Unfortunately, no consensus exists on the underlying causes of this crisis or on the best ways to escape from it. The US and UK agree that the excesses of the financial sectors have their roots not just in deregulation, but also in the massive excess supply of surplus countries, of which China, Germany and Japan (with respective current account surpluses of $372bn, $253bn and $211bn in 2007) are the most significant. But China and the continental European countries, led by Germany, argue it is all the fault of profligate deficit countries. Yet China also hopes that the world will soon be able to absorb its excess supply again.
Obama is quoted in the article "G-20's Hidden Issue; A Global Trade Imbalance":
"In some ways, the world has become accustomed to the United States being a voracious consumer market and the engine that drives a lot of economic growth worldwide," Obama said, hinting that this position may not be sustainable. "We're going to have to take into account a whole host of factors that can increase our savings rate and start dealing with our long-term fiscal position as well as our current account deficits."
What does 'dealing with our long-term fiscal position' mean, in this context ? After doling out trillions to the finance sector, it seems to portend austerity and cuts in social programs, especially entitlements. And perhaps a small increase in taxes for the wealthy, so there is the cover of 'shared sacrifice'. In terms of the current account balance, it means renegotiating free trade agreements (as will likely be done with South Korea), as well restoring profitability to Domestic Nonfinancial industries. This restoration looks to be achieved by a mauling of wages, induced by the recession. Countries that have relied on exporting to the United States should expect to deal with a long-term shift in U.S. consumption.
Krugman writes:
The bottom line is that China hasn’t yet faced up to the wrenching changes that will be needed to deal with this global crisis. The same could, of course, be said of the Japanese, the Europeans — and us.
And that failure to face up to new realities is the main reason that, despite some glimmers of good news — the G-20 summit accomplished more than I thought it would — this crisis probably still has years to run.
Can China , in particular, shore up domestic demand when they are not enforcing new minimum wage and labor laws, and trying to preserve low wage export industries ? A possible 'solution', in the medium term, seems to come from China's desire to reform its agricultural sector by making it possible for more productive farmers to own larger tracts of land. This would push a new group of peasants off the land, to serve as a newly exploitable class of labor in the cities. This, in turn, would boost profits and allow for an expansion of the Chinese middle class. But, plans to reform the rural areas of China carry with them explosive possibilities. For now, unemployed migrant workers can return home because they have land to go to. If they don't, it creates the possibility of a large urban and unemployed working class during a recession.
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Related Posts:
Jawboning China to Consume
"Global Imbalances"
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