acct + reserve accum = 0). China runs a current account surplus AND a capital account surplus. I find that extremely hard to explain without any strong government interference. This would suggest that the govt is artifically inflating the savings rate.
I’d be surprised if a large number of the other fifteen countries also ran a capital account surplus.
10. November 2011 at 15:10
[…] less like an individual balancing present vs future consumption and more like a billionaire or a state, models of capital allocation that focus on investors seeking “real return” fade into […]
10. November 2011 at 19:35
Jaap, Thanks for the info.
Peter, The only way China can manipulate their exchange rate is via saving. People often assume they can simply wave a magic wand and set the real exchange rate.
MP, Even Krugman would be embarrassed by that jobs argument, which was discredited 200 years ago by Ricardo. See my newer post on China for more comments on that point.
Jon, You are confusing all sorts of issues. If having a high saving rate is mercantilism, why aren’t we mad at northern Europe? Check out my newer China post for a more complete rebuttal.
Federico, China is a communist country, of course their government saves. They have little or no social security system. It makes no difference in terms of US jobs whether the savings are in one account or another.
The Norwegian government is also saving a massive amount, why aren’t we mad at them?
11. November 2011 at 02:51
Scott, I’m not making the jobs argument. I’m just trying to see if there’s another way to understand the politics other than racism, as I don’t see how your racism argument accounts for the lack of rancor toward Saudi Arabia. And I don’t hear anyone complaining about Singapore or Malaysia.
Of course, the jobs argument completely fails to account for the lack of rancor toward Germany. And I agree with you about the attitude toward Japan not so long ago.
12. November 2011 at 14:11
MP, Maybe you are right that with SA it’s partly oil. I’m no mind reader. As I said the overall pattern of much more hostility to Asia than Europe is what disturbs me most.
2. January 2012 at 15:28
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