Demand, Supply and Interdependence

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This material will discuss the current situation in the global economy and the outlook for the future. It will also review the progress of the global recovery from both the demand side and —and the supply side, where our focus is on promoting technological progress and maintaining macroeconomic stability.
1. The Global Economy: Demand, Supply and Interdependence
Remarks by Jason Furman1  
Chairman, Council of Economic Advisers
Globes Israel Business Conference
December 7, 2014
As prepared for delivery
I am very excited to be in Israel for the Globes Conference, one of the world’s leading economic
conferences. Israel has been such a close friend to the United States since its founding. It has one
of the world’s most innovative and dynamic economies, undertaking a remarkable
transformation from a protected, low-end manufacturing- and agriculture-led economy to one
that is diverse, open, and led by a cutting edge high-technology sector and, more recently,
remarkable natural gas discoveries. We are proud of our strong economic and commercial
relationship, including $45 billion in two-way goods and services trade. Israel does not just have
important economic ties to the United States, but it is also an important player in the global
economy, well disproportionate to its size.
In my remarks today I want to discuss the current situation in the global economy and the
outlook for the future. We are seeing differentiated performance by countries around the world.
The latest economic news out of the United States has been very strong, with the strongest pace
of job growth in over 15 years, upward revisions to GDP growth, and a rapidly declining budget
deficit. In contrast, the most recent European data were relatively flat, the Japanese economy has
contracted for two straight quarters, and many emerging markets have seen their growth rate
forecasts marked down. This morning, I want to explore some of the causes of these differences.
I will also try to draw a few lessons from the United States’ post-crisis experience. In particular,
I will review the progress of the global recovery from both the demand side—where the United
States’ aggressive fiscal and monetary policies contributed to our recovery—and the supply side,
where our focus on promoting technological progress and maintaining macroeconomic stability
will help increase U.S. potential output. I will also consider the slowdown in international trade,
the sustainability of global growth, and global inequality across income levels and nations.
(Earlier this year, I identified some important lessons from the global economy for the United
Of course, our experience in the United States is special in many ways and some aspects would
not apply everywhere, especially in a small open economy like Israel’s—and even less so in
emerging economies. In this talk, I will therefore try to focus on U.S. lessons that may have
relevance across a broad range of economies, leaving aside some specific issues—for example,
management of the exchange rate or of capital inflows—that are naturally a major policy focus
in most small open economies.
Eric Van Nostrand, Susie Scanlan, and Matthew Aks at the CEA provided research assistance.
2  Furman,
Jason. 2014. “Global Lessons for Inclusive Growth.” May
2. A Varied Recovery
Nearly every advanced economy endured a recession amid the global financial crisis, but the
experience since then has varied widely across countries. A notable exception is Israel which
weathered the crisis admirably—in no small part due to its fine stewardship of economic policy.
To illustrate the divergent dynamics of global post-crisis growth, we can study the evolution of
GDP across economies. For comparability, I focus on real GDP growth adjusted for the growth
rate of the working age population. Ten of the 18 economies shown in Figure 1 have surpassed
the level of GDP per working age population they achieved before the crisis, while the other 8
have not. The United States, Canada, Australia, and Japan have risen more than 4 percent above
their pre-crisis peak, while many advanced economies—including much of peripheral Europe—
have yet to fully recover.
Figure  1  
GDP  per  Working  Age  Population,  Recent  Growth  vs.  Recovery  
Real  Growth,  2013:Q2-­‐2014:Q2
Advanced  Economies United  Kingdom
Spain United  States
2 Portugal
Denmark Germany
Greece Switzerland
Netherlands Israel
Italy France Japan
-­‐25 -­‐15 -­‐5 5 15 25
Cumulative  Real  Growth  Since  Pre-­‐Crisis  Peak
But looking at how current growth rates compare to the advanced economy median of about 1½
percent growth in GDP per working age population we see four broad patterns of recovery:
• The United States is firmly planted in the top-right quadrant of Figure 1, having both
exceeded its pre-crisis peak while continuing to demonstrate global leadership in growth.
The United Kingdom and Sweden have also exceeded their previous peaks, albeit by
thinner margins. All three economies continue to see growth in GDP per working-age
person of more than 2 percent per year. In the United States, this output growth has been
accompanied by an increasing pace of job growth—with 2014 on pace to be the fastest
pace of job growth since the 1990s—and the unemployment rate falling at the fastest
pace in thirty years.
