President Obama is on his way to Saudi Arabia, and Secretary Geithner is done with his major initiative in China. In part, this is just the U.S. normalizing its relations with the rest of the world and rebuilding some basic diplomatic niceness. But it's also about reshaping--or not--the way the world's economy works after the crisis.
From all appearances, President Obama will ask the Saudis to continue their efforts to stabilize the oil market, including by bringing new production on stream, and the Saudis will offer--to the best of the abilities--to play exactly this role within OPEC. Of course Secretary Geithner just asked the Chinese to continue their efforts to stabilize the market for long Treasuries, including by investing their current account surplus in U.S. secureties, and the Chinese have agreed--with some pretend grumbling--to play this role.
It looks like adding up to a big mistake--just ask Mikhail Gorbachev.
You don't have to take a completely pro-Reagan view to agree that the U.S. boxed the Soviet Union into overinvesting in an unproductive rent-seeking sector (the military-industrial complex), which wasted a huge amount of productive resources and undermined the economy's broader innovative potential--as well as its ability to put basic consumer goods on the table. Even worse, when Gorbachev did try reform, the system proved so brittle and the capture of policy so complete that the whole empire collapsed in debt, inflation, and catastrophic tunneling (in turn leading to a new wave of oligarchs, etc).
If we continue to depend on "cheap enough" oil, that's dangerous enough in geopolitical terms. But if we run our economy so we finance our oil imports by borrowing heavily from the outside world (not all from China; the Middle East and Japan are also big providers of net savings), we are asking for trouble.
The collapse of the dollar is not necessarily imminent, and the temporary use of deficit spending makes senes as a way to get through this deep recession. But when exactly do we plan to wean ourselves off (a) the oil, and (b) the borrowing from abroad? This doesn't have to be done tomorrow, but it has to be done--unless it is somewhere written that the U.S. will stay powerful and solvent forever.
We should be committing ourselves to energy prices (and carbon prices) that rise over time, hence creating an incentive for innovation in fuel efficiency (and lower emissions) throughout the economy. The Saudi swing-producer role means that, if things go well, they keep pushing oil prices down below the pain point, thus limiting longer-term moves away from oil (and they are quite explicit about this as their goal). The Chinese swing-investor role means that, at best, long-term interest rates will remain low enough for us to feel like we can keep borrowing (you can draw your own conclusions on their true goals).
Show me the policies-in-place that bring down our external payments deficit, and explain the commitments that will really make this happen. Or even start the conversation in these terms, domestically and with our various kinds of allies overseas.
Just don't tell me that the financial sector will collapse if we make any moves in the right direction, e.g., cutting back on our current budget-breaking implicit subsidies to that enormous rent-seeking sector; we're on our way to doubling our debt/GDP ratio, from around 40% to near 80%, directly because of the way this sector has behaved. Remember the excessive power of particular sectors (and all their policymaking friends) consistently hampers sensible efforts to reform any economy. If that's too vague for you, look at how and why Gorbachev failed--and all the awful consequences.
There are people who attribute the entire subprime debacle to irresponsible borrowers. Personally, I would spread the blame more broadly, including lenders, the way the financial system has come to operate, and the way U.S. and European governments looked the other way--or supported the prevailing ideology--as a megabubble developed.
But it is true that someone has to step up and take responsibility any time you see a potential debt bubble developing. And for our current level of international indebtedness and where this is headed, who will now take responsibility? Or, if that's too complicated a question, let's try a simpler version: who will tell the President?
[Cross-posted at The Baseline Scenario.]
--Simon Johnson
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COMMENTS (13)
The mistake is not understanding basic accounting:
For every debit there is a credit. For every liability there is an asset. For every borrower there is a saver.
Our "indebtedness" is what allows for private dollar savings.
www.mikenormaneconomics.blogspot.com
What do you propose to do? Seize Chinese dollars holdings? If they want to save in dollars why do we care? If you don't want the government debt offerings influencing long term interest rates, why not just stop offering long term bonds. During the Bush administration we stopped selling 30 yr bonds without any ill effect ... view full comment
The mistake is not understanding basic accounting:
For every debit there is a credit. For every liability there is an asset. For every borrower there is a saver.
Our "indebtedness" is what allows for private dollar savings.
www.mikenormaneconomics.blogspot.com
What do you propose to do? Seize Chinese dollars holdings? If they want to save in dollars why do we care? If you don't want the government debt offerings influencing long term interest rates, why not just stop offering long term bonds. During the Bush administration we stopped selling 30 yr bonds without any ill effects.
