♠ Posted by Emmanuel in Bretton Woods Twins,China,Credit Crisis,Development at 1/08/2009 07:52:00 AMDear readers, never let it be said that my blog posts--rants if you're so inclined--are the product of mere creative writing. Making predictions is a tricky business, and I doubt whether people would bother with me if, on the balance, I got far more things wrong than right. It is my sworn duty to report that I again appear to have been vindicated. In mid-November, I estimated the 2009 US deficit to be in the $1.5 trillion range. The Financial Times now reports that the US Congressional Budget Office pegs this figure at $1.2 trillion--before Barack "Trillions in Deficits" Obama's proposed stimulus package (how I abhor that term) which is likely to cost $775B over two years. If so, I actually undershot the mark. I don't call the blog's official parlor game "How Much More Will Sammy the Beggar Owe in 2009?" for nothing. The CBO report is here; the Peterson Foundation has more.
Kindred at the University of North Carolina - Chapel Hill and I have been engaged in an exchange [1, 2, 3] about whether a trade war would be welcome to clear global economic imbalances now fouling up the world economy. Although Kindred is far too polite, I gather he thinks I've gone off the deep end ;-) Let me pull things together here using recent blog posts bearing on the matter. I really should be moving on as I suspect many visitors want more Doraemon and less Dick Cheney. Nevertheless, as this discussion lies at the heart of IPE matters--hegemony, trade, finance, and development, I guess it deserves one more go. In his latest missive, Kindred repeats a line common to those who are sanguine on US deficits: in GDP percentage terms, America's national debt isn't particularly high compared to those of other industrialized countries. Two things: not for long (see large PDF) and that we must be concerned with its absolute size as well. I am aware of America's extraordinary privilege of being able to print its debt denominated in the world's foremost reserve currency. What I am wary about is how the US goes about abusing this privilege and much else.
First off, Obama's promise to inflict trillions of dollars' worth of US debt on the rest of the world is not particularly liberal in the classic sense of the word. Or, for that matter, sustainable. The US will be testing the limits of its ability to count on the kindness of strangers. As I've repeated, the proper response of the rest of the world to this sort of behavior is to tell Sammy to beat it. Isn't depending on other countries to buy low-to-no yielding Treasuries at a considerable loss not a beggar-thy-neighbor strategy, dodgy math aside? As a development scholar, I find it simply appalling that the world's richest country expects LDCs to shoulder its burdens. Make no mistake that there are consequences here. In China's case, there are far more socially productive alternatives to piling on Treasuries. Speaking of education, how about building safer schoolhouses?
Recently, I expressed my dismay at the lack of LDC representation at international institutions. To be sure, the US has outsized influence over these institutions as it was instrumental in their creation. I'm sure all are familiar with American efforts to engage the IMF in currency-bashing shenanigans, though it's unlikely that the IMF will get the ball rolling on this matter. More importantly, I am struck by the change of tone made by the IMF from the Asian financial crisis days to the present. Before, it was all about belt-tightening, austerity measures, structural adjustment, and so forth. That of course was the situation when those erring East Asian LDCs engaged in all sorts of tomfoolery--crony capitalism, fat subsidies, and what else have you.
Nowadays, it seems the Washington Consensus made sense for others afflicted by contagion--but not Washington itself [1, 2]. Instead of structurally adjusting from a consumption- to a production-based economy to help pay for its onerous and quickly growing obligations, the IMF appears to be cheering on excessive US spending to hopefully cure what was caused by too much spending to begin with. I am struck by this interview with current IMF Chief Economist Olivier Blanchard:
IMF Survey online: Some people are questioning the wisdom of taking on new debt when the effect of past stimulus packages has been uneven at best. Aren't countries running a big risk of saddling future generations with massive new debt at the very time when the effects of population aging will hit many developed countries?In other words, the Asian financial crisis was "normal" as it concerned *only* unimportant LDCs, not the United States, so stimulate this and stimulate that is the proper response now in a way it wasn't then. I may not be very bright, but it seems that you cannot inspire discipline by indulging self-destructive behavior.
Blanchard: In normal times, the Fund would indeed be recommending to many countries that they reduce their budget deficit and their public debt. But these are not normal times, and the balance of risks today is very different.
What the IMF is in effect doing is sanctioning subprime globalization via American profligacy--capital flowing uphill and the rest of it. Part of the deal includes zombie industries. Apparently, infant industries for LDCs were incorrect, but pump-priming any number of moribund American ones is just fine. The point of having a trade war with respect to zombie industries is that it would prevent their formation by making the cost of capital for firms and the US government more realistic unlike the current condition in which the latter gets a free pass. That is, both would be high to realistically account for the risks involved in lending to such legendarily profligate entities. At a time when the relevance of international institutions is being questioned, a clear case of IMF lackeyism isn't going to go down too well with LDCs which have borne the brunt of stringent policies in times past. You cannot have a liberal economic order with such stacked institutions that make a virtue out of America's bad example. It's realism, not liberalism, via Thucydides: The strong do what they will, the weak suffer what they must.
Last point--Kindred cautions that many Chinese would lose their jobs due to a trade war. There is good reason why global economic imbalances are called "unsustainable." If manufacturing overcapacity in China is one of its symptoms since the rest of the world cannot absorb what it manufactures, laborers employed under conditions of overcapacity are working on borrowed time. One of the ironic things about China's development has been the world's most populous nation being more capital-intensive than labor-intensive. World Bank research has consistently pointed this out. Shifting to a domestic focus will mean more than simply selling stuff meant for export markets at home given that they are (1) unaffordable to many Chinese and (2) not primarily designed to appeal to domestic markets. Shifting to a domestic focus will mean designing products for Chinese consumption as well as offering more labor-intensive services. Inter alia, think of banks extending currently negligible consumer credit.
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I have not come up with this idea just now. In February of 2008, I said the following about the present subject matter on Martin Wolf's blog. I gather he's well-known among economist types:
Ironically, political protectionism is a more likely path to reducing global imbalances. Witness the sovereign wealth fund backlash as the EU and US vie to create voluntary codes of conduct, which in the event of LDC non-cooperation may lead to punitive measures. Biting the hand that feeds may only serve to deter capital flowing uphill and hasten the process of rebalancing as an unintended consequence.Unintended consequences are a mainstay of liberal thought. Witness the "invisible hand" (I risk a thrashing from Gavin Kennedy). That subprime globalization has not only remained firmly in place but is expanding its reach in a manner damaging to the liberties of ordinary Americans, Chinese, and indeed the rest of us is fairly incontrovertible from my POV. If once-in-a-lifetime dislocations have not gotten rid of these imbalances, what will it take? I wish Kindred were right in saying that a negotiated solution between the US and China is within reach. However, endless strategic economic dialogues and G-20 meetings have failed to produce the desired result.
Moving the main protagonists out of their dead zones on their own accord has proven to be a fruitless enterprise. For everyone's benefit--and I do mean everyone--it's time to cry havoc and unleash the dogs of (trade) war. Ladeez and gentlemen, in the Red(s) corner, weighing in at $2.0 trillion, the heavyweight reserve champion of the world...