• Japan, France, and Australia occupy the bottom-right quadrant. They have also exceeded
their pre-crisis peaks, but are slipping back with essentially a halt to growth in Japan and
France over the last year. Japan’s contraction has been exacerbated by the consumption
3. tax increase in April, but that is not the whole story. The Japanese economy experienced
slowing growth rates last year, culminating in a contraction in the fourth quarter of 2013,
well before the consumption tax went into effect.
• Portugal, Spain, and Ireland, in the top-left quadrant, remain below their peak. But over
the last year, the Iberian nations enjoyed decent growth of around 2 percent per year, and
Ireland very strong growth of nearly 7 percent per year. Nevertheless, unemployment
rates remain elevated in all of these countries—especially in Spain, where unemployment
stands at 24 percent, down from 26 percent one year ago.
• Italy has not only failed to recover, it has continued to face significant economic
challenges with growth well below average in the last year. Italy’s recession is now
approaching its fourth year and the unemployment rate has risen to 13 percent.
Emerging markets also show differentiation. Most have surpassed their pre-crisis peaks in GDP
per working age population. But in terms of recent growth in GDP per working age population,
the emerging world is much more varied around a median of about 1¼ percent. Brazil and South
Africa are actually contracting, while China and India are growing, as shown in Figure 2.
Figure  2  
GDP  per  Working  Age  Population,  Recent  Growth  vs.  Recovery  
Real  Growth,  2013:Q2  to  2014:Q2
Mexico India
South  Africa
-­‐2 Argentina
Emerging  Economies
-­‐10 0 10 20 30 40 50 60
Cumulative Real Growth  Since  Pre-­‐Crisis  Peak
Although many elements of the global economy in 2014 are historically unique, this
differentiation is not. The variation of growth rates across advanced and emerging economies is a
long-standing feature. In fact, this variation has trended down over the past three years and is
now below the 2001-2007 average, as shown in Figure 3.
4. Figure  3  
Standard  Deviation  of  Annual  Real  GDP  Growth  Across  Major  
Advanced &  Emerging Economies
Percent, annual  rate
-­‐ -­‐ -­‐ 2001-­‐07  Average 2014:Q2
1996 2001 2006 2011  
Looking forward, the 40 percent decline in global oil prices since their mid-June peak is likely to
drive additional global differentiation between oil consumers and producers. One important
contributor to the falling energy price environment has been the notable boom in U.S. oil
production, which has now surpassed Russia and Saudi Arabia as the largest oil producer in the
world. Despite this progress, however, the United States remains a net importer of oil, so it is
likely to see a benefit from the recent decline in oil prices, along with other net oil importers like
Japan, India, China and the major European economies—as well as many of you all here in
Israel. Other countries that have depended on large petroleum trade surpluses are likely to face
strains from the recent declines in prices, and monitoring for negative spillovers that emanate
from these economies is likely to be an important task over the next several months. On net, the
consensus is that the recent developments are likely to represent a meaningful boost to global
aggregate demand—with the IMF projecting a 0.8 percent boost to global GDP—as consumers
in the United States and elsewhere spend a large chunk of the windfall that, under a
counterfactual scenario of continued high prices, would not have been spent as quickly by oil
producers. An additional force leading to a net rise in global output is increased supply by
energy-using industries.  
Supply and Demand
Like so much in economics, the level of a country’s output reflects the interaction of supply and
demand. In the macroeconomic context, supply tells us how much goods and services can be
produced if all resources were fully utilized—it determines an economy’s potential output.
Supply reflects factors like the size of the capital stock, the skills of the workforce, and the
advancement of technology. The second factor is demand, which tells us how much actually is
produced given the purchasing power of individual consumers, business purchases of plants and
equipment, and government consumption and investment. This determines how much of the
supply is actually utilized.
5. These two factors are interrelated. Increased supply raises incomes and thus boosts demand.
Conversely, inadequate demand today implies less investment in equipment, infrastructure or
education as well as more unemployed workers losing their skills, all of which translates into less
supply in the future. Nevertheless, supply and demand are useful constructs that have different
implications for the economic outlook and economic policy. Let me consider each in turn on a
global basis and explore the ways that policy has affected and will continue to affect them in the
United States.
Demand Deficiencies
We do not directly observe either supply or demand. But several clues can help us distinguish
between them and identify appropriate policies to help sustainably grow each.
Slack resources are the equivalent of inadequate demand. When the unemployment rate is
11.5 percent, as in the euro zone today, it is clear that the binding constraint on output is not a
supply-side factor like technology or the capital stock, but instead the fact that demand is
inadequate to fully utilize all the resources that already exist. And labor market slack comes in
many different flavors than just the headline unemployment rate: in the United States, many
policy conversations center on slack that is evident from alternative measures of labor utilization
such as shortfalls in labor force participation and involuntary part-time employment.
