During yesterday’s Super Bowl, the championship game of American football, viewers witnessed countless numbers of overpowering collisions as powerful running backs repeatedly charged into massive linemen.
So what happens when such unstoppable forces meet correspondingly immovable objects? To quote the legendary McGuire Sisters: Something’s Gotta Give!
Perhaps Herbert Stein, the chairman of the U.S. Council of Economic Advisors during the Nixon and Ford Administrations in the 1970s, was watching a football game when he first conceptualized what we now know as Stein’s Law. Simply put, Stein’s Law states: “If something cannot go on forever, it will stop.”
In other words, those ostensibly unstoppable running backs eventually halted, simply because they couldn’t continue running forever. Today, as we ponder what we might do to address seemingly intractable macro-economic imbalances around the world, it might be helpful to remind ourselves of Stein’s Law.
Balance of Payments … or Lack Thereof
Stein originally formulated his Law to address imbalances in payments between nations. Writing about the trade and budget deficits and surpluses in the United States and Japan, for instance, Stein predicted that they would inevitably lead to counterbalancing fluctuations in currency values, interest rates, and other factors, and that national economies would eventually adjust accordingly. His advice regarding these deficits was thus to simply permit the market to run its course.
Stein is no longer alive to opine on the current deficit imbalances between the United States and China, but his argument would appear to apply to our contemporary situation as cogently as it did to his historical one. At the moment, the government of the United States appears to be willing to continue borrowing limitless amounts of currency from nations like China. And China appears to be willing to continue repressing the value of its currency indefinitely, regardless of its natural value.
How might Stein have advised us to manage this situation? Well, according to Stein’s Law, these expanding debt and currency imbalances will eventually cease growing on their own accord. And the United States and China will inevitably adjust their economic policies accordingly. In other words, Stein might well have advised current policy makers to simply wait for the global economic system to correct its own imbalances.
Deficits Don’t Matter … or Do They?
Stein was thus relatively sanguine about the ability of global markets to adjust to changing circumstances. But what if nations simply refuse to make such adjustments? After all, former Vice President Dick Cheney once asserted that “deficits don’t matter,” thereby signaling that America might continue issuing debt indefinitely. And just this week, China again refused to consider permitting any appreciation of the renminbi against the dollar.
But if America steadfastly refuses to reconsider its debt policy, and if China similarly refuses to reconsider its currency policy, how can Stein be correct? How can the market run its course if the major players ostensibly refuse to permit it to do so?
Stein once explained that “the conditions to which deficit(s) responds may be good or bad, and may be the results of good or bad policy; but if there is a problem, it is in the underlying conditions and not in the deficit per se.” In other words, Stein may well have noted that today’s major players will be forced to modify their policies once global circumstances (i.e. underlying conditions) make any other policies impossible.
Thus, America will eventually stop issuing so much debt – even if it would prefer not to do so – when it can no longer find willing lenders to lend it money. And China will eventually stop repressing the value of its currency so dramatically – again, even if it would prefer to continue doing so – when it can no longer find willing trading partners with whom to engage in transactions. Stein believed that such changes in policy become inevitable once imbalances in payments become unsustainable.
What To Do?
Stein’s Law is simple, isn’t it? So simple, in fact, that it may not be readily apparent how nations like the United States and China can apply it to their own circumstances when addressing contemporary disputes regarding global payment imbalances.
If Stein was still alive to advise these nations, though, he might well have chosen to suggest that “It might be more efficient and effective to stop haranguing other nations to change their policies, and focus instead on preparing for the day when they inevitably do so of their own accord. And while we prepare for that day to arrive, we might even find ways to benefit from the status quo while it lasts.”
Such a “wait and see” approach may not be feasible in addressing global concerns such as global warming, where (if you believe Al Gore’s prognostications) the damage that may be inflicted while we wait for market corrections may be catastrophic in nature. And yet, for many of our macro-economic concerns, a “wait for the inevitable” strategy might indeed be the wisest approach of all.