Public debt sustainability in most advanced economies used to be a non-issue, or at most a back-burner one. A couple years back, if the topic came up, most people associated it with developing or emerging market countries. Defaults, rising sovereign risk premia, getting shut out from capital markets were, let’s face it, not really imagined to be possibilities for advanced economies. Of course there were fiscal challenges, demographic pressures being the obvious one, but these were issues for the long term, not the here and now.

The Group of Twenty industrialized and emerging market economies (G-20) has broken new ground over the past year or two. It has embraced the type of collaborative approach to policy design and review that is well suited to today’s interdependent world, where policies in one country can often have far-reaching effects on others.

Collective action by the G-20 in response to the recent crisis was critical in avoiding a catastrophic financial meltdown and a potential second Great Depression. Exceptional policy responses around the globe—including macroeconomic stimulus and financial sector intervention—indeed helped avoid the worst. These actions were notable, both for their scale and force, but also for their consistency and coherence.

My last blog post listed some policies and institutions with which various small countries around the world have had success — innovations that might be worthy of emulation by others.  Of course there are plenty of other examples of policies and institutions that have been tried and that are to be avoided.    The area of agricultural policy is rife with them.   Many start with a confused invoking of the need for “food security.”The recent run-up in wheat prices is a good example.   Robert Paarlberg wrote an excellent column in the Financial Times recently, titled “How grain markets sow the spikes they fear.”   Grain producing countries point to the high volatility of prices on world markets and the need for food security when imposing taxes on exports of their own grain supplies, or outright bans, as Russia did in July.    The motive, of course, is to keep grain affordable for domestic consumers.  But the effect of such export controls is precisely to cause the price rise that is feared, because it removes some net supply from the world market.    (The same could be said when grain importing countries react to high prices by enacting price controls, because that adds some net demand to the world market.)   

Those who argue that "small businesses create the most jobs" have it partly right, but they also destroy the most jobs so that the net contribution of small firms isn't so clear.

What is the relationship between firm size and job growth? It turns out the age of a firm is important independent of size. The paper finds that "once we add controls for firm age, we find no systematic relationship between net growth rates and firm size. The paper does find, however, that conditional on survival, young firms (who tend to be small) grow faster than older firms. Thus, there is a sort of risk-return tradeoff. Startups, who tend to be small, do grow fastest if they survive, but they also have high rates of failure and job destruction.

Earlier this week I compared household saving rates across the US, UK, Canada, and Germany. My conclusion was pretty simple:

So generally, this simple analysis would suggest that Menzie Chinn's skepticism of a "status quo" of US consumer imports is worthy. But with the status quo firmly in place in Germany, the household saving data paint a foreboding picture - certainly for the Eurozone, but possibly for the global economy as well.

Beijing-based fiance professor and commentator Michael Pettis gives a typically sobering outlook in a Financial Times comment today, seeing the seemingly irresistible force of trade surplus countries’ resistance to shifting towards more internal generated demand colliding with the immovable object of trade deficit countries’ inability to tolerate the high unemployment rates that result for a prolonged period.

There are some interesting elements of his presentation. First, although he thinks a trade war is a bad outcome, he also see the odds as low that the trade surplus countries will take the steps needed to rebalance their economies. That brings us to the second point, Pettis, without invoking the word mercantilist, sees the trade surplus countries as taking overly aggressive measures to preserve their positions. This may sit poorly with some readers, who tend to see trade surplus/high savings countries as virtuous, and the trade deficit/debtor nations as wastrels. But the existence of surplus countries requires debtor nations. Deriding the debtors while praising the surplus nations is like saying you think sex is sinful but consider babies to be a blessing. Unless you believe in storks as the mechanism for procreation, that position can’t be reconciled.

Menzie Chinn at Econbrowser breaks down US import data by sector to argue the following (see entire article here):

What is clear is that consumer goods do not vary that much; now, part of auto and auto parts is going to satisfy consumer demand as well, and here we do have some evidence in support of the hypothesis of the consumer going back to his/her old ways of sucking in imports. ... Consumption hardly seems resurgent, so attributing the increase in imports to consumers means that one is assuming a very high share of imports to incremental consumption -- something I'm not sure makes sense. So, I think the book is still open on whether the consumer is going to drive the US back into a rapidly expanding trade deficit.

Another way to look at this is by comparing global household saving rates. Specifically, I look at the household saving rates across the US (the world's largest economy in 2007, as measured in PPP dollars - download the data at the IMF World Economic Outlook database), UK (6th largest economy), Canada (a small-open economy), and Germany (5th largest economy). The household saving ratio is calculated as gross household saving divided by personal disposable income, as reported in country National Accounts.