Low or falling inflation can be a sign of inadequate demand. It is often difficult to observe
resource utilization directly because the sustainable level of unemployment varies across
countries and time. And other factors—like participation, work hours or even work effort—
might systematically vary with the business cycle. As a result, it is useful to look at changes in
inflation as another indicator of aggregate demand. Inflation confirms the same story that the
euro zone unemployment tells—with inflation low and falling, as shown in Figure 4. Japan,
which does not have excessively high unemployment, appears to have insufficient demand when
viewed through the lens of inflation—which trended down this year when excluding the impact
of the consumption tax hike and long-term inflation expectations remain below 1 percent.
The signals from inflation are more straightforward in a large, fairly-closed economy like the
United States. In other economies, inflation dynamics are strongly affected by exchange rates
and by external factors, so managing demand through monetary policy involves more
complicated trade-offs.
6. Figure  4  
Consumer  Price  Inflation  and  Market  Inflation  Expectations
Percent  per  Year
4 United  Kingdom
United  States
Euro  Area
Japan  (ex-­‐VAT)
Actual  Inflation Market-­‐Implied Expectations
2008 2010 2012 2014 2016 2018 2020
An abrupt change in output can be explained by a shock to aggregate demand. Demand can
be volatile from quarter to quarter and year to year, as consumers and businesses shift their
spending and investment patterns, leading to jumps in output. In contrast, supply is generally
more smooth—and largely incapable of explaining abrupt contractions in output. However,
supply shocks, such as a power supply disruption following a natural disaster, can result in
abrupt changes in output. This is especially true in smaller economies. On this account, demand
again appears to be playing an important role in both the euro area—which is still more than 2
percent below its 2008 peak in GDP per working age person as shown in Figure 5—and also in
Japan. Indeed, the demand shortfall is projected to result in 8 years of lost growth to the euro
area: output per working-age person is not projected to return to 2008 levels until 2016.
Figure  5  
Euro  Area  Real  GDP  per  Working  Age  Population
Index (2008:Q1=100)
Forecast  (IMF  for  
GDP,  OECD  for  
95 Real  Euro  Area  GDP  per  
Working-­‐Age  Population
2008 2010 2012 2014 2016  
7. Although the causes of demand shortfalls vary greatly, the solutions to them differ to a much
lesser extent. Expansionary monetary and fiscal policy, often in tandem, constitute the well-
understood remedy for the problem. And while there may be some tradeoffs in some
circumstances, sometimes these policies can even offer up a free lunch: shifting the economy to a
better equilibrium can increase output while potentially even shrinking the debt as a share of the
economy. In that regard, the steps Japan has taken to delay its consumption tax and that the
European Commission is taking to invest in infrastructure clearly move in the right direction,
although it is far from clear that the magnitude will be sufficient.
Lessons from the United States: Demand Management
I believe that one of the reasons the United States has recovered comparatively well has been
more aggressive use of aggregate demand management than other countries, stimulating demand
on both the fiscal and monetary side of the equation. Of course, as with all lessons, different
countries in different macroeconomic and fiscal circumstances may not necessarily benefit from
the same remedies.
The United States passed its first round of fiscal support in February 2008, when the
unemployment rate was still 4.9 percent and virtually no economist even realized the economy
had already slipped into recession. The Recovery Act signed into law by President Obama a year
later was the largest single countercyclical effort in American history and it was followed by a
dozen additional fiscal-jobs measures that, together, peaked at more than 3 percent of GDP in
2010. Together with automatic stabilizers, the fiscal support to the economy in 2010 totaled 5.5
percent of GDP.
The Administration’s fiscal efforts were accompanied by accommodative monetary policy. The
Federal Reserve cut the target Federal Funds rate to effectively zero at the end of 2008 and has
kept it there ever since. On top of zero rates, the Fed implemented unconventional policy tools
such as quantitative easing and forward guidance that have helped further extend the recovery.
