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Read the whole thing, Part II

October 22nd, 2004

Following up on the theme of manufacturing decline, here’s a piece by Ronald McKinnon of Stanford, linking the decline of US manufacturing to the low rate of national savings. I’m not entirely convinced by the argument, which seems to rest heavily on the manipulation of identities that gave rise to the twin deficits hypothesis, but I’ll think about it a bit more.

It is certainly striking that all the English-speaking countries seem to have a broadly similar pattern of large current account deficits, low household saving, and rapid decline in the manufacturing sector (more I think than can be accounted for by long-run structural change). This would be an obvious basis for contagion in the event of a financial crisis affecting the US.

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  1. October 22nd, 2004 at 11:07 | #1

    Compare and contrast Keynes’s observations on the savings level in Britain. He is quite explicit about this in his thumbnail sketch of recent economic history, in the introductory part of “The Economic Consequences of the Peace”. However, he also thought it remained far too high in the depression of the ’30s, and he tried to get institutional changes to lower it.

    Myself, I think he succeeded. I know that people like me with formative years in the ’70s feel in our bones that saving is the most futile form of waste since it will all be inflated out from under us without even the pleasure of consumption. That’s quite apart from whatever we may know intellectually, and the complete reverse of what people felt in the ’30s.

  2. October 22nd, 2004 at 11:49 | #2

    As you’ve stated, the key point in that article is the acceptance of the “twin deficits” hypothesis, but it’s not really discussed at length in the article. Do you have a good layperson’s reference you can point to on the topic? I must admit I’m sceptical – Australia has been running governmental budget surpluses for years now and our trade deficit remains stubbornly high…

  3. James Farrell
    October 22nd, 2004 at 21:48 | #3

    That a fiscal expansion is bad for manufactures is a standard result from two-sector models. An increase in government spending, ceteris paribus, is bound to increase demand for, and therefore output of, non-traded goods. At full employment, this must cause the production of traded goods to decline. Generic manufactures are the archetypal traded good. A tax cut, ceteris paribus, has the same consequences (especially if it’s for the rich, who spend more on services).

  4. ridgel
    October 24th, 2004 at 01:25 | #4

    ?Canada. Well, not 100% english speaking.

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