All well and good, except for this sentence:
"You don't have to take a completely pro-Reagan view to agree that the U.S. boxed the Soviet Union into overinvesting in an unproductive rent-seeking sector ..."
It's true that you don't have to take a completely pro-Reagan view to argue that. You have to take a completely pro-fantasy view to argue that. Reagan's objective in the arms buildup of the 1980s was never to "box the Soviets in" to spend more, but rather to "catch up" to an enemy Reagan believed was already almost decisively ahead of us in the arms race. Furthermore, since the fall of the Soviet Union and the opening of Russian state archives, this is an easil ... view full comment
All well and good, except for this sentence:
"You don't have to take a completely pro-Reagan view to agree that the U.S. boxed the Soviet Union into overinvesting in an unproductive rent-seeking sector ..."
It's true that you don't have to take a completely pro-Reagan view to argue that. You have to take a completely pro-fantasy view to argue that. Reagan's objective in the arms buildup of the 1980s was never to "box the Soviets in" to spend more, but rather to "catch up" to an enemy Reagan believed was already almost decisively ahead of us in the arms race. Furthermore, since the fall of the Soviet Union and the opening of Russian state archives, this is an easily resolved factual question, and in point of fact the Soviets did not markedly increase defense spending during the 1980s even though they were fighting an actual ground war on their border during most of the decade. What accelerating military spending increases did come, late in the decade, went mainly to military salaries, and were actually a part of Gorbachev's reforms.
And let's not forget that Dan Quayle and Bill Kristol were among the earliest advocates of this little fable. Anyone who wants to trust Bill Kristol as a source for economic history is free to do so, but having done so he should not expect anyone else to take him seriously on the subject.
Maybe Obama is going for a smooth landing.
Every economic catastrophe can be summed up by the phrase 'rapid change in prices.'
Rapid changes in basic prices (energy, credit, your currency, food) is a a VERY bad thing. Slow price changes in proper and realistic directions is a good thing.
Maybe Obama wants oil prices to rise slowly so our industrial policy can adjust, maybe Obama wants China to divest slowly so our interest rates can adjust.
Maybe Obama is going for a smooth landing.
Every economic catastrophe can be summed up by the phrase 'rapid change in prices.'
Rapid changes in basic prices (energy, credit, your currency, food) is a a VERY bad thing. Slow price changes in proper and realistic directions is a good thing.
Maybe Obama wants oil prices to rise slowly so our industrial policy can adjust, maybe Obama wants China to divest slowly so our interest rates can adjust.
I like Simon Johnson's take on things, generally, but I would also object to his "analogy" with Gorbachev's Soviet Union, which was way past saving, economically, by the period of glasnost and perestroika. And not because U.S. military spending had "boxed in" the Soviet economy. It was sick from top to bottom for a whole boatload of reasons. And the Russian people were sick to death of the deprivations of their broken system; they were the ones who brought down communism, let us not forget -- it wasn't Reagan. The only people invested in the success of Gorbachev were Communist Party hacks in the nomenklatura. Everyone else was either angry or drunk -- there was zero domes ... view full comment
I like Simon Johnson's take on things, generally, but I would also object to his "analogy" with Gorbachev's Soviet Union, which was way past saving, economically, by the period of glasnost and perestroika. And not because U.S. military spending had "boxed in" the Soviet economy. It was sick from top to bottom for a whole boatload of reasons. And the Russian people were sick to death of the deprivations of their broken system; they were the ones who brought down communism, let us not forget -- it wasn't Reagan. The only people invested in the success of Gorbachev were Communist Party hacks in the nomenklatura. Everyone else was either angry or drunk -- there was zero domestic material for a competitive economic system.
Possibly worth noting that it's the 25th anniversary of Tetris, one of the world's best-selling games, created by Russian mathematician Alexei Pajitnov, who was at the time working for the Academy of Science of the USSR. In a "normal" economy, Alexei would be obscenely rich, which he was not nor is he now, but more to the point at the time that Tetris took off, there was no system possible in the Soviet Union for the game to be turned into something resembling a product or a company. Tetris had to be developed into a product by Gilman Louie in the U.S., who ironically enough would eventually become the head of venture capital for the CIA. The basic outlines of this story were far more representative of the fall of the Soviet Union than a story involving Reagan and military spending.