Altogether, Alan Blinder and Mark Zandi estimated that the combination of these demand
management policies with other financial policies prevented the loss of a further 8.5 million jobs
and prevented the unemployment rate from rising above 16 percent in the wake of the crisis.3
Supply Shortfalls
At the same time, supply shortfalls have also played an important role in the slower pace of
global growth. The International Monetary Fund (IMF) has marked down its growth projections
for many of the world’s major economies, as shown in Figure 6, which compares the five-year-
ahead growth forecasts made in the April 2010 World Economic Outlook to the five-year-ahead
growth forecasts made in the October 2014 World Economic Outlook, a decent proxy for
revisions to the expectation of the growth of aggregate supply. While Japan, France, and Italy
have seen downward revisions to medium-term growth expectations, one striking aspect of this
figure is the sharper downward revisions to prospects for the BRIC economies, which saw
Blinder, Alan, and Mark Zandi. 2010. “How the Great Recession Was Brought to an End.” July
8. growth outlooks marked down by 1 to 3 percentage points. In fact, in the most recent World
Economic Outlook, the IMF noted that the BRIC economies have been responsible for half of the
IMF’s total growth forecast errors from 2011-14, despite representing just over a quarter of
global GDP. Much of that shortfall has been in economies operating with relatively little slack
and without the lowflation that has characterized the euro zone and Japan.
Figure  6  
Five-­‐Year-­‐Ahead  Growth  Forecasts  in  Selected  Economies
Forecasted  in  April  2010 Emergi ng  Ma rkets
10 9.5
Forecasted  in  October  2014
6 5.0
Adva nced  Economies 4.1
4 3.73.2
2.42.6 2.2 2.52.4
1.7 1.9 2.0
2 1.0 1.21.3 1.31.1
For these emerging markets, much of this supply-side slowdown in growth cannot be explained
by capital or labor, and thus is in the residual category of “total factor productivity” (TFP) which
measures some combination of technology, efficiency in production processes, the scale of
markets, and measurement error. As shown in Figure 7, China, India, and Brazil all saw
noticeable drops in total factor productivity growth from 2011 to 2013, relative to the preceding
ten years. For advanced economies, the story around TFP growth since 2000 is somewhat more
varied, though as I will show momentarily, declining productivity growth is also a clear
challenge for most advanced economies when looking over a longer time horizon.
Figure  7  
Sources of  Output  Growth:  2000-­‐2010  vs.  2011-­‐2013
Percentage  Points,  Annual  Rate
'11-­‐'13 TFP
China India Brazil Russia*  
9. The emerging market productivity slowdown may be just a temporary phenomenon, and perhaps
is at least in part a response to the economic crisis and weak demand. Another possibility is that
it could represent the end of an unusual period in global economic history when the integration
of China and India into the global economy led to a rapid period of catching up with the
technological frontier, but as these nations—especially China—get closer to the frontier then the
easier opportunities for growth are no longer available. Meanwhile, as shown in Figure 8, labor
productivity growth in most advanced economies (which depends heavily on TFP growth) has
been consistently slowing since the end of World War II—although the productivity boost in the
United States with the new economy beginning in the mid-1990s represents somewhat of an
Figure  8  
15-­‐Year  Centered  Moving  Average  of  
Annual  Labor  Productivity  Growth
Percent  per  year
United  Kingdom
8 France
7 Germany
United  States
1950 1960 1970 1980 1990 2000 2010
Although the slowdown in productivity growth appears to be a global phenomenon, many of the
solutions are very much national in character. Certain elements—like investing more in research
(and Israel is an exemplar in this respect) or STEM education are likely to make a constructive
addition to productivity growth in a wide range of economies. But the types of reforms that are
most needed in product markets, labor markets, tax systems, and elsewhere in the economy will
vary significantly from country to country. Israel, for example, could benefit from a regulatory
framework that is more transparent and stable, particularly in the energy sector, encouraging
more domestic and foreign investment in your economy.
One potential cause—and solution—however, is global, and that is the slowdown in the growth
of trade which I will turn to in a moment. But first let me briefly address another hypothesis:
secular stagnation.
Secular Stagnation
One hypothesis for the current situation facing the global economy is “secular stagnation,” a
term that Larry Summers revived from Alvin Hansen. In one sense, secular stagnation is a
10. demand side phenomenon characterized by chronically insufficient aggregate demand that
cannot be remedied by conventional monetary policy. Specifically, even a real interest rate of
zero does not generate enough investment growth to utilize the economy’s potential. The fear is
that this leads to a vicious cycle—inadequate demand leads to falling inflation leads to higher
real interest rates which leads to even less adequate demand.
The possibility of falling into a secular stagnation trap is closely linked to insufficient growth of
supply, which is one of the reasons, together with the global savings glut and a shift in portfolio
preferences, that the real interest rate has fallen so much across economies in recent decades, as
shown in Figure 9.
Figure  9  
Real  10-­‐Year  Benchmark  Rate  in  Selected  Countries
7 France
4 Germany
United  States
1985 1990 1995 2000 2005 2010 2015
In some countries, like Japan and possibly the euro zone, the combination of a low equilibrium
real interest rate and low inflation expectations makes it very hard for monetary policy to be as
accommodative as it should be, raising the real fear that the secular stagnation hypothesis
describes important features of these economies today.
