Ray Fair is the John M. Musser Professor of Economics at Yale University and a professor within the Cowles Foundation and the International Center for Finance. Fair received his bachelor’s degree from Fresno State College in 1964 and a doctorate from MIT in 1968 and now focuses on teaching and researching macroeconomic theory, econometrics, and macroeconomic modeling. He has authored several textbooks about macroeconomics, including “Principles of Economics” and is also known for inventing a economic formula that predicts presidential elections. The Group of Twenty (G20) Finance Ministers and Central Bank Governors met in Seoul, South Korea last week to discuss global economic policy, so the News sat down with Fair in his Hillhouse Avenue office on Monday to discuss the economics and politics behind the gathering.
Q Do you think that progress was made at this summit? Did anything significant occur?
A The G20 doesn’t really do anything. They never do anything. They’re not useless. They discuss things, then have some general statement at the end of the conference that really doesn’t mean much. The issues that they’re working on … some people are complaining that the Chinese exchange rates are too low, and then some people are now complaining that the United States is lowering its exchange rates. Bernanke is issuing $600 billion over the next six months, and countries are complaining that Bernanke is trying to lower the value of the dollar. So there’s a big exchange rate fight. For the most part, the fight won’t go anywhere because we’re not going to be able to do much about China. We can’t tell them what to do so they’ll do what they want and they can’t tell us what to do so we’ll do what we want. So, there’s an exchange rate issue.
Q What other issues were discussed?
A Well, the other issue is the trade deficit. Some people in the United States complain that Germany and China, in particular, are running big surpluses and they don’t like that we’re running big deficits. So some are saying that maybe some countries should run smaller surpluses and we should run smaller deficits. A country like Germany has a lot of exports relative to its imports. The more output they produce and export, the higher their GDP, or gross domestic output.
Q And gross domestic product measures an economy by looking at the total monetary value of goods and services produced domestically?
A Yes. Now the US is the opposite; we import a lot more than we export. So a lot of these goods that we’re importing, if we instead produce them ourselves rather than import them from China, then we’ll have more GDP. So that’s the issue. Whether there should be a U.S. embargo through some sort of limit on trade surplus.
Q Do you think that countries will become more protectionist given this economic climate?
A Sometimes, Congress threatens to put tariffs on China’s goods, through what we call protectionist measures. It’s a big deal to do that and that would be a big response to China if they did that, but I think it’s highly unlikely that they will.
Q So do you think that we will begin to make our own products then? Or is that just all talk?
A No. The U.S. government can’t dictate to the private sector what it will make. There isn’t much you can do about that. We have a very low savings rate so that translates to buying more stuff and the government is deliberating on how we’re going to change people’s saving rates. And the Germans, in particular, save a lot more so they run more surpluses. They are saving and not consuming as much, themselves, and they export to us. We are not saving as much. The U.S. government itself is not saving either. And that’s where we get the deficit.
Q The budget deficit occurs when the government’s spending exceeds its income over a particular period of time?
A Yes, and that is certainly more important moving forward. The problems discussed at the G20 are really small and irrelevant to the two big problems the U.S. faces – high unemployment and a looming budget deficit.
Q Are these two problems related?
A Yes. If we stimulate the economy and spend money now, it hurts the deficit. Going forward, it’s a serious problem that we need to solve.
Correction: November 18, 2010
An earlier version of this article misrepresented economics professor Ray Fair’s opinion on the Group of 20 meeting. While the article stated Fair said the G20 was “not useful,” he, in fact, said the meeting was “not useless.”