Edward Conard

Top Ten New York Times Bestselling Author

  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

AI Summary. Trade responds to exchange-rate changes with a lag of roughly 8 to 12 quarters, and after the dollar fell from its mid-1980s peak the US trade deficit dropped from about 3% to about 1% of GDP while Japan's surplus fell from 4% to 2%. The author argues currency appreciation, not fiscal consolidation, drove that rebalancing.

Brad Setser and Shahin Vallée Council On Foreign Relations
Date Posted:

The dollar strength in the post-pandemic period is above the level associated with the tech bubble. The broad real dollar fell ~20% btw 2001 and 2005. Setser argues for Asian currency appreciation vis-a-vis the dollar to facilitate trade rebalancing.

Can currency moves, rather than fiscal consolidation, shrink trade imbalances?

Core argument: The U.S. overall trade deficit fell from around 3% of GDP to around 1% of GDP between 1987 and 1990, following the Plaza agreement and the dollar's move off its 1985 highs.

Trade adjusts to changes in exchange rates with a lag (usually thought to be 8 quarters but some work suggests that it might now be more like 12 quarters. The Plaza agreement didn’t bring the U.S. deficit down immediately, but by 1987 the real U.S. trade deficit was clearly shrinking. The overall trade deficit fell from around 3% of U.S. GDP to around 1% of U.S. GDP) between 1987 and 1990. This fall occurred even with strong demand growth in the US in 1988 and 1989, so it wasn’t just a function of underlying shifts in the global pattern of demand growth. Net exports contributed positively to U.S. growth once the dollar had clearly moved off its 1985 highs across the cycle. Japan’s surplus also fell from 4% of GDP to 2% of GDP—with a large reduction in its bilateral surplus with the U.S. This suggests that currency appreciation, not fiscal consolidation, was the primary driver of rebalancing in the 1980s.

Takeaways by Macro Roundup® AI

  1. The U.S. overall trade deficit fell from around 3% of GDP to around 1% of GDP between 1987 and 1990, following the Plaza agreement and the dollar's move off its 1985 highs.
  2. Japan's surplus fell from 4% of GDP to 2% of GDP, with a large reduction in its bilateral surplus with the U.S., suggesting currency appreciation rather than fiscal consolidation was the primary driver of 1980s rebalancing.
  3. Trade adjusts to exchange rate changes with a lag usually thought to be 8 quarters, though some work suggests it may now be closer to 12 quarters, and the U.S. deficit narrowed even amid strong U.S. demand growth in 1988 and 1989.

Related Articles:

  • The Real Problem With Global Trade — Asia's $1.5tn trade surplus is larger as a share of world output than at any point since 1945 and is the only large surplus in the global economy. Exchange rates have a meaningful impact on trade balances: China's surplus reached about 10% of its output amid renminbi depreciation, then fell below 2% after a 40% real appreciation.
  • The Dollar has Further to Fall — The author argues the dollar has considerably further to fall, noting Federal Reserve data show its real value nearly two standard deviations above its average since 1973, a level matched only twice before, each followed by depreciations of 25-30%. Financing the $1.1tn US current account deficit requires matching net capital inflows.
  • Understanding Global Imbalances — The US, China, Germany, and Japan account for roughly two-thirds of global current account imbalances, with the US deficit at 4% of GDP financed by capital inflows into dollar assets. The average duration of a surplus or deficit spell roughly doubled since the 1980s, building large net foreign asset and liability positions.
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