Fiscal Consolidation, Depreciation, and Recovery

Transcription

1 FiscalConsolidation,Depreciation,andRecovery JoyA.Buchanan,StevenGjerstad,andVernonL.Smith TheU.S.economyisstuckinapainfullyslowrecovery.Neithertheaccommodativemonetary policy nor the fiscal stimulus has catalyzed a strong recovery.in this article we examine comparable financial crises and balance sheet recessions in other countries. We present evidencethatfiscalconsolidationinothercountrieshastriggeredexchangeratedepreciation, andthatdepreciationhasgeneratedexportgrowththatfillsthevoidleftwhenaboominfixed investment suchasresidentialandcommercialrealestate collapses. Theusualimpactofmonetarypolicy In a recent article in The American Interest we examined the usual impact of monetary policy. 1 Inthatarticleweshowedthat,undernormalcircumstances,monetarypolicyhasits sharpestimpactonoutputofresidentialstructuresandconsumerdurablegoods.thereason that monetary policy works most prominently through these channels isn t too surprising. When the Federal Reserve increases its purchases of shortterm Treasury securities, that pushestheirpriceup,loweringshortterminterestrates.thishastwoeffectsondepository institutions.it brings down their cost of funds: since Treasury bills a close substitute for demandandtimedeposits havealowyield,bankscanpayalowinterestrateandstillattract deposits.atthesametime,mortgageandotherinterestratesfallmuchmoreslowly,soopen marketpurchasesbythefederalreservewidenthegapbetweenthelendingandborrowing ratesofdepositoryinstitutions.consequently,openmarketpurchasesbythefederalreserve encourage lending, primarily to households and to small businesses who rely on financial intermediariesforaccesstocredit. 2 Whenmortgagelendingincreases,thatimmediatelyleads to sales of new homes, which in turn leads to construction of new homes to replenish the inventorythatwasdepletedduringtherecession. InterdisciplinaryCenterforEconomicScience,4400UniversityDrive,MSN1B2,Fairfax,VA22030 EconomicScienceInstitute,ChapmanUniversity,OneUniversityDrive,Orange,CA See UnderwaterRecession inthemay/juneissueoftheamericaninterest,pp Whilehouseholdsandsmallbusinessesrelyonfinancialintermediaries,largecorporationstypicallyhaveaccess to corporate bond markets especially for their longterm financing requirements.consequently they are less affectedbyshiftsinmonetarypolicythatprimarilyaffecttheincentiveoffinancialintermediariestolend. 1

2 Limitationsofmonetaryandfiscalpolicyinabalancesheetrecession The accommodative Federal Reserve monetary policy in 2008 combined with the bank bailoutsprobablypreventedacollapseofthefinancialsystemliketheonethatoccurredinthe GreatDepression.Tothatextentthemonetarystimulushasbeenasuccess.Butithasnot generatedarobustrecovery.sincemonetarypolicytypicallyhasitsmostpronouncedeffecton construction of new homes and purchases of consumer durable goods, and since these are both unresponsive now due to households excessive debt burdens and concerns about the prospect of further house price declines, monetary accommodation is unlikely to generate a quickrecovery,inspiteofitsmagnitude.otherdirectevidencereinforcesthisview.lending andeconomicperformancechangedlittlewhenthefederalreserveembarkedonitssecond quantitativeeasingprogram(qe2).betweennovember17,2010andjuly6,2011thefederal ReserveincreaseditsholdingsofU.S.Treasurysecuritiesby$750.9billion. 3 We vearguedthat inpastrecessions,whenthefederalreservedrivesdownshortterminterestrates,bankshave anincentivetolend.butduringthe7½monthsofqe2,totallendingofcommercialbanksin theu.s.declinedfrom$6.92trillionto$6.56trillion. 4 If,asweargued,itisthegapbetween lendingratesandfundingcoststhatcreatetheincentivetolend,thenthelackofresponseto QE2isunderstandable:whateverproblemsrestrainedlendingbeforeQE2remainedduringthe QE2program,becausetheQE2programonlydrovetheyieldonshorttermTreasurydebtdown from0.2%to0.1%.althoughit spossiblethatbanklendingwouldhavefallenmorewithout the QE2 program, its ineffectiveness strongly suggests that monetary policy alone cannot rekindleinvestmentandgrowthinthecurrentenvironment. Neither fiscal stimulus nor exceptionally easy monetary policy has been effective in generatingarobustrecovery.webelievethispoorperformancerelatesdirectlytothesevere householdandbankbalancesheetdamagecausedbythehousingboomandbust.untilthat damageisrepairedweareunlikelytoseerobusteconomicgrowth.thechallengethenisto determine what course of action promotes balance sheet repair.our examination of past financial crises indicates that fiscal consolidation has triggered exchange rate depreciation in othercountries,anddepreciationhasledtostrongrecoveriesbasedonexportgrowth. FinancialInflowsandDepreciation In all of the economies we ve examined that experienced a boom and collapse, with a financial crisis precipitated by the collapse, a rapid increase in fixed investment has been a 3 WecalculateTreasurysecurityacquisitionbytheFederalReservefromthedifferencebetweenline3inTable1 ofthejuly7,2011andthenov.18,2010h.4.1releasesfromthefederalreserve. 4 Thefiguresonbanklendingcomefromline9onpage2oftheH.8releasefromtheFederalReserve. 2

