Federal Reserve Vice Chair Stanley Fischer’s speech yesterday in Sweden understandably attracted lots of attention because he publicly entertained the idea that the U.S. economy could indeed be mired in what former Treasury Secretary and top White House economic advisor Larry Summers has called “secular stagnation.”
That’s a little like the Chinese government admitting, “Yes, the air’s looking pretty dirty,” given Summers’ belief that America has been so weakened that only deficit-ballooning fiscal or bubble-inducing monetary policies can produce even minimally acceptable growth, and given the Fed’s ongoing record as the world’s greatest bubble blower.
But Fischer’s speech was also noteworthy for its brief treatment of U.S. trade flows and the role they have played in keeping the recovery subpar by any reasonable standard – because he got the problem substantially wrong.
According to Fischer, “unexpectedly slow global growth, which [has] reduced export demand” is one of “three major aggregate demand headwinds [that] appear to have kept a more vigorous recovery from taking hold.” (The other two are the continuing problems of the housing sector and the rapid reduction in the bloated federal budget deficit.)
Since Fischer is seen as one of the world’s leading teachers of economics as well as one of its greatest practitioners, it’s surprising to say the least that he’s focused on U.S. exports as such. Like President Obama, he’s ignored how trade flows either speed up or slow down growth fundamentally through changes in the trade balance, not in its individual export and import components. And so far, the growing deficit has taken a bigger bite out of the current recovery (reducing its pace by 6.38 percent in real terms) than it took out of even the bubble decade’s growth (3.88 percent) and out of the Reagan expansion (1.97 percent). Only the Clinton expansion was slowed more by an increasing trade shortfall (12.46 percent).
These figures, moreover, start to reveal the main problem with Fischer’s slow global growth focus: It doesn’t explain why America’s sluggishly performing trade competitors seem to have retained so much of their ability to sell to the United States – at least on a relative basis.
It’s true that U.S. import growth has weakened significantly in absolute terms. Since the current expansion officially began in the middle of 2009, America’s overseas purchases are up by 33.48 percent after inflation. During the bubble expansion, which lasted six years versus the current recovery’s five, real imports rose by 44.45 percent. During the nearly 10-year 1990s expansion, imports soared by 146.44 percent.
But the more important measure looks at the relationship between U.S. import growth and overall U.S. economic growth during these expansions – and thus takes macroeconomic cycles and their relative magnitudes into account . During the current recovery, real U.S. imports have increased 2.95 times faster than real gross domestic product. During the recklessly bubbly 2000s, the gap was actually smaller – inflation-adjusted imports were rose only 2.47 times faster than inflation-adjusted growth. Ditto for the 1980s expansion (2.52 times). The gap was greater in recent decades only during the 1990s expansion, when real import growth outpaced real economic growth by a factor of 3.53.
Even these figures, however, understate how strongly the rest of the feeble world economy is still able to sell to America. For U.S. import growth in previous expansions was boosted in large measure by oil imports. During the current expansion, they’re actually down in real terms – from $62.34 billion during the second quarter of 2009, at the recovery’s onset, to $50.83 billion in the second quarter of 2014 (the latest available data). If the inflation-adjusted oil deficit had simply stayed the same during this recovery, real imports would have risen 3.16 times faster than real gross domestic product – even closer to the 3.53 ratio during the much faster growing 1990s.
Sure it would be great to increase U.S. exports, and more effective American policies to achieve this goal would be most welcome. But precisely because the world economy is growing so disappointingly, and because other countries’ enthusiasm for buying American was limited even in much better economic times, the real lesson taught by the data is that the United States must work harder and smarter to curb imports.
The good news is that limiting and even reducing imports is a far easier objective to achieve than developing new markets for exports. Even if America’s competitors were more import-friendly, U.S. market conditions obviously are much easier for Washington to influence than conditions abroad. In other words, the share of American consumption controlled by foreign-made goods is the lowest hanging fruit available to U.S. policymakers, as well as one of the biggest. It’s high time they open their eyes and try to harvest it – and for Fed officials like Stanley Fischer help point them in the right direction.