Stephen Roach is almost right. No doubt an avid reader of EconoSpeak, he has come to see that the US has slid into the condition of a bubble economy, and that the post-bubble landscape has the potential to be chronically depressive. His article is constructed around a comparison between the US today and Japan in the wake of its own debubblization. The big difference, of course, is that Japan was and remains a major creditor nation, while the US is storming new depths in external debt.
This matters a lot. Leaving Japan aside for another day, we should note that the broad relationship between US bubbles – stocks, mortgages, creative credit packages, and the currency itself – are ultimately derived from the recycling of dollars exiting the country through the current account deficit. These returning capital inflows purchase assets that support, directly or indirectly, the ability of US consumers to enjoy consumption in excess of production. The moral of the story: the US economy, steadily