Secular stagnation is not relevant for thinking about the United States in 2014 or in the near term,
because a self-sustaining recovery is well underway and inflation expectations remain well
anchored. But slower population growth and the retirement of the baby boomers likely means
that potential GDP growth going forward will not match the rates enjoyed in the second half of
the twentieth century—a factor that reflects not “secular stagnation” but just standard growth
mechanics. At the same time, the longer-term downward trend in U.S. interest rates increases the
risk that in responding to the next recession—whenever it occurs—monetary policy will again be
constrained by the zero lower bound. As such, secular stagnation is best understood not as a
binary phenomenon that you either have or do not have, but as a probabilistic risk.
In the United States, we are taking two main policy lessons from the secular stagnation
hypothesis to ameliorate the risks associated with potentially hitting the zero lower bound again
in future recessions. The first is that fiscal policy may have to do more of the counter-cyclical
11. work in the future, and so we are looking very closely at ways to improve automatic stabilizers.
In this regard, we are expanding our concept of what an automatic stabilizer is and ought to do.
For example, the Affordable Care Act is not normally thought of as a countercyclical
macroeconomic policy, but it is. The combination of progressive tax credits and the Medicaid
expansion will significantly help households smooth consumption and will expand aggregate
demand when it would otherwise be impaired.
A second takeaway from the secular stagnation hypothesis is that it underscores the importance
of promoting financial stability, since an extended period of low interest rates could fuel
excessive risk-taking. In addition to continuing to implement the Dodd-Frank Act, we are also
pressing to complete the most important piece of unfinished business in the financial arena—
reforming the housing finance system and Fannie Mae and Freddie Mac. To promote financial
stability internationally, the Administration also continues to argue for Congress to ratify
important reforms that would modernize and strengthen the IMF. These reforms were agreed
upon by G-20 leaders in 2010, and ratification by our Congress is the last step before they can go
into effect.
The Slowdown in the Growth of Trade
In addition to the issue of secular stagnation, another major question surrounding the global
economic situation is the outlook for global trade. At the outset of the financial crisis, the volume
of global merchandise trade fell even more sharply than it did during the early stages of the Great
Depression, although it quickly rebounded and by the end of 2011 was about 5 percent higher
than its pre-crisis peak, as shown in Figure 10. Economists generally have a handle on explaining
what happened between 2008 and 2011. A massive synchronized drop in global demand led to
the postponement of purchases for commodities, consumer goods, and industrial equipment, and
for those latter two categories, the development of global supply chains over the preceding thirty
or so years served to amplify the initial shock. Unlike the experience in the 1930s, however,
WTO rules helped to ensure that countries avoided turning to extreme protectionist measures in
the immediate wake of the crisis, enabling a relatively rapid rebound of trade to its pre-crisis
peak, at least during 2010 and 2011.
Figure  10  
Global Trade  in  the  Great  Depression  and  Great  Recession
Index, 1929/2008=100
100 2008=100
0 12 24 36 48 60 72 84
Months  from  January  1929/2008
12. What is less well understood—and perhaps more concerning—is the more recent slowdown in
global trade that has unfolded since about 2012. And by slowdown, I mean that in 2012, 2013,
and 2014, global trade is estimated to have grown at about the same pace as overall global
output—an unusual shift given that from the mid-1980s until 2008 when global trade (including
goods and services) grew more quickly than global output by an average of nearly 3 percentage
points per year. Figure 11 tells this story, with global exports rising steadily as a percent of GDP,
from 18 percent in 1985 to 32 percent in 2008, dropping sharply during the crisis, rebounding in
2010 and 2011, and then plateauing over the last three years. As a result global trade as a share
of global GDP in 2014 is estimated to be slightly lower than it was at its peak in 2008.
Figure  11  
Global  Goods  &  Services  Exports  as  a  Percent  of  GDP
30 2014
1980 1985 1990 1995 2000 2005 2010 2015
There are three broad sets of explanations for this plateauing of global trade. Because this
phenomenon is so recent, I present these sets of explanations not as definitive answers and not to
say they explain an equal share of what we have seen, but rather to frame the discussion on this
important topic.
One possible explanation is that the recent slowdown in global trade is cyclical and reflects the
weak spots in the ongoing global economic recovery that I have been discussing. On this point, it
is worth noting that the volume of euro area imports is still 8 percent below its pre-crisis peak,
while Japan’s import growth has been flat over the past twelve months.
