Summary of the Argument: Global Imbalances & Trade Surpluses
This text discusses the complexities of trade surpluses, challenging the traditional view that they are inherently bad. The core argument revolves around where excess savings are exported and the recipient country’s investment needs. Here’s a breakdown of the key points:
1. Trade Surpluses & Lasting Production:
* A trade surplus arises when a country sustainably produces more than it demands. Traditionally, this would necessitate production cuts and unemployment.
* However, in a globalized economy, a country can run a trade surplus by exporting excess savings.
2. The “Good” Surplus – Exporting to Developing Nations:
* Exporting savings to developing countries with investment constraints (insufficient domestic savings to fund needed investment) is beneficial.
* this allows for increased investment in those countries, boosting growth, while global demand remains healthy. German savings flowing to a developing spain would be a positive example.
3. The “Bad” Surplus – Exporting to Advanced Economies:
* The problem arises when surplus savings are exported to advanced economies without investment constraints (like the US, Canada, and the UK).
* In this scenario,investment doesn’t increase. Something must adjust to balance the equation.
4. How Imbalances Adjust (and the Problems They Cause):
* Robinson’s Argument (historical context of the gold standard): Imbalances would adjust through increased unemployment in the recipient country (e.g., Spain). Wage repression in the exporting country (Germany) leads to lower consumption and increased exports, creating a persistent surplus.
* Modern Adjustment (post-gold standard with credit expansion): Recipient countries have an alternative to unemployment: increased debt (fiscal deficits).This boosts domestic demand but redirects it towards the service sector,causing inflation and asset bubbles.
* The Core Problem: If a country (Germany) runs a surplus due to internal income distribution issues (wage repression) and exports those savings to a country (Spain) that doesn’t need the investment, Spain must either experience rising unemployment or rising debt.
5. Real-World Example: Germany & Spain (Early 2000s – 2008):
* German labor reforms led to a surplus.
* This capital flowed to Spain, fueling rapid household credit expansion and a shift from fiscal surplus to deficit.
* when Spanish debt could no longer rise (2008 crisis), the adjustment occurred through rising unemployment.
6. Generalization:
* this pattern applies to other surplus countries like South Korea and Japan. Policies leading to surpluses (wage repression) and investment in the US, Canada, and UK lead to persistent deficits in those countries.
In essence,the text argues that trade surpluses aren’t inherently bad,but their impact depends heavily on the economic conditions of the recipient country. exporting savings to countries that can productively invest them is beneficial, while exporting them to countries that simply accumulate debt or experience unemployment creates instability.