What is a "rent-seeking sector"?
What is a "rent-seeking sector"?
'rent seeking' is when a factory takes a marginal dollar profit and, rather than plowing it back into the business for factory improvements, they use it to lobby the government to create rules that will advantage their business.
Basically, the Soviet military used their political muscle to suck up national resources rather than like 'earning' it.
'rent seeking' is when a factory takes a marginal dollar profit and, rather than plowing it back into the business for factory improvements, they use it to lobby the government to create rules that will advantage their business.
Basically, the Soviet military used their political muscle to suck up national resources rather than like 'earning' it.
gary21cp, Rhube - please stop circulating the canard that Reagan's escalation of the arms race was not the central cause of the Politburo's 180 degree turnaround in the mid-1980s from an aggressive and very provocative universal expansion effort under Andropov to Gorbachev's complete capitulation in the arms race aka "New Thinking."
Oil prices rise and fall, and command economies, even those that depend heavily on commodity prices, can be sustained indefinitely so long as the regime retains its iron determination to sustain that political economy and the accompanying foreign policy. The Soviet economy was struggling in the 1980s, sure. Was there ever a time when it was not st ... view full comment
gary21cp, Rhube - please stop circulating the canard that Reagan's escalation of the arms race was not the central cause of the Politburo's 180 degree turnaround in the mid-1980s from an aggressive and very provocative universal expansion effort under Andropov to Gorbachev's complete capitulation in the arms race aka "New Thinking."
Oil prices rise and fall, and command economies, even those that depend heavily on commodity prices, can be sustained indefinitely so long as the regime retains its iron determination to sustain that political economy and the accompanying foreign policy. The Soviet economy was struggling in the 1980s, sure. Was there ever a time when it was not struggling, when it did not need to mobilize the military every autumn just to harvest potatoes (forget meat, or even butter and eggs), when its people had a living standard that was even within shouting distance of the poorest western nation?
Despite the amnesia of those on the left-- who conveniently forget about more than half a century of laughably inept left-lib "scholarship" that insisted that the US and the USSR were "converging", that the USSR was here to stay, that any attempt by the US to challenge and roll back an aggressive and expansionary USSR was dangerous "warmongering" that was bringing the world to the brink of armeggedon etc-- despite all this claptrap, the USSR's economy was always and ever a basket case, third-world economy whose meager output was diverted overwhelmingly, to a degree that we can't even imagine, to the needs of the military.
What changed in 1985 was not the fundamental nature of the soviet economy-- it was chugging along, squandering resources and causing much of the populace to go hungry, as always-- and not western sovietologists' view of the Soviet economy, but the calculations of the old men in the Politburo, their view of the "correlation of forces," in soviet military jargon.
Specifically, their estimation of the soviet's ability to sustain an arms race which by then had shifted irrevocably into the high-technology realm, a point that SDI brought home graphically and powerfully. The soviets' leading foreign policy and economics experts were painfully aware that, in areas like semiconductor technology, the USSR had by the early 1980s fallen far behind not just the United States but also *Taiwan* and *Japan*. As Jacques Attali, Mitterand's top aide, noted in his memoirs ("Verbatim", vol. II), SDI scared the sh*t out of his boss; it had the same effect on Mitterrand's fellow amerophobes in the Politburo. Any top soviet official from that era will agree-- my source was the head of the USA-Canada Institute, the leading f-p think tank for the regime.
IOW, Game Over.
It was the US determination to take the arms race to an entirely new realm-- not so much space as the information revolution-- that convinced the leaders of an economy that was still struggling to master the industrial revolution that there was utterly no chance of catching up to the US. That, not any economic calculation, is why the old men in the Politburo took a gamble in 1985 on a badly-educated hick from south Russia and his fanciful "new thinking." The sovki threw in the towel.
We are all rent-seekers now.
Solllll-idarity forevvvver, solidarity forever, solidarity forever, in Government Sachs/UAW/SEIU we trust....
We are all rent-seekers now.
Solllll-idarity forevvvver, solidarity forever, solidarity forever, in Government Sachs/UAW/SEIU we trust....
I'm not sure I agree with all of what you write Simon. But you have a bloggers talent (which is a compliment) for distilling such complex matters into small punchy paragraphs; if any writer under a less "credible", "centrist" brand equated the Soviet arms industry with the American financial services industry, they would lose that all important centrist credibility, instantly. Yet you pull it off quite well. Brave, gripping stuff. By far the best read on TNR these days. A nice antidote to the increasingly desperate and incoherent paranoid rants on Hope and the ME.