3 significantelementoftheboom. 5 Inmostofthesecases,substantialsupportfortheboomhas come from foreign investment.during a boom, most financial inflows find their way into privateinvestmentsbyeitherhouseholdsorfirms.afterafixedinvestmentboomcollapses, the demand for private investment instruments (such as mortgagebacked securities) diminishessharply.ifthesupplyofpublicinvestmentinstruments(i.e.,sovereigndebt)also declines,therearefewinstrumentsthatforeigninvestorscanobtainfromacountrythathas beenrunningacurrentaccountdeficit.thisnecessitatesachange.ifforeigninvestorsdon t find appealing investment instruments, then financial inflows will cease or even switch direction.theimmediateeffectofthereducedforeigndemandforinvestmentinstrumentsisa decline in the exchange rate. This currency depreciation immediately reduces the price of exportsandraisesthepriceofimports;exportersexpandoutputinresponsetothesurgein profit margins. Hence, the reversal of financial and capital account flows translate into a reversalofthecurrentaccountdeficit.andtheshifttowardexportsalsoaddstototaloutput andgeneratesanaddedincomestreamforexportorientedfirms,fortheirsuppliers,andfor thelabormarket. FiscalConsolidation,DepreciationandRecoveryinFinland,Thailand,andIceland ThecourseoftheFinnish,Thai,andIcelandiccollapsesandtheirfinancialcrisesweresimilar inmanywaystoourownexperience,althoughallhadmuchmoreseveredownturnsthatours. In the U.S., from peak to trough, GDP fell 5.1% in the recent recession.in Finland GDP fell 12.6%,inThailandthedeclinewas16.0%,andGDPfell14.3%inIceland. Inmostofthecountriesthatwe veexamined,theboom,collapse,andrecoveryfolloweda similarpath.ineach,muchofthegrowthwasinfixedinvestmentsfinancedlargelybyforeign investment.whenthereturnontheseinvestmentsgrewuncertain,foreigninvestmentslowed andthenreversedsuddenlycausingafinancialcrisis.inalloftheseeconomies,thecollapseof fixedinvestmentwassimilarinmagnitudetothetotaldeclineineconomicoutput.bythetime thattheseeconomieshadrecoveredtothelevelofoutputthattheyfirstattainedbeforethe collapse,thedeclineoffixedinvestmentswasalmostentirelycompensatedforbyanincrease in net exports.in other words, the economy had reoriented itself from a boom in fixed investmentstoanemphasisonexportledgrowth. In addition to the depth of the collapses of fixed investments in these economies, the durations of the fixed investment collapses were remarkable.in Finland, fixed investment peakedinthelastquarterof1989andfell52.5%overthenextfouryears;itwas17½years beforefixedinvestmentreacheditsprecrisislevelagain.inthailand,fixedinvestmentpeaked 5 Fixed investments are primarily residential and commercial structures and firms investments in plants and equipment. 3

