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PIIE Update Newsletter
June 11, 2010
"Top Think Tank in the World" in 2008
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Op-ed
New Imbalances Will Threaten Global Recovery
C. Fred Bergsten
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The G-20 needs to adapt its rebalancing strategy at its upcoming summits to prevent eurozone surpluses—estimated to be at least $300 billion annually within the next few years—from threatening global recovery and stability. Along with the large surpluses of China and other Asians, the new European surpluses could double the US current account deficit to more than its former record of $800 billion in 2006, which is opposite of the rebalancing strategy originally agreed by the G-20. The United States needs to let the world know that it is unwilling to again become the consumer and borrower of last resort, and surplus countries such as Germany, China, and Japan need to stimulate domestic demand in order to limit the imbalances.
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Working Paper 10-7
The Realities and Relevance of Japan's Great Recession: Neither Ran nor Rashomon
[pdf]
Adam S. Posen
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Japan's Great Recession resulted from a series of macroeconomic and financial policy mistakes. It could have been largely avoided once the initial shock from the bubble bursting had passed. This is demonstrated by the underappreciated strength of Japan's recovery once policies were reversed in 2002–03. Structural deficiencies in Japan's financial system and corporate governance offset the many structural advantages Japan had, particularly with respect to fiscal policy, when deflation persisted.
The UK and US economies are at low risk of turning Japanese in the sense of having recurrent recessions through macroeconomic policy mistakes—but deflation itself cannot be ruled out. The United Kingdom worryingly combines a couple of financial parallels to Japan with far less room for fiscal action to compensate for them than Japan had. More active investors and greater openness in the United Kingdom than in Japan may be able to turn this around.
One problem Japan did not face during its Great Recession was poor prospects for external demand and the need to reallocate productive resources across export sectors. The United Kingdom, the United States, and many euro area economies do now face this challenge simultaneously, which may limit the pace of, and their share in, the global recovery.
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Working Paper 10-8
Do Developed and Developing Countries Compete Head to Head in High Tech?
[pdf]
Lawrence Edwards and
Robert Z. Lawrence
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Amid widespread concerns that both (1) growth in developing countries could worsen the US terms of trade and (2) that increased US trade with developing countries will increase US wage inequality, Lawrence Edwards and Robert Z. Lawrence find that there is no cause for concern. The United States and developing countries each specialize in different product categories that mostly do not overlap. In the cases where exports are in overlapping categories, there are vast differences in unit values, suggesting that the products made by the United States and those made by developing countries are not very close substitutes—developed-country products are more sophisticated. This explains why the US terms of trade have improved and why the wages of unskilled US workers have not fallen victim to downward pressure despite developing-country export expansion.
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Policy Brief 10-13
Hobbling Exports and Destroying Jobs
[pdf]
Gary Clyde Hufbauer and Theodore Moran
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The US House of Representatives has just passed the American Jobs and Closing Tax Loopholes Act. The tax provision of this bill will hurt American workers, reduce American exports, and make American companies less competitive in the international marketplace. Since the US Senate has already passed companion legislation, these ill-considered bills could soon be reconciled in conference and become the law of the land. If so, American firms and workers will pay a substantial price.
The tax measures would cost $14 billion over 10 years for the foreign operations of US-based multinational corporations (MNCs), say Hufbauer and Moran. They illustrate an unfortunate direction of US tax policy under the Obama administration and its congressional allies: the eagerness to tax the foreign income of US-based MNCs as if they competed only with firms that are subject to US tax rules. MNCs based in Europe, China, India, or Brazil pay far less than the US tax rate when they compete head-to-head with US firms in world markets. Studies show that plants of US multinationals are the most productive in the United States, the most technology intensive, and pay the highest wages. If US tax policy is changed to hinder outward investment by US MNCs, the result will be fewer US exports, and fewer exports will spell fewer US jobs.
The best bottom line for American workers—and the American economy as a whole—is to make the United States a more favorable location for American multinationals to do business. Instead of raising taxes on the foreign income of US-based MNCs, Congress should be lowering the US corporate rate to 20 percent. Other countries understand the competitive realities well enough, but Congress seems determined to turn the United States into a loser.
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See also Policy Brief 10-10: Higher Taxes on Multinationals Would Hurt US Workers and Exports
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Op-ed
Yanukovych at the Crossroads
Anders Åslund
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Ukrainian President Viktor Yanukovych needs to cooperate with the International Monetary Fund and the European Union in order to help Ukraine successfully navigate out of its current economic impasse and deliver on his promise of stability and reform. While Ukraine is no longer in a state of financial emergency, its recovery remains precarious and now, when the government is about to unveil its reform program, is the time for cooperation.
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Peterson Perspectives Interviews
Labor Strife in China
Nicholas R. Lardy assesses the impact of labor disputes on Chinese wages, noting that wages have actually been increasing 15 percent per year for a decade.
A "Stress Test" for Europe's Banks?
Nicolas Véron assesses the prospects for stress testing Europe's banks as a way to stabilize markets and the economic outlook in Europe.
Europe Heads Toward Fiscal Discipline
John Williamson concludes that European countries are sending the right signals to markets with their initial steps toward greater fiscal austerity.
PIIE Noted in the News and on the Web
C-SPAN
Washington Journal Program, June 8, 2010
Nicholas R. Lardy, PIIE's China expert, speaks on the Washington Journal Program for June 8 about China's economy and what impact it has on the United States.
Market News International
Risk EMU Financial Crisis Could Spread To US, UK
Adam S. Posen sees a risk that the eurozone financial crisis could spread to the United Kingdom and the United States unless Europe moves to normalize its banking system.
Bloomberg
Latvian Austerity Plan Is a "Success," Peterson's Åslund Says
Latvia's strategy to narrow its deficit while keeping the lats fixed to the euro is a "success" and may be a model for other countries, says Anders Åslund.
Preview of Our Next Issue
Policy Brief
In Defense of Europe's Grand Bargain
Jacob Funk Kirkegaard
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Peterson Institute for International Economics
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Tel: 202-328-9000 | Fax: 202-659-3225 | www.piie.com
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