Speech

Changing World Demographics and Trade Imbalances TheAmericanEuropeanCommunityAssociation(AECA) Round-TableConferenceLuncheon Brussels,Belgium April16,2007 Iam very pleased to have the opportunity growthinallourcountries.Iespeciallywantto to be involved in today’s discussion. I highlightmyuneasewithusingtheterm know that the American European “imbalances”tocharacterizethecurrentsitua- Community Association plays an impor- tion.Thattermalmostbegsforapolicyresponse— tant role in improvinginternationalunderstand- howcanpolicymakersallowimbalancesto ingbyorganizing discussions on numerous persist?Unfortunately,policyresponsescould issues that are of importance to both American wellinvolvedamagingprotectionistmeasures. and European audiences. Iwillarguethat,toalargeextent,thecurrent Theworldeconomyischaracterizedbythree situationisnotfundamentallyanimbalancebut highlyunusualconditions.First,thecapitalflow ratheraconditionthatisconducivetocoping intotheUnitedStatesfromtherestoftheworld withthemajordemographicchangesthatare andaccompanyingrest-of-worldcurrentaccount occurringthroughouttheworld. surplus—theU.S.currentaccountdeficit—isvery Beforeproceeding,Iofferthestandard largeandpersistent.Second,theU.S.personal FederalReservedisclaimer.Theviewsexpressed savingratehasbeenfallingandpastyearbecame aremineanddonotnecessarilyreflectofficial negativeforthefirsttimesince1933.Third,high- positionsoftheFederalReserveSystem.Iappre- incomecountriesarejustnowbeginningademo- ciatecommentsprovidedbymycolleaguesat graphictransitioninwhichthefractionofretired theFederalReserveBankofSt.Louis.CletusC. personsinthetotalpopulationwillrisetolevels Coughlin,vicepresidentintheResearchDivision, neverbeforeexperienced.TheideaIwillexplore providedspecialassistance.However,Iam withyouisthatthesethreeconditionsarecon- responsibleforanyerrors. nected;thefirsttwo,Ibelieve,aretoaconsider- ableextentaconsequenceofthethird. Today’stopicontheconnectionbetween CURRENT ACCOUNT BALANCES: demographicchangesandtradebalancescertainly FACTS AND EXPLANATIONS isimportant.Myanalysiscombinesdemographic andeconomicsfactswitheconomictheoryto Largeandpersistentcurrentaccountsur- providesomeinsightsintotheconnections plusesanddeficitsarecommonintheglobal betweendemographicchangesandinternational economytoday,asillustratedinFigure1.Since trade.Ihopethatmycommentswillcontribute early1998,theU.S.currentaccounthastrended atleastinsomesmallmeasuretoincreasinginter- downward,afactthathasattractedmuchatten- nationalunderstanding,especiallygiventhe tionnotonlyintheUnitedStatesbutalsothrough- criticalimportanceofanopeninternational outtheworld.AsashareofU.S.GDP,theU.S. tradingsystemtoimprovementsineconomic currentaccountdeficithasincreasedfromroughly 1 INTERNATIONALTRADEANDFINANCE 2percenttoalevelexceeding6.5percentin2006. cialintermediation;5)theglobalsavingglutand Priortorecentdevelopments,since1960the emergingmarketsfinancialcrises,whichisan largestU.S.currentaccountdeficitwasnearly explanationcloselyassociatedwithFedChairman 3.5percentduringthemid-1980s,thoughtatthe BenBernanke;6)exchangerateinterventionby timetobeunusuallylarge.Itisclearthattoday’s specificAsiancountries;and7)increasingoil U.S.currentaccountdeficitsubstantiallyexceeds prices.Undoubtedly,someoftheseexplanations anyothersuchdeficitsduringthesecondhalfof