4 15yearsago(inthefourthquarterof1996)andthenfell58.9%overthenexttwoyears;real fixedinvestmentwasstill15.7%belowthatpeaklevelinthefourthquarterof2011.iniceland, fixedinvestmentfell78.2%fromitspeakinthefourthquarterof2006toitstroughinthefirst quarter of 2009.In the fourth quarter of 2011, real fixed investment in Iceland was 59.1% belowitspeaklevel.intheu.s.,nonresidentialfixedinvestmentplusinvestmentinresidential structuresfell32.5%betweenitspeakinthefirstquarterof2006anditstroughinthefourth quarter of 2009; it now stands 23.4% below its peak level.in all of these economies, for a recoverysomethingneedstopickuptheslackfromthesteepdeclinesinfixedinvestment. We veseencommonpatternsinfinland,thailand,andiceland.ineachofthesecountries, whenfixedinvestmentcollapsed,economicoutputcontractedsharply.butinallthreecases, capitalinflowsandthecurrentaccountdeficitcontinueduntilgovernmentexpenditureswere curtailed;oncegovernmentexpendituresfell,neithertheprivatesectornorthepublicsector couldabsorbcapitalinflowsfromabroad.internationalcapitalinflowsreverseddirection,their currenciesdepreciatedsharply,andnetexportsgrewrapidly. Following depreciation, when exports rapidly increase (and typically overtake imports as they did in Finland, Thailand, and Iceland), that addresses several problems. First, a current accountsurplusreplacesthenetcapitalinflowsthatexistedwhenthecountrywasrunninga currentaccountdeficit.thatis,theincomestreamgeneratedwhenexportsexceedimportsisa form of capital formation that can replace the financial inflows from abroad that prevailed before depreciation and the current account reversal.second, the capital formation that results from a reversal of the current account can be used to repay the foreign debts accumulated during the period of current account deficits; far from beggaring their neighbors,theyarepayingthemback.third,exportproductionbecomesasourceofgrowthin placeofthegrowthoffixedinvestmentsthatissocommonduringaboom.finally,byraising thecostofimportsandallowingforpriceincreasesinthedomesticproductsthatcompetewith importedgoods,depreciationcreatestheinflationarypressurethatdomesticmonetarypolicy wasimpotenttocreate,andtypicallyovercomesthedeflationarypressurethatissocommonly apartofthecollapseofaninvestmentboom.theseforcesbeginmendingdamagedbalance sheetsbyreducingdebtloadrelativetoassetvalue,andrebuildingequity. The fixed investment declines in Finland, Thailand, and Iceland were extremely deep, yet growthratesduringtherecoveryperiodsinthosecountrieshavebeenconsiderablyhigherthan in the U.S. since the second quarter of 2009.The annual growth rate in the U.S. in the ten quarterssincethebottomoftherecessionhasbeen2.4%.infinland,theannualgrowthrate overthefirsttenquartersaftertherecessionwas3.4%,andinthailanditwas5.0%.icelandis only6quartersintoitsrecoverybutitsgrowthrateoverthatperiodhasbeen5.5%peryear. Ourargumentisthatexportdrivengrowthisthemosteffectivecoursewhenthecollapseofa 4

