April 18, 2016
Paul Krugman had a good column this morning pointing to a lack of competition as an explanation for relatively weak investment in spite of low interest rates and high corporate profits. His immediate target is Verizon, where workers are now striking, which shows little interest in expanding its Fios high-speed Internet network in spite of soaring profits. Krugman points out that with little competition, Verizon sees little need to invest more to improve the quality of its service. He then argues that this weak investment is a major cause of secular stagnation, the ongoing weakness of demand that prevents the economy from reaching full employment.
I’d agree with virtually everything in the piece (Krugman may be a bit overly optimistic about the interest in the Obama administration in pursuing a serious competition policy), but there is an aspect to the argument that bothers me. While we should perhaps expect investment to be booming in a context of high profits and very low interest rates, investment actually is not low measured as a share of GDP.
At 12.7 percent of GDP in the 4th quarter, it’s comparable to its pre-recession peaks. Given the weak growth of demand (yes, this is partly circular — stronger investment would mean stronger demand — but companies make their investment decisions individually, not collectively), investment is certainly not low by historical measures.
On the other hand, we continue to run a trade deficit that is close to 3.0 percent of GDP, or more than $500 billion a year. Suppose that our trade deficits were still in the neighborhood of 1.0 percent of GDP, which was the case before the East Asian financial crisis in 1997.
This difference of 2 percentage points of GDP would have the same impact on demand as increasing investment by 2 percentage points of GDP. That would be a huge increase in investment. If better competition policy could increase demand by even half of this amount everyone would view it as an enormous success.
So the question is, why do Krugman and others highlight the lack of competition in many areas as a cause of secular stagnation, but largely ignore the trade deficit? This question is further aggravating since the trade deficit has featured very prominently in the upward redistribution of income in the last two decades.
Note that contrary to the latest thinking in elite circles, it is not normal for rich countries to run large trade deficits with poor countries. The textbook economics say that capital is supposed to flow in the opposite direction. It is an incredible failure of the international financial system, traceable to the botched bailout from the East Asian financial crisis, that poor countries have been forced to grow by lending capital to rich countries. It certainly is not a necessary path for development and it has had horrible consequences for the working class in the United States and other rich countries.
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