arerelevantforunderstandingthecurrentglobal thelastcentury. patternofcurrentaccountimbalances. TheUnitedStates,however,isnottheonly InarecentpaperOlivierBlanchard(2007) countrywithacurrentaccountdeficitthatisa arguesthatanexplanationfortheU.S.deficit relativelylargeshareofitsgrossdomesticprod- andthecorrespondingforeignsurplusesrequires uct.Infact,certainEuropeannationsfitsucha acombinationofmanyoftheprecedingexplana- description.Figure2ofthehandoutshowsthis tions.Specifically,hearguesthatlowU.S.sav- ratiofortheEuropeanUnionandforselected ing—privateaswellaspublic—isonekeyfactor. Europeancountries,someofwhichhavecurrent Anotherishighforeignsaving—particularlyin accountdeficitsrelativetoGDPlargerthanthe Asia.Athirdislowinvestmentinanumberof UnitedStates.Forexample,bothSpainand countriesinbothEuropeandAsia.Thefourth Portugalhavecurrentaccountdeficitsthatare keyfactorisstronginvestorpreferenceforU.S. closeto10percentofGDP. assetsrelativetothoseofothercountries. Giventhelogicofbalanceofpayments Blanchard’sargumentissupportedbyinforma- accounting,thecurrentaccountdeficitsofcoun- tionsuchasthatcontainedinBenBernanke’s triessuchastheUnitedStates,Spain,andPortugal 2005speechdiscussingtheglobalsavingglut mustbeoffsetbycurrentaccountsurplusesin andbydataontheU.S.currentaccountbalance therestoftheworld.Oneobservationisthatthe bygeographicregions. timingoftheincreaseintheU.S.currentaccount Table1Acontainsdataoncurrentaccount deficitroughlycoincideswithanincreaseinthe balancesthroughouttheworldfor1996,2000, currentaccountpositionofdevelopingcountries 2004and2005.Acomparisonof1996with2005 asagroup,withdevelopingcountriesinAsia highlightssomeimportantdevelopments.First, beinganespeciallynoteworthysubset.Thisfact thecurrentaccountpositionofindustrialcoun- isshowninFigure1. trieshaschangedfromsurplustodeficit.Without Notsurprisingly,thelargechangesincurrent question,thechangeintheU.S.currentaccount accountbalanceshaveattractedmuchinterest balanceoverwhelmschangesinothercountries. fromresearchers.Economictheorycanbeused Second,developingcountries,mostnotablyChina, toidentifyvariousfactorsthataffectinternational areexportingcapitaltotheindustrialcountries; capitalflows.Potentialexplanationsforaworld thiscapitalflow,ofcourse,isthecounterpartof economyinwhichsomecountriesexhibitlarge thecurrentaccountdeficitsoftheindustrial currentaccountsurplusesandothersexhibitlarge countries. currentaccountdeficitsabound.Forexample, Table1Bprovidessomegeographicdetailon JosephGruberandStevenKamin(2005)identified theU.S.currentaccountdeficitfor2006.The sevenexplanationsfortheincreasingU.S.current UnitedStatesisrunningacurrentaccountdeficit accountdeficitandtheincreasingsurplusesof witheverymajorregionoftheworld.Roughly EastAsianeconomies.Timeconstraintspreclude halfofthedeficitcanbeaccountedforbyAsia, morethanacrypticidentificationoftheexplana- withChinaandJapanbeingtheprimarycountries. tions.Theseexplanationshighlightthefollowing: Meanwhile,Europeaccountsfor18percentof 1)theincreaseoftheU.S.fiscaldeficit;2)the thedeficit. declineintheU.S.privatesavingrate;3)theU.S. Overall,Blanchardconcludesthatprivate productivitysurge;4)theincreaseinglobalfinan- savingandinvestmentdecisions,albeitsome- 2 ChangingWorldDemographicsandTradeImbalances 800 600 400 200 0 -200 -400 -600 -800 -1000 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 United States DevelopingAsia Emerging MarketsandOtherDevelopingCountries 3 DSUsnoilliB Figure 1 Current Account Levels 6 4 2 0 -2 -4 -6 -8 -10 -12 -14 -16 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 EuropeanUnion France Germany Italy Portugal Spain tnecreP SOURCE:IMF—WorldEconomicOutlookDatabase,September2006. Figure 2 European Current Accounts as a Percent of GDP Germany E.U. Italy France Spain Portugal SOURCE:IMF—WorldEconomicOutlookDatabase,September2006. INTERNATIONALTRADEANDFINANCE Table 1A Current Account Balances ($ Billions) Countries 1996 2000 2004 2005 Industrial 35.3 –251.1 –262.9 –477.7 UnitedStates –124.9 –416.0 –668.1 –805.0 Japan 65.7 119.6 172.1 163.9 EuroArea 76.9 –41.9 75.2 2.5 France 20.5 18.0 –8.4 –27.6 Germany –14.1 –32.5 101.7 114.8 Italy 40.0 –5.8 –15.1 –26.6 Spain –2.2 –23.2 –55.3 –85.9 Other 17.6 87.2 157.9 160.9 Australia –15.7 –15.2 –40.2 –42.2 Canada 3.4 19.7 22.2 25.0 Switzerland 22.0 30.7 52.4 50.7 UnitedKingdom –11.4 –37.0 –43.2 –58.1 Developing –76.0 103.8 237.8 450.4 Asia –37.8 46.1 94.7 155.4 China 7.2 20.5 68.7 158.6 HongKong –4.0 7.0 15.9 19.0 Korea –23.1 12.3 28.2 16.6 Taiwan 10.9 8.9 18.5 16.4 Thailand –14.4 9.3 6.9 –3.8 LatinAmerica –38.3 –47.0 18.0 30.2 Argentina –6.8 –9.0 3.3 3.3 Brazil –23.5 –24.2 11.7 14.2 Mexico –2.5 –18.6 –7.2 –5.7 MiddleEastandAfrica 9.7 77.2 102.5 211.2 EasternEuropeand –9.6 27.5 22.6 53.6 theformerSovietUnion StatisticalDiscrepancy 40.7 147.3 25.1 27.3 SOURCE:IMF–WorldEconomicOutlookDatabase,April2006. 4 ChangingWorldDemographicsandTradeImbalances timesaffectedbypoliciessuchascapitalcontrols Table 1B andreserveaccumulation,aredrivingcurrent accountbalancesthroughouttheworld. 2006 U.S. Current Account Deficit Iwanttohighlightademographicexplana- ($ Billions) Total$856.7 tion.Suchanexplanationiscloselyconnected Europe 158.0 toprivatesavingandinvestmentdecisions.While Canada 43.8 thisexplanationiscertainlynotnovelandhas LatinAmerica 114.0 receivedattentionbyresearchers,Ithinkitmerits increasedattention,especiallyinpolicydiscus- Asia 440.1 sions.Similartotheexplanationsofferedabove, China 261.7 ademographicexplanationcanbeonlyapartial, Japan 112.5 thoughIbelievequantitativelyimportant,expla- MiddleEast 48.1 nationofthecurrentglobalpatternofnational Africa 57.6 currentaccountsurpluses/deficits. InternationalOrganizations (5.1) TherearemanyreasonsthatIthinkademo- graphicperspectivemeritsmoreattention.A SOURCE:U.S.DepartmentofCommerce,BureauofEconomic Analysis,InternationalEconomicAccounts.ReleaseDate demographicperspectiveisnecessarilyalong- March14,2007. termview,whichIthinkisrequiredforunder- standingthepersistenceofcurrentaccount surplusesanddeficits.Ademographicperspec- Populationgrowthhasbeenmuchfasterinthe tivealsoforcesonetothinkthroughtheunderly- poorercountriesthaninthosewithhighstandards inggeneralequilibriumprocessthatdetermines oflivingandwealth.Whereasthedeveloped currentaccountbalancesacrosscountries. countriesofEurope,NorthAmerica,Australia Manypolicymakersandeconomistsworry andNewZealandaccountedforroughlyone- thattheU.S.currentaccountdeficitistoolarge. thirdofworldpopulationin1900andaboutthe Obviously,theU.S.deficitcannotcontinueto samepercentagein1950,by2000,thosecountries expandindefinitely,whichhasledtoaliterature