5 fixed investment boom leads to losses on assets, a financial crisis, a severe downturn and damagedbalancesheets. TheFinnishCrisis TheFinnishcrisiswasprecededbyalongperiodwithahighleveloffixedinvestmentthat increased until it peaked at 30.4% of GDP.Fixed investment began to collapse in the first quarterof1990.bythetimeofthebankingcrisisinthefallof1991,fixedinvestmenthadfallen nearly 30%.For several years before the financial crisis and the balanceofpayments crisis, exportsinfinlandhadbeenfallingwhilecapitalinflowshadbeenrising.inatypicalpattern, some foreign investors must have detected the decline in exports, because capital inflows diminished before the crisis.government expenditures continued to rise rapidly during the first six quarters of the downturn, but after the financial crisis, government expenditures leveledoffinthelastquarterof1991andbegantofallearlyin1992.thefiscalconsolidation contributed to the sharp depreciation of the Finnish markka between August of 1992 and Februaryof1993.Exports,whichhadbeenfluctuatinginanarrowrangearound25%ofthe Finnish economy since the last quarter of 1985, began to surge immediately after the depreciationofthemarkka,reaching35%offinnishoutputtwoyearsafterthedepreciation began. In a pattern that we ve seen following financial crises in many countries, when governmentexpenditureswerecurtailed,thecurrencydepreciatedsharplyandthegrowthrate ofexportsmovedsharplyaheadofthegrowthrateofimports.thereductiontogovernment expenditurescameatthemiddleofthedepression,butevenafterthedepressionendedthere wasamodestdeclineingovernmentexpendituresthatcontinueduntiltherecoverywaswell underway. Soon after government expenditures began to fall, the value of the Finnish markka fell 33.3%.Bythetimethatthesharpdepreciationended,agaphadalreadyopenedupbetween exportsandimports.thatgapgrewovertimeandbytheendof1993finlandhadentereda currentaccountsurplus.(thefactthatnetexportswerealmost4%ofgdpinthethirdquarter of1993andthecurrentaccountwasstillnegativeindicatesthatservicecostsonexternaldebt werelargeinfinlandafterthelargecapitalinflowsinthe1980s.) Whentheeconomiccyclepeakedinthefirstquarterof1990,Finnishexportswere22.4%of GDP.BythetimethatGDPrecoveredtoitspeaklevelinthefourthquarterof1996,exports hadreached37.5%ofgdp.duringthesameperiodimportswentfrom23.1%ofgdpto31.1% of GDP. Precrisis, during the period when the current account is negative, imports typically growfasterthanexports.postcrisisthatreverses.thereversalappearstobepartofanatural process in which external creditors recognize that capital flows are out of balance and their 5

6 investments might not perform well. When the currency depreciates excessive inflows of capitaldeclineandeventuallyreverse. Figure1:TheFinnishdepressionin ThetoppanelofthegraphshowsGDPineach quarterfrom1986to1997relativetoitslevelatthepeakoftheeconomiccycleinq11990.for example,gdpwas10.5%lowerinq21987thanitwasinq11990;itwas9.8%lowerinq31991 thanitwasinq11990.theotherthreeseriesareinterpretedsimilarly.thefinnishdownturn wasnearly2½t timesasdeepastheu.s.downturnandtheirfixedinvestmentcollapse,at14.4% ofgdp,wassubstantiallylargerthanthemaximumfixedinvestmentdeclineof4.9% %ofgdpin theu.s. The fundamental dislocation during the crisis and depression was a collapse of fixed investment; the recovery consisted primarily in filling the gap from the reduction to fixed investment with export growth. Fixed investment was 29.7% of the Finnish economy at the 6

