The problem of too much stuff sloshing around the global economy

Sometimes there can be too much of a good thing. Right now, in the global economy, there appears to be far more commodities available than current demand merits. This glut is matched by too many available workers and too much capital sloshing around the global economy. In the Friday edition of The Wall Street Journal, Josh Zumbrun and Carolyn Cui highlight these gluts, but the question underlying the article is whether these oversupplies are the result of increasing supply or due to insufficient demand.

First, let’s point out that the trends here are certainly different for different aspects of the glut. Take oil. The rapid decline in oil prices during 2014 was one of the biggest economic stories of the year. But what exactly caused that decline? In another piece, Zumbrun highlights research from the International Monetary Fund on the cause in the decline of oil prices. According to the IMF, the decline was first caused by a slowdown in economic activity (a reduction in demand) before increased supply of oil contributed an increasingly large role in the price decline.

That explanation might not hold for other commodities in the current situation. In the copper market, for example, technology can’t lead to a sudden expansion of copper supply analogous to the rise of fracking that has contributed to the increased oil supply. The decline in copper prices is almost certainly a function of declining demand, especially from China.

Then there’s capital. Interest rates are very low right now due to the monetary easing done to counteract the Great Recession and the weakness in many parts of the world, such as Europe. In other words, the price of capital is quite low right now because of demand. Just as the United States economy appears to be healing, Europe, China, and other weak spots could start growing at a healthy clip and that would reduce the glut of capital.

That possibility assumes that the mismatch between the supply and demand of capital is a short-term phenomenon. Given enough time, the price of capital will adjust so that’s there’s no oversupply or insufficient demand. But as Zumbrun and Cui note in their piece, there’s an argument, advanced by former Treasury Secretary Larry Summers, in which nominal interest rates need to drop below zero for the imbalance to disappear. And if you’ve paid attention to Europe in recent months, you’ve seen interest rates do exactly that.

Summers has argued that this imbalance has been a feature of the global economy for years and has been responsible for the decline in interest rates and some the bubbles of the late 20th and early 21st century. Ben Bernanke, the former Federal Reserve Chair, has argued that the imbalance is a fleeting feature of the global economy and will abate as the economy recovers.

When it comes to labor, this particular glut might be the one that is most clearly a long-run trend. The new waves of workers from the former Soviet Union, China, and India have dramatically increased the supply of labor in the global market. This increase plus the increased opening of the U.S. economy is one potential cause of the decline of the labor share of income in the United States.

Whether these gluts are something economists understand as a strange, but one-off event or as a major feature of our times will have a large impact on how we understand our economic future.

April 27, 2015

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