accountedforjust20percentofworldpopulation. onthesustainabilityofthedeficit.Howmuch Itseemslikely,however,thatthepopulation largerwillthesedeficitsbecomebeforetheyare growthofmanylesser-developedcountrieswill reversedandwillthereversalbeorderlyordis- slowduringthepresentcentury. ruptive?InmycommentstodayIwanttohigh- Worldpopulationhasmorethandoubledin lightthepotentialeffectsofdemographicchanges thelast50years,andithasnearlyquadrupled oncontributingtoanorderlyadjustment. since1900.Currently,worldpopulationisgrow- ingatarateof1.35percentperyear.TheUnited Nations’mostrecentforecast,however,predicts CHANGING NATIONAL aslowinginthegrowthofworldpopulationto DEMOGRAPHICS THROUGHOUT about0.33percentperyearby2050,atwhichtime THE WORLD: SOME FACTS forecastersarepredictingthatworldpopulation Thelogicalplacetobeginademographic willtotal8.9billionpersons. discussioniswithsomefactsaboutpopulation Whiletheworld’spopulationgrowthhas growth.Worldpopulationgrowthhasslowed slowed,improvementsinlifeexpectancyhave and,usingrecentprojectionsfromtheUnited continued.Thesetwoconditionsareleadingtoa Nations,itislikelythatpopulationgrowthwill rapidagingofthepopulation,whichcanbeseen slowfurther.Anotabledevelopmentisthechang- inTable2.Agoodsummarymeasureofapopu- ingdistributionofpopulationbetweentheso- lation’sageisthemedianage—theagesuchthat called“developed”and“less-developed”nations. halfthepopulationisolderandhalfisyounger. 5 INTERNATIONALTRADEANDFINANCE Overthepasthalfcentury,themedianageofthe Germanywith12.3percent,Francewith10.9 world’spopulationhasincreasedby2.8years, percentandBelgiumwith10.6percentareafew from23.6in1950to26.4in2000.TheUnited examples.Meanwhile,theUnitedStatesispro- Nationsforecastsmedianagetoriseto36.8years jectedtohave7.2percentofitspopulationmade in2050.Moredevelopedcountriesareexpected upofthose80andolder. tohaveanincreaseinmedianagefrom37.3years Thecriticalpointtotakeawayfromthese to45.2years,andlesserdevelopedcountriesfrom populationprojectionsisthattodaytheUnited 24.1yearsto35.7years.Usinganestimatefor StateshasayoungerpopulationthanEuropeand 2005,Japanisthecountrywiththeoldestpopu- muchyoungerthanJapan.By2050,thesegaps lation,havingamedianageof42.9years.Japan willhavegrownsignificantlyandevenChina isprojectedtohaveamedianageof54.9yearsin willhaveanolderpopulationthantheUnited 2050.SimilarchangesareoccurringinEurope. States,measuredbymedianage. Italy,withamedianageof42.0yearsin2005,is projectedtohaveamedianageof50.4yearsin 2050.Comparablenumbersforselectedcountries A DEMOGRAPHIC PERSPECTIVE inWesternEuropeare:Germany—42.1and49.4; ON CURRENT ACCOUNT France—38.9and44.3;andBelgium—40.3and BALANCES 46.2.TheUnitedStatesisnotexcludedfromthis aging;however,theUnitedStatesremainssome- Theprojecteddemographicchangeswillhave whatyounger.ThemedianageoftheU.S.popu- verysignificanteconomiceffects,mostnotably lation,bycontrast,iscurrently36.0years,andis oneconomicgrowthand,thus,onvirtuallyevery forecasttobe41.1yearsin2050. economicvariable.Theconnectionbetween Chinawillalsobeundergoingasubstantial demographicchangesandinternationalcapital demographicchange.China,whichhasbeen flowsfollowsdirectlyfromthelife-cycletheory experiencingrapidgrowthandistheworld’s ofconsumptionandsavingdevelopedbyFranco mostpopulouscountry,mustbeincludedinany