7 peakoftheeconomiccycleinthefirstquarterof1990.whenthepeaklevelofgdpwasfirst reached again in the fourth quarter of 1996, fixed investment was 18.2% of GDP. Exports increased by 15.1% of GDP over that period, while imports increased by 8.0% of GDP.Net exportsincreasedby7.1%ofgdpoverthatperiodwhilefixedinvestmentdeclinedby11.5%of GDP.Toalargeextenttherecoveryconsistedofashiftfromfixedinvestmenttoproductionfor exporttotherestoftheworld. One frequent objection to depreciation is that it will set off a series of competitive devaluations that essentially constitute a zerosum game in which countries in succession followabeggarthyneighborstrategy,takingexportmarketshareawayfromothercountries. ButthisisnotwhathappenedinFinland:importsintoFinlandrosealongwithexportsafterthe depreciationofthemarkka.intheeightyearsprecedingdevaluation,realimportsinfinland grew 4.1% (only 0.5% per year); in the first four years after depreciation real imports grew 38.2%(8.4%peryear)andinthefirsteightyearsafterdepreciationtheygrew73.2%(7.1%per year).inmostoftheotherseriousdownturnsthatwe veexamined,includingthailand,korea, Malaysia, Argentina, and Mexico, imports have increased as a percentage of GDP following depreciation, so this objection to depreciation does not have empirical support in the crisis countriesthatwehaveevaluated. TheThaiCrisis AsintheU.S.overthedecadefrom1997to2006,Thailandwentthroughalongperiodof largecurrentaccountdeficits.asintheu.s.,asinvestmentgrewandcurrentaccountdeficits accumulated,investorseventuallygrewskittishandwithdrew.thecollapsesofconstruction andfixedinvestmentwereverypronouncedandappearedevenbeforethefinancialcrisisand the balanceofpayments crisis. After asset values fell and international financial inflows ceased, the financial crisis developed and International Monetary Fund (IMF) assistance was sought.loanfundsfromtheimfwereprovidedwiththestipulationthatgovernmentfinances remain on a solid foundation.restricted access to foreign capital meant that capital was scarce,andthatareversalofthecurrentaccountfromdeficittosurpluswastheonlywayto improveliquidity. By midaugust, about six weeks after the collapse of the baht, the government had implemented tax increases and finalized spending cuts as the first steps in its fiscal consolidationplan.bythetimeofthatthefiscalconsolidationprogramwasundertaken,the bahthadfallenfrom25tothedollartoabout32tothedollar.overthenextfivemonths,itfell to about 52 to the dollar before improving over the course of 1998 and settling in a range around 40 to the dollar. We ve described linkages from fiscal consolidation to currency 7

8 depreciation,andfromdepreciationtoashifttowardexportledgrowthinfinland.inthailand thesamesequenceplayedout. Reversal of the current account deficit came quickly after depreciation in Thailand; the improvementwasextremelyrapidatfirstandthensubsided.asinfinlandinseptember,1991, inicelandinoctober,2008(andintheu.s.inseptember,2008forthatmatter),thefinancial crisiscameinthemiddleofthedownturn.asinfinlandandiceland,financialinflows were seriouslyimpededduringthecrisis,andrapidcurrencydepreciationresulted.theimpactof thisontheexportsectorwasalmostimmediate. Figure2:TheThaidepressionof Theinterpretationofthedataseriesinthetoppanel isthesameasinfigure1.thethaidownturnwasdeep,butthequickrecoveryoftheircurrent accountfacilitatedbalancesheetrepair.thelackofforeigncapitalinvestmentafterthecrisis forceddevaluationonthailandbecausethatwastheonlywaytoobtainneededfunds. 8