Alternatively, a second possible explanation recently advanced by economists at the IMF and
World Bank is that structural changes in the world’s two largest economies have contributed to
slowing global trade. In the United States, the wave of offshoring that occurred in the 1990s has
abated and domestic manufacturing has begun to rebound, curtailing or perhaps even reversing
international supply chain fragmentation. At the same time, the development of domestic supply
chains in China has likely reduced the need for China to import intermediate inputs for the
purpose of processing and re-export.
13. The third possible set of explanations for the recent slowdown in trade focuses on policy. A more
innocent hypothesis put forth by Paul Krugman is that trade liberalization is now a victim of its
own success—tariff rates have been cut substantially for both advanced and emerging
economies, limiting the scope for future progress toward global trade integration. Taking into
account this and other one-off events like China’s WTO accession that are now behind us, a
plateauing in global trade as a share of global output may seem perfectly natural. A related
hypothesis is that progress in multilateral trade negotiations has slowed. But there is also a more
nefarious version of the policy-related hypothesis: it holds that we have actually seen a stealth
resurgence in protectionist measures in recent years, with countries turning to non-tariff barriers
like local content requirements or increasing the use of trade defense measures like anti-dumping
and countervailing duties or safeguards. Non-tariff barriers remain particularly important for
trades in services, a growing component of total trade.
Even as economists continue to debate which of these potential explanations is most important,
the Obama Administration’s trade agenda recognizes that there is likely to be a grain of truth in
each one. For starters, U.S. exports face tariff barriers in other countries that are persistently
higher than the tariffs the United States charges for foreign imports. That is a key reason that our
trade agreements result in higher rates of export growth to our FTA partner countries relative to
countries that do not have agreements. Our strategy also places a major emphasis on reducing
non-tariff barriers to trade, where there is perhaps even more scope for progress. For instance,
economists at the Peterson Institute in the United States estimate that a global trade facilitation
agreement could raise global GDP by nearly $1 trillion over the long term. This sort of
agreement was reached in principle at the WTO ministerial in Bali last year, and would
standardize and streamline a number of customs and related processes at national borders. Gains
of a roughly similar magnitude could also result from a global agreement on trade in services.
We are also honing in on tariff reductions in specific categories like information technology
products and environmental goods, where there are unique benefits to be had. In the case of
information technology products, many of these items are evolving so quickly that they are not
even covered by the standard tariff schedule. President Obama’s trip to China in November
yielded important progress on the Information Technology Agreement that should contribute to a
rapid conclusion of the broader negotiations. Regarding a possible Environmental Goods
Agreement, eliminating tariffs on items like solar panels and wind turbines offers positive
spillovers for worldwide protection of the environment. We also believe that Israel could do
more to open trade, especially in agriculture where it would give consumers lower prices and
greater variety.
Moreover, the two major plurilateral trade agreements currently under negotiation—the Trans-
Pacific Partnership and the Transatlantic Trade and Investment Partnership which cover 40 and
50 percent of the global economy, respectively—focus not just on the tariff and non-tariff
barriers I’ve been discussing, but also place substantial emphasis on cross-border investment,
where there is still tremendous room for global progress. Finally, to the extent global economic
growth remains a headwind, the push for trade and investment liberalization is accompanied by a
similarly robust push for pro-growth policies—both on the supply and demands sides, as I was
discussing earlier. All told, these efforts have the potential to make a major impact on the global
14. economy and represent a large step forward in realizing further productivity- and welfare-
enhancing gains from trade.
Ensuring Growth Is Sustained: The Role of Current Account Rebalancing
For many of the world’s economies, today’s biggest imperative is getting growth going and
better utilizing demand. But it is not just about the level of growth: sustainability matters too.
Growth built on artificial foundations—bubbles and excessive borrowing—is not only unlikely
to last, but it also risks the propagation of much deeper problems, as witnessed during the global
financial crisis. There are a number of elements to sustainability, including a sound financial
system, fiscal sustainability, and domestic financial balances. I want to focus on one element that
in some senses represents a combination of these three and has proved to be particularly
important in recent crises: the current account balance.
The current account balance measures the net current transactions between a country and its
trading partners. It is comprised of net exports, net factor income, and international transfers.
When a country receives more cash inflows that in expends, its current account is in surplus.
When a country spends more than it takes in, it runs a current account deficit, and must borrow
from abroad to finance its activity.