ModiglianiandRichardBrumbergintheir1954 discussionstressingdemographicchangeand paper(1980).Theargumentisstraightforward. tradebalances.Between2005and2050,the Younghouseholdssaverelativelylittle,because medianageinChinaisprojectedtoincreasefrom oftheexpenseofchildrearing.Middleaged 32.5yearsto45.0years.Notethatthisabsolute householdssavealot,inanticipationofretire- changeinmedianageexceedsthatoftheEuropean ment.Elderlyhouseholds,nolongerworking, countriesthatIhavehighlighted.Moreover,and drawdownassetstopayfortheirconsumption. remarkably,theseprojectionsindicatethatin Theseideasareeasilyextendedtotheentire 2050China’smedianpopulationagewillbeabove economy. thatoftheUnitedStates. Whenapopulationcanbecharacterizedas Theworld’sfastestgrowingagegroupiscom- middleaged,thentheeconomyshouldtendto prisedofpersons80yearsandolder.In2000,1.1 haveahighersavingratethanwhenitcanbe percentofworldpopulationwasaged80orolder. characterizedaselderly.Thus,asthepopulation By2050,thenumberaged80orolderisexpected ofacountrymovesfrommiddleagedtoelderly, tobe4.2percentofworldpopulation.Inthatyear, itisreasonabletoexpectacountry’ssavingrate 21countriesorareasareprojectedtohaveatleast todecrease.Unlessthecountry’sinvestmentrate 10percentoftheirpopulationaged80orover. movesidentically,foreigncapitalflowsandcur- Japanisforecasttohave15.4percentofitspopu- rentaccountbalanceswillbeaffected.Exactly lationaged80ormore.Italyisprojectedtohave howdependsonthechangeininvestment. 15.2percentofitspopulationaged80ormore. Thedeclineinthenumberofworkersassoci- MostwesternEuropeancountrieswillhavemore atedwithanagingpopulationtendstodepress than10percentofpopulationaged80ormore. investmentdemandrelativetoacaseofnodecline 6 ChangingWorldDemographicsandTradeImbalances Table 2 Population Projections Percentageofpopulation MedianAge 65orolder 80orolder Country/Area 2005 2050 2005 2050 2005 2050 World 28.0 38.1 7.3 16.2 1.3 4.4 Moredevelopedregions 38.6 45.7 15.3 26.1 3.7 9.4 Lessdevelopedregions 25.5 36.9 5.5 14.7 0.8 3.6 Leastdevelopedcountries 19.0 27.9 3.3 6.9 0.4 1.1 Africa 19.0 28.0 3.4 6.9 0.4 1.1 Asia 27.6 40.2 6.4 17.5 1.0 4.5 China 32.5 45.0 7.7 23.7 1.2 7.3 India 23.8 38.6 5.0 14.5 0.7 3.1 Japan 42.9 54.9 19.7 37.7 4.8 15.5 Europe 38.9 47.3 15.9 27.6 3.5 9.6 Austria 40.1 48.0 16.2 29.0 4.3 11.9 Belgium 40.3 46.2 17.3 27.1 4.3 10.7 Denmark 39.5 43.8 15.1 23.9 4.1 9.2 Finland 40.9 44.4 15.9 25.6 4.0 10.0 France 38.9 44.7 16.3 25.9 4.6 10.2 Germany 42.1 49.4 18.8 30.2 4.4 13.1 Greece 40.1 50.1 18.3 31.7 3.5 11.1 Iceland 34.2 44.6 11.7 25.4 3.0 9.6 Ireland 33.4 43.0 11.1 23.4 2.7 6.7 Italy 42.0 50.4 19.7 32.6 5.1 13.3 Luxembourg 38.3 40.4 14.2 19.5 3.2 6.9 Netherlands 39.1 44.2 14.2 25.2 3.6 10.4 Norway 38.0 43.7 14.7 23.8 4.6 9.0 Portugal 39.1 48.8 16.9 30.7 3.7 10.1 RussianFederation 37.3 45.3 13.8 23.8 2.1 5.8 Spain 38.8 49.5 16.8 33.2 4.3 12.2 Sweden 40.2 43.3 17.2 24.1 5.3 9.3 Switzerland 40.1 44.2 15.4 25.0 4.3 11.0 Ukraine 38.9 50.0 16.1 27.6 2.6 7.1 UnitedKingdom 38.9 43.4 16.1 24.1 4.5 9.2 LatinAmerica/Caribbean 26.0 40.1 6.3 18.5 1.2 5.2 NorthAmerica 36.3 41.5 12.3 21.5 3.5 7.8 Canada 38.6 45.3 13.1 25.7 3.5 10.0 UnitedStates 36.0 41.1 12.3 21.0 3.5 7.6 Oceania 32.3 40.0 10.3 19.4 2.6 6.8 Australia 36.7 43.4 13.1 24.3 3.5 9.3 NewZealand 35.5 44.1 12.2 24.1 3.2 9.2 SOURCE:WorldPopulationProspects:The2006RevisionPopulationDatabase,UnitedNationsPopulationDivision. 