9 If we examine the changes in output from the peak of the economic cycle in the third quarterof1996tooutputwhentheeconomyreacheditspeakoutputlevelagaininthethird quarterof2002,wefindthat,asinfinland,thedeclineinfixedinvestmentaccountedformost of the fall in output, and the increase in net exports accounted for most of the recovery of output. Fromthepeakoftheeconomiccycleinthethirdquarterof1996untilthatpeakoutputlevel wasfinallyreachedagaininthefirstquarterof2002,fixedinvestmentfellfrom39.6%ofgdp to23.0%ofgdp.duringthesameperiod,exportswentfrom37.8%ofgdpto61.7%ofgdp, andimportsincreasedfrom43.7%ofgdpto54.3%ofgdp.asinthefinnishdepression,fixed investmentfellsubstantiallyasaproportionofgdp,andnetexportsmadeupformuchofthe decline.inthailandthedeclineinfixedinvestmentwas16.6%ofgdpandtheincreaseinnet exportswas13.3%ofgdp.clearlyitwasnetexportsthatmadeupformostofthedeclinein fixed investment.moreover, as in Finland, in Thailand depreciation led to an increase in imports.betweenthepeakoftheeconomiccycleinthethirdquarterof1996andtherecovery tothepeakinthefirstquarterof2002,thaiimportsgrewfrom43.7%ofgdpto54.3%ofgdp. TheIcelandicCrisis The Icelandic crisis was preceded by several years of extraordinary capital inflows.at its maximum,thegapbetweenimportsandexportsreached22.0%ofgdpinthefourthquarterof These capital inflows supported equally extraordinary growth of fixed investment. Betweenthefirstquarterof2002andthefourthquarterof2006,thegrowthrateofprivate fixedinvestmentinicelandwas31.3%peryear.forperspective,growthoffixedinvestment exceededtotalgrowthoftheicelandiceconomyduringthatperiod.whenthefixedinvestment bubble burst, the collapse was even faster than the expansion had been real private fixed capitalformationfell78.3%inonly9quarters anditfelltoalevelbelowitslevelwhenthe rapidexpansionbegan. Therapidexpansionoffixedinvestmentwasfueledbythelargeincreaseinthedepositsin the Icelandic banking system.according to the Central Bank of Iceland, the liabilities of the IcelandicBankingsystemreached12.9timesGDPontheeveofthefinancialcrisis.TheU.S.has a large banking system, but the liabilities of our financialsector in the third quarter of 2008 whenthefinancialcrisisstruckwere1.18timesgdp. Soon after the financial crisis entered its final stage in the U.S., conditions deteriorated sharplyiniceland.theassetsoftheicelandicbankingsystemwereilliquidandtheirvaluefell sharplyinthelastquarterof2008.icelandturnedtotheimfforloans,andtheimfrequired fiscalconsolidationasaconditionoftheloans.thekronabegantodepreciatejustbeforefiscal consolidationwasundertaken,andicelandicexportsquicklyovertookimports.asinfinland 9

10 andthailand,theimprovementinnetexportshasbeenthemajorcontributortotherecovery up to this point.over the five years since fixed investment peaked in the fourth quarter of 2006,privatefixedinvestmenthasfallenfrom35.5% ofgdpto11.1%ofgdp adeclineof 24.4%ofGDP.Inthatsameperiod,exportshaveincreasedby22.7%ofGDPandimportshave fallenby4.8%ofgdp,sonetexportshaveincreasedby27.5%ofgdp.inonlysevenquartres of recovery, the Icelandic economy has now recovered 62.2% of the total decline in output suffered during the depression. The improvement in net exports can account for the entire recoveryoficelandicoutputtoalevelthatitfirstattainedjustfourquartersbeforethepeakof theeconomiccycle. Figure3:TheIcelandicdepressionof Theinterpretationofthedataseriesinthetop panelisthesameasinfigure1.theicelandicdepressionwasnearly2¾timesasdeepasthe U.S.downturnandtheirfixedinvestmentcollapse,at24.4%ofGDP,was5timeslargerthanthe maximumfixed investmentdeclineof4.9% %ofgdpintheu.s.nevertheless,theirgrowthrate duringtheirrecoveryhasexceededthegrowthrateintheu.s.sinceourrecoverybegan. 10