Persistent deficits and surpluses both threaten the sustainability of global growth. Current
account deficits left countries like Greece and Spain especially vulnerable to outflows of capital,
even though the deficits themselves stemmed from very different causes. Greece’s persistent
deficit was rooted in fiscal policy, while bank-fueled private real estate investment drove
Spain’s. Conversely, excessive surpluses are not just an unreproducible model for the world as a
whole, but they also can lead to unbalanced growth in the surplus countries and promote
problematically large deficits in their trade partners. The evolution of the current account
balances for selected major economies since 2000 is shown in Figure 12.
Figure  12  
Global  Current  Account  Balances
Percent  of  Domestic  GDP
China Sep-­‐14
-­‐6 United  States
2000 2003 2006 2009 2012 2015
15. As Figure 13 shows, global imbalances, measured by the sum of absolute surpluses and deficits,
have fallen since the Great Recession, primarily as a result of weak global demand following the
financial crisis.4 In the process, however, some countries have continued to run sizable surpluses,
forcing others to have bigger deficits and slower growth than they otherwise would.
Figure  13  
Current  Account  Balance
Percent  of  Global  GDP
3 Other
2014 Surplus
2 Deficits
Euro  area
1 Periphery
0 Countries
Euro  area
Core  ex
-­‐1 Germany
-­‐2 Germany
-­‐3 States
1980 1985 1990 1995 2000 2005 2010 2015
The United States has seen its current account deficit fall to nearly 2 percent of GDP, reaching
the smallest as a share of the economy since the 1990s, driven in part by reductions in net U.S.
oil imports. Greece, Italy, Ireland, Portugal and Spain have reversed the trend in their current
account deficits and are currently running small surpluses—although the rebalancing has come at
great cost for their domestic economies.
China has reduced its current account surplus as a share of its economy, but it still has further to
go as a market-determined exchange rate would likely lead to additional adjustment. In addition,
a significant concern is that while China has moved in the direction of rebalancing from external
demand to domestic demand, much of that domestic demand has been increased investment,
particularly in real estate and infrastructure, instead of in the form of higher consumption. The
eventual unwinding of that investment, combined with the persistent high growth in
manufacturing exports, poses a risk of increasing the imbalance.
Germany’s current account surplus exceeds China’s surplus, and indeed it has not declined since
2008 as a share of global GDP. Germany’s outsized surplus is largely attributable to its high
exports beyond the borders of the euro area. Germany has not used this surplus to increase
domestic demand, which could feasibly offset the contraction of demand in the weaker European
economies and insure against a further weakening in the German economy itself.
Treasury’s “Report to Congress on International Economic and Exchange Rate Policies” (October 2014).
16. Ensuring Growth Is Shared: The Role of Inequality
Finally, it is important to remember that growth—even sustainable growth—is not enough. We
must take more steps to ensure that growth is shared. This is particularly a challenge in the
United States and also in Israel—two countries that have significantly greater inequality than the
average OECD economy.
Inequality has increased in a wide range of countries, as shown in Figure 14, including the
United States where the top 1 percent of households now receive nearly 20 percent of national
income while incomes in the middle have stagnated. The growth in technology over the last few
decades has increased the need for an educated work force and has driven up the wage premium
for college education, exacerbating inequality. And all the while, the minimum wage has not
kept pace with inflation; in real terms, the minimum wage has declined by about a fifth since the
early 1980s.
As a result, there is substantial scope for policies that lead to more inclusion, many of which
would also strengthen growth. These include higher minimum wages, stronger labor institutions,
more progressive taxes and investments in education. The goal of promoting shared growth also
has important implications for trade policy on two fronts. First, because export-related jobs pay
higher on average than non-export jobs, we have sought to promote the growth of our exports at
a faster rate than overall global trade growth. Second, trade benefits consumers by reducing the
cost of living, which is of greater relative impact for those on the lower end of the income
Figure  14  
Top 1  Percent  Income  Share
Percent  of  national  income
United  States
5 United  Kingdom
1915 1925 1935 1945 1955 1965 1975 1985 1995 2005
But although inequality is rising within countries, because of large populations and rapid
economic growth in emerging Asian economies, inequality appears to have been stable or
possibly even decreasing when measured at a global level, as shown in Figure 15. Measured at a
global level, the biggest income gains from 1988 to 2008 went to households between
approximately the 15th percentile and the 65th percentile of global income.
17. Hundreds of millions of people have been lifted out of poverty in recent decades, and that is in
many ways the most stunning economic achievement in global history. But the fact that this
improvement is happening at the same time that inequality is rising within countries raises a
serious challenge to the sustainability of the global economic model that helped facilitate these
gains. This paradox suggests that policies to ensure inclusive growth within countries are an
essential complement to growth-promoting policies themselves.