7 INTERNATIONALTRADEANDFINANCE inworkers.Thereasonissimple.Acountrywith Inarecentarticle,Feroli(2006)simulatesa adecliningworkforceneednotreplaceallits multi-regionoverlappinggenerationsmodel.The depreciatingcapitaltomaintainitscapitalstock modeliscalibratedtomatchthedemographic perworker.Incontrast,acountrywithagrowing differencesamongG-7countriesfrom1950-2000. workforcemustreplacedepreciatingcapitaland Thedemographicdifferencesdoexplainsomeof addtoitscapitalstocktopreventthestockper thelong-termcapitalmovementsamongtheG-7 workerfromfalling.Thus,thetendencyforsaving countries.Themodelpredictsthatfrom2000-2030 tooutruninvestmentinmanycountrieswith theNorthAmericanmembersoftheG-7,the slowlygrowingordecliningworkforcesisper- UnitedStatesandCanada,willbenetexporters fectlysensibleandnotasignofimbalance.But ofsavings,whiletherestoftheG-7willimport withsavingoutrunninginvestment,capitalflows savings.Clearly,Feroli’smodelhasnotcorrectly abroad,especiallytotheUnitedStates.1 predictedthetimingofthechangeindirection Eventually,foracountrywithanagingpopula- oftheU.S.capitalaccount,giventhatthecapital tion,thedeclineinsavingwillexceedthedecline flowtotheUnitedStatescontinuedtogrowafter ininvestment,whichwillcausethecountry’s 2000.Nevertheless,themodeldoesillustratea currentaccounttodecrease.However,itisnot muchdeeperlevelofdetailthantheanalysisI obviouswhetheragingwouldimmediatelycause haveoutlinedhere. investmenttofallmoreorlessthansaving.Itis RecentworkbyNicolettaBatini,TimCallen possiblethatdomesticinvestmentfallsmorethan andWarwickMcKibbin(2006)alsoprovidesa savinginitiallybecauseofpersistenceinsaving globalviewoftheimpactsoftheunfoldingdemo- habits.Thekeypointisthatthesaving-investment graphictransition.Theauthorsexaminethe balancesofindividualcountriescanevolvein impactsofthetransitionforfourregions—Japan, complexways. theUnitedStates,otherindustrialcountriesthat Thiscomplexityiscompoundedbytheinter- areprimarilyinEuropeanddevelopingcountries. nationaldimensionsofthisissue.Theimpactof Theystressfourresults.First,populationaging agingonnationalsavingrelativetoinvestment inindustrialcountrieswillreducegrowth.Not willnotnecessarilybethesameforeverycountry. surprisingly,Japanwillexperiencethiseffectfirst. Atthegloballevel,thesumofcurrentaccount Second,developingcountrieswillexperience balancesmustbezero.Thus,whatmattersisnot strongergrowthoverthenext20to30yearsas thefactofagingforaspecificcountry,butrather therelativesizeoftheirworking-agepopulations howitisagingrelativetoothercountries. increases.Ultimately,theeffectsofagingwillset inforthosecountriesalso.Third,andmostrele- vanttothecurrentdiscussion,demographic CURRENT ACCOUNT STUDIES changeinduceschangesinsaving,investment andinternationalcapitalflows.Specifically,the FROM A DEMOGRAPHIC fastestagingcountries—Japanandtoamuch PERSPECTIVE lesserextenttheotherindustrialcountries—will Anumberofresearchershaveusedademo- likelyexperiencelargedeclinesinsavingand graphicperspectiveintheirstudiesofchanges currentaccountbalancesastheelderlysupport inthecurrentaccount.Idonothavetimetopro- currentconsumptionbydrawingdowntheir videathoroughliteraturereview;so,Iwilllimit assets.Meanwhile,theUnitedStatesanddevelop- myselftoarticlesthatareespeciallyrelevantto ingcountrieswillexperienceincreasesintheir today’sdiscussion. currentaccountbalances.Fourth,theauthors 1 ThispointwasmadebyHiggins(1998),whoarguedthatthedemographic“centerofgravity”forinvestmentdemandshouldoccurpriorin theagedistributionthanforsaving.Asaresult,regionswitharelativelyhigherproportionoftheirpopulationsinthehighsavingyearsshould tendtohavesavingexceedinvestmentandthusruncurrentaccountsurpluses. 