« Shifting jobs in high-tech | Main | Immigration and competitiveness »
March 1, 2006
Emerging markets and US deficits
There is a general belief in Washington (at least in the economic community) that the solution to the US trade deficit is for other countries to grow faster. This view is exemplified by Robert Samuelson's piece "The Next Big Spenders" in today's Washington Post:
Purchasing power would slowly shift from consumers in Chicago and Denver to those in Shanghai and Sao Paulo. What we call "emerging markets" would increasingly drive the world economy. If this transition occurs -- a big "if" -- everyone would benefit. The U.S. economy would depend less on Americans' spendthrift habits and more on exports and investment.
. . .
For countless reasons, this benign outcome might not materialize: Asian countries might cling to export-led growth; sloppy practices in consumer lending might create large losses (that's already happened in South Korea); and even a slow reduction in U.S. trade deficits might not prevent a currency crisis. But at least there's one plausible path from today's unsustainable trade imbalances to a more stable future.
A major part of this argument is macroeconomic: the trade deficit is a function of America's low savings rate (and therefore high spending rate). Or as Fed Chairman Ben Bernanke once called it (back in 2005 when he was a mere Fed Governor) "the global savings glut."
I agree in part that faster grow in other countries will help the US economy. But I disagree that this growth automatically creates the "soft landing" which avoids a painful currency crisis.
The foreign growth will save us argument is about a shift in consumption patterns. It says nothing about a shift in production. As Samuelson notes,
Their [multinational companies] investments in emerging markets increasingly focus on serving high-wage consumers as opposed to creating low-wage export platforms.
In other words, the production to meet that growing consumer demand in emerging markets may not come from the US -- but from production within those emerging markets themselves. Unless we take steps to improve the competitiveness of US-based production, it won't matter if the consumption is by Americans or people in merging markets -- it will still all come from factories in China and software houses in India.
That is, it won't matter short of a massive currency crisis that turns the US into the low cost producer.
And, as I constantly point out, pure trade in intangibles won't solve the problem either -- not with an unchanging $6 billion surplus compared to a growing $726 billion overall trade deficit.
We need to harness intangibles to make all of our production more competitive. Only them will American-based production and American workers and citizens be able to benefit from the grown wealth and incomes in other countries.
Posted by Ken Jarboe at March 1, 2006 8:28 AM
Trackback Pings
TrackBack URL for this entry:
http://www.athenaalliance.org/mt/mt-tb.cgi/561