11 Conclusions When households and banks suffer from pronounced and widespread balance sheet damage, the economy's response to both monetary and fiscal stimulus is severely muted comparedwithwhatwouldnormallybeexpectedifthehouseholdandbankequitypositions werestrong.theexperienceofothercountriesstronglysuggeststhatinthesecircumstances fiscalconsolidationtriggersamechanism currencydepreciation thatsupportsrecoveryof aggregateoutput. Thefiscalconsolidationcurrencydepreciationmechanismisremarkable 6 ;itoffersasubtle endrunaroundthefailureofmonetaryeasetostimulatethesupplyofcredittohouseholdsfor theirpurchasesofhousinganddurablegoodsviathenormalrouteofincreasinglenders profit margins on loans.the effect of depreciation is to immediately increase the solvency and improvethebalancesheetsinexportrelatedindustries.itwillalsotendtobeinflationaryand this serves to initiate a mechanism for reducing the burden of debt and improving balance sheetsgenerallyintheeconomy. AlthoughtheexportincreasesinFinland,Thailand,andIcelandwereverylarge,comparable increasesarenotrequiredintheu.s.foratleasttworeasons.infinland,fixedinvestmentfell from30.4%ofgdpjustbeforethepeakoftheireconomiccycletoonly16.0%fouryearslater. IntheU.S., fixedinvestment(includingresidentialconstruction)fellfromapeakof15.0% of GDP to 10.1% of GDP.The fixed investment decline in Finland was over 2¾ times as large relativetogdpasitwasintheu.s.inthefourthquarterof2011,investmentintheu.s.is $435.6billionbelowitspeaklevel.InFinlandmostoftheadjustmenttooktheformofashift from fixed investment toward a greater emphasis on exports.for the U.S. to replace that investmentgapwithexports,wewouldneedtoseeanincreaseinexportsfrom13.8%ofgdp to17.1%ofgdp.anincreaseinexportsofthismagnitudeisfeasible.infact,suchanincrease wouldstillleaveuswithasmalltradedeficit.eveniftheeffectisnotthatlarge,itwouldwork therightdirection,aidingrecovery. FiscalstimulusmaypartiallypropupGDPintheshortrun,butitextendsacurrentaccount deficitfromtheprecrashperiodintothepostcrashperiod,pushingupthevalueofthedollar, makingourexportslesscompetitiveonworldmarkets.we veshownthreecountriesthatall cuttheirgovernmentexpendituresandquicklyexperiencedasharpdepreciation,rapidexport growth, and then a robust recovery. All three of these countries experienced a reduction in fixedinvestmentduringtheircrashthatwasmuchmoreseverethanourown.inoneofthese cases,finland,ittook17½yearsbeforerealfixedinvestmentrecoveredtoitsprecrisislevel; 6 Wesawitsoppositeoccurintheaftermathofthestimulusof20089whichusheredinanincreaseintheUS currentaccountdeficit,andworkedagainstanincreaseindomesticproductionandemployment. 11

12 even after it had recovered, fixed investment remained a much smaller part of the economy.atthepeakoftheinvestmentboominthelastquarterof1989fixedinvestmentwas 30.4%oftheFinnisheconomy;inthesecondquarterof2011twentyoneandahalfyearsafter the collapse began it was 19.0% of their economy. Two decades after the collapse fixed investmenthasnotrecoveredtherolethatithadinthefinnisheconomybeforethecollapse, andprobablyneverwill.proponentsoffiscalstimulussuggestthatgovernmentexpenditures shouldfillthegapfromdecliningprivateinvestment,butthisisanenormousgaptofill,and pastexperiencesuggeststhatitwouldneedtobefilledforalongtime.nogovernmentcould persistinsuchaprogramandremainsolvent,noristhereanyneedtodoso.thegrowthand recoveryinfinland,asinthailandandiceland,cameinnetexports.fortunatelyfortheu.s., wehadamuchsmallerdeclineinfixedinvestment,from15.0%ofgdpto10.1%ofgdp,sowe needamuchsmallerincreaseinexportstocompensatefortheinvestmentdecline.butthereis goodreasontobelievethatwe llneedthegrowthinexportstocompensateforthedeclinein fixedinvestment:intheyearandahalfsincefixedinvestmentbottomedoutat10.1%ofgdp,it hasonlyrisento11.1%ofgdp.we veonlyrecoveredonefifthofthewaytothepeakoffixed investmentwhenitreached15.0%ofgdpfiveandahalfyearsago.basedonourownslow recovery,andonthedecadeandahalfthatithastakenothercountriestoregaindeclinesin fixedinvestmentafterfixedinvestmentboomsend,itseemsclearthatsomethingelseneedsto fillthegap:exportledgrowthhasfilledthatroleinalloftheothercomparablecrashesthat we veexamined. 12