8 ChangingWorldDemographicsandTradeImbalances stress—quiteappropriatelyinmyview—thatthe differencebetweendisposablepersonalincome resultsaresensitivetoassumptionsmadeabout andconsumption,expressedasafractionofdis- productivitygrowthandexternalriskpremia. posableincome.Thelowsavingrate—actually Thispointhasbeenmademoregenerallyby slightlynegativein2006—doesnotappearto DavidBloomandDavidCanning(2004).They reflectabnormalhouseholdbehavior.Acareful stressthatpopulationagingisanewphenome- examinationofhouseholdassetssuggeststhat non.Consequently,drawinginsightsfromprevi- consumptionhasbeendrivenimportantlyby ouseconomichistoryisproblematic.Fully gainsinassetvalues,primarilyequitiesandreal anticipatingthemyriadofbehavioralresponses estate.2 tothechangingeconomicconditions,someof Whyhaveassetvaluesgrownsomuchin whicharetheresultofpolicychanges,isdiffi- recentyears?Partoftheanswerhastodowith culttosaytheleast.Consequently,futureage-spe- thesurgeinU.S.productivitygrowthsince1995. cificbehaviorislikelytodifferfromthepast.For Butanotherpartisthatrealinterestratesinthe example,longerworkinglivesappeartobe worldasawhole,andintheUnitedStates,appear inevitable,buthowmuchlonger?Suchbehav- tohavedeclinedsignificantlysincethelate1990s. ioralresponseswilltranslateintoeffectsonsav- Thedeclineisrelatedtotheglutofworldsaving ingandinvestmentand,therefore,on relativetoinvestmentthatBernankediscussed internationalcapitalflows. inhis2005speech.Bernankedidnotdiscussthe Theimportanceofunderlyingassumptions originoftheglut,butIbelievethatdemographics hasalsobeenmadeinarecentpaperbyCharles havesomethingtodowithit.Manymiddle-aged EngelandJohnRogers(2006).Theiranalysisis householdsaroundtheworldareintheirhigh focusedontheU.S.currentaccountdeficit,but savingyears,inanticipationofretirement—the theydonotstressdemographicfactors.Intheir anticipatedrapidagingofthepopulationsinmany model,theU.S.currentaccountbalanceisdeter- countries.And,asIarguedabove,theneedfor minedbytheexpecteddiscountedpresentvalue capitalformationisreducedwhenlaborforce ofitsfutureshareofworldgrossdomesticprod- growthislow.Thus,inanagingpopulationsaving uctrelativetoitscurrentshareofworldgross tendstooutruninvestment,atleastforawhile. domesticproduct.Usingwhattheyviewarerea- TheU.S.populationisagingalso,ofcourse,but sonableassumptionsaboutU.S.growthrelative ataslowerratethaninmanyothercountries. toothercountries,theyconcludethatitispossi- Thus,differentialdemographicsarecentralto bletoexplaintheU.S.currentaccountdeficitas differentialcurrentaccounts. theequilibriumoutcomeofoptimalconsumption/ savingdecisions.Ofcourse,ifU.S.growthisnot robustrelativetoothercountries,thenanother CONCLUDING COMMENTS explanationwouldbeinordertoexplainthehis- Itisgenerallyrecognizedthattheworldis toricallylargeU.S.currentaccountdeficit. undergoingamajordemographictransition. Populationgrowthisslowingandtheagestruc- tureofthepopulationischanging,withtheshares