Figure  15  
International  and  Global  Inequality
Gini  Coefficient
74 2011
1986 1991 1996 2001 2006 2011
I have addressed the outlook for the global economy and a number of lessons from the U.S.
experience. But the United States of course, has its challenges too—many of which lie at the
intersection of growth and inequality, manifesting themselves in our long-standing objective of
raising incomes and wages for typical families. President Obama will continue to advocate for a
robust agenda to address these challenges, including investing in physical infrastructure and
human capital, reforming the tax system to make it more competitive, expanding trade around
the world, raising the minimum wage, and fostering conditions for greater innovation. As the
United States seeks to meet its own economic challenges, we look forward to continued
conversations with you all and our counterparts in other nations to promote sustainable and
inclusive economic growth around the world as well.
18. Notes to Figures
Figure 1
Note: Working-age population is defined as those persons 16 to 64 years of age in the United
States, and 15 to 64 elsewhere. In countries where population is estimated on an annual basis,
quarterly interpolations are used. Data as of 2014:Q3 for the United States, 2014:Q2 for all
others. Where recent data on working-age population is unavailable, the working-age share of
the total population is assumed to remain constant from 2013. Horizontal axis is positioned at the
median recent growth rate.
Source: Eurostat; World Bank; national sources; CEA calculations.
Figure 2
Note: Working-age population is defined as those persons 15 to 64 years of age. In countries
where population is estimated on an annual basis, quarterly interpolations are used. Data as of
2014:Q2. Where recent data on working-age population is unavailable, the working-age share of
the total population is assumed to remain constant from 2013. Horizontal axis is positioned at the
median recent growth rate. For countries that did not contract in the global financial crisis,
cumulative growth is calculated since 2008:Q4.
Source: World Bank; national sources; CEA calculations.
Figure 3
Note: The sample of countries includes 30 countries, all those included in Figures 1 and 2 where
sufficient real GDP data is available over the time horizon included in the chart. U.S. recessions
Source: National sources; CEA calculations.
Figure 4
Note: Actual inflation is measured by each economy’s headline index of consumer prices.
Market-implied expectations are forward consumer price inflation rates calculated from the
market prices of inflation swaps. U.S. recessions shaded.
Source: Bloomberg Professional Service; national sources.
Figure 5
Note: Working-age population includes all person 15 to 64 years of age. The projection is
calculated by CEA using growth projections from IMF and population projections from OECD.
Source: Eurostat; IMF; OECD.
Figure 6
Note: Five-year-ahead forecast is for year-over-year growth in 2015 (blue bars) and 2019 (red
Source: International Monetary Fund, World Economic Outlook (April 2010 and October 2014
Figure 7
Note: Data for Russia covers 2001-2010 versus 2011-2012.
Source: The Conference Board, Total Economy Database; CEA calculations.
19. Figure 8
Note: Data through 2013; last data point shows average of 1999-2013.
Source: The Conference Board, Total Economy Database; CEA calculations.
Figure 9
Note: Data for 2014 is based on first 10 months of this year, except for Japan inflation data,
which is based on average for first three months of this year (prior to the tax increase). Japan’s
inflation data is also adjusted for the tax increase in 1997.
Source: National sources via Haver Analytics; CEA calculations.
Figure 10
Note: Red dots represent annual averages for 1929-1935.
Source: CPB World Trade Monitor (data through September 2014); International Trade Statistics
1900-1960, Statistical Office of the United Nations (published May 1962, available at: <  
Figure 11
Note: The World Bank’s published merchandise trade data extends through 2012, while the UN
Conference on Trade and Development provides data on services trade through 2013.
Merchandise trade data for 2013 is projected using monthly data from the CBP World Trade
Monitor. Global GDP and trade is projected for 2014 using the IMF World Economic Outlook.
Source: World Bank, World Development Indicators; United Nations Conference on Trade and
Development; CBP World Trade Monitor (data through September 2014); International
Monetary Fund, World Economic Outlook (October 2014 edition).
Figure 12
Note: GIIPS includes Greece, Ireland, Italy, Portugal and Spain
Source:  National sources via Haver Analytics; CEA calculations.
Figure 13
Source: International Monetary Fund, World Economic Outlook (October 2014 edition); CEA
Figure 14
Source: Facundo Alvaredo, Tony Atkinson, Thomas Piketty and Emmanuel Saez, The World
Top Incomes Database.
Figure 15
Source: Milanovic, Branko. Global Inequality by the Numbers: in History and Now. The World
Bank Development Research Group Poverty and Inequality Team. (published November 2012,
available at: <>).