I'm not sure I agree with all of what you write Simon. But you have a bloggers talent (which is a compliment) for distilling such complex matters into small punchy paragraphs; if any writer under a less "credible", "centrist" brand equated the Soviet arms industry with the American financial services industry, they would lose that all important centrist credibility, instantly. Yet you pull it off quite well. Brave, gripping stuff. By far the best read on TNR these days. A nice antidote to the increasingly desperate and incoherent paranoid rants on Hope and the ME.
"Despite the amnesia of those on the left"
I'm most struck Tep by your amnesia about Bush.
The guy presides over total (and totally OBVIOUS) economic collapse, fucks up a war, fucks up a hurricane rescue, not a peep from you. The entire time, he stuffed corporate cronies with hundreds of billions in cash, both directly and indireclty.
Not a peep from you.
Obama's been in town what? 4 months? And it's spazoid after spazoid.
You call yourself a 'democrat,' but as such, your weird priorities have always puzzled me. I think, basically, you're a non-christianist Republican who happens to believe in UHC.
"Despite the amnesia of those on the left"
I'm most struck Tep by your amnesia about Bush.
The guy presides over total (and totally OBVIOUS) economic collapse, fucks up a war, fucks up a hurricane rescue, not a peep from you. The entire time, he stuffed corporate cronies with hundreds of billions in cash, both directly and indireclty.
Not a peep from you.
Obama's been in town what? 4 months? And it's spazoid after spazoid.
You call yourself a 'democrat,' but as such, your weird priorities have always puzzled me. I think, basically, you're a non-christianist Republican who happens to believe in UHC.
Charges that Obama is a 'socialist' are totally ludicrous, might as well go join the 'Cheney planned 9/11!' or 'Obama is a Manchurian terrorist!' brigade.
Charges that Obama is a 'socialist' are totally ludicrous, might as well go join the 'Cheney planned 9/11!' or 'Obama is a Manchurian terrorist!' brigade.
hog - that's kind of a lame defense of cronyism, don't you think?
In any case, attacking Bush adds nothing but more noise to an online cacophony that's already deafening. fwiw I don't expect better than cronyism and corporate welfare from Bush and the GOP. Their cronies (ADM, aerospace/defense, the telcos) have always been obvious.
What's breathtaking, and totally UNexpected, is the cronyism from OurSide. Giveaways to labor aristos like the UAW, whatever, I grew up in SE Michigan, been there, done that. But to Gov't Sachs? WTF?
hog - that's kind of a lame defense of cronyism, don't you think?
In any case, attacking Bush adds nothing but more noise to an online cacophony that's already deafening. fwiw I don't expect better than cronyism and corporate welfare from Bush and the GOP. Their cronies (ADM, aerospace/defense, the telcos) have always been obvious.
What's breathtaking, and totally UNexpected, is the cronyism from OurSide. Giveaways to labor aristos like the UAW, whatever, I grew up in SE Michigan, been there, done that. But to Gov't Sachs? WTF?
What changed in 1985? Not Reagan, I think, but the end of the last of the revolutionary dinosaurs in the Soviet leadership. The system was tired and worn out, and there was nobody left who had the iron determination to maintain the system, as you put it. Recall that Gorbachev didn't embark on a massive purge of his competent (and thus dangerous) competitors, and when you look at other Russian "leaders: of the era and the Soviet collapse, the simplest conclusion to draw is that there was not a lot of competition. Personally, I think the lingering war in Afghanistan drained them a lot more than trying to keep up with St. Ronnie.
And don't even get me started about SDI. What a colossal wast ... view full comment
What changed in 1985? Not Reagan, I think, but the end of the last of the revolutionary dinosaurs in the Soviet leadership. The system was tired and worn out, and there was nobody left who had the iron determination to maintain the system, as you put it. Recall that Gorbachev didn't embark on a massive purge of his competent (and thus dangerous) competitors, and when you look at other Russian "leaders: of the era and the Soviet collapse, the simplest conclusion to draw is that there was not a lot of competition. Personally, I think the lingering war in Afghanistan drained them a lot more than trying to keep up with St. Ronnie.
And don't even get me started about SDI. What a colossal waste of money that has been. 20 years after Reagan, Bush decided to pretend we had a working missile defense (I don't think we do), but if anything the spending into the ground shoe is on the other foot.....