DEMOGRAPHICS AND U.S. oftheyoungdecliningandtheelderlyincreasing. SAVING Assessingthepreciseimplicationsiscomplicated ThelowU.S.personalsavingrateappearsto bythefactthatdifferentcountriesareatdifferent beaproximatecauseofatleastpartoftheU.S. stagesofthisdemographictransition.Itisalso currentaccountdeficit.Thesavingrateisthe importanttorecognizethatthescenariosIhave 2 Theanalysissupportingthispointcanbefoundinmyspeech,“U.S.Saving,”whichwasgiveninOmaha,Nebraska,attheCFASocietyof NebraskaonFebruary15,2007.Seewww.stlouisfed.org/news/speeches/2007/pdf/2-15.pdf. 9 INTERNATIONALTRADEANDFINANCE highlightedabovearenotpreciseforecasts,but Bloom,DavidE.andCanning,David.“Global ratherareattemptstoisolatesomekeyimpacts DemographicChange:DimensionsandEconomic ofthedemographicchanges.Itisreasonableto Significance.”PresentedattheFederalReserveBank expectthatthesedemographicchangeswillcause ofKansasCity’ssymposiumGlobalDemographic policychangesthatwillproducechangesinwork- Change:EconomicImpactsandPolicyChanges, ing,savingandinvestmentbehaviorsthatare JacksonHole,Wyoming,August26-28,2004,pp. notfullycapturedintheexistingmodels. 9-56.http://www.kansascityfed.org/PUBLICAT/ SYMPOS/2004/pdf/BloomCanning2004.pdf Totheextentthatthisanalysisiscorrect, differentialratesofagingacrosscountriesare Engel,CharlesandRogers,JohnH.“TheU.S. responsible,inpartanyway,forthepatternsof CurrentAccountDeficitandtheExpectedShareof currentaccountdeficitsandsurplusesweobserve. WorldOutput.”JournalofMonetaryEconomics, Thesedeficitsandsurplusesmaybedesirable July2006,53(5),pp.1063-93. outcomesofoptimizingbehaviorratherthan imbalances.Weshouldnotinterferewitha Feroli,Michael.“DemographyandtheU.S.Current processthatisallowingtheglobaleconomyto AccountDeficit.”TheNorthAmericanJournalof copeinanefficientmannerwiththechanging EconomicsandFinance,2006,17,pp.1-16. demographics. Gruber,JosephW.andKamin,StevenB.“Explaining theGlobalPatternofCurrentAccountImbalances.” REFERENCES BoardofGovernorsoftheFederalReserveSystem InternationalFinanceDiscussionPapers,Number Batini,Nicoletta;Callen,TimandMcKibbin, 846,November2005. Warwick.“TheGlobalImpactofDemographic Change.”InternationalMonetaryFundWorking Higgins,Matthew.“Demography,NationalSavings, PaperWP/06/9,January2006. andInternationalCapitalFlows.”International EconomicReview,May1998,39(2),pp.343-69. Bernanke,BenS.“TheGlobalSavingsGlutandU.S. CurrentAccountDeficit.”PresentedattheHomer Modigliani,FrancoandBrumberg,Richard.“Utility JonesLecturehostedbytheFederalReserveBank AnalysisandAggregateConsumptionFunctions: ofSt.Louis,April14,2005. AnAttemptatIntegration,”inAndrewAbel,ed., http://www.federalreserve.gov/boarddocs/speeches/ TheCollectedPapersofFrancoModigliani. 2005/20050414/default.htm. Volume2:TheLifeCycleHypothesisofSaving. Cambridge:MITPress,1980,pp.128-97. Blanchard,Olivier.“CurrentAccountDeficitsin RichCountries.”MassachusettsInstituteof TechnologyDepartmentofEconomicsWorking Paper07-06,February10,2007. 10

William Poole (2007, April 15). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20070416_poole

@misc{wtfs_speech_20070416_poole,
  author = {William Poole},
  title = {Speech},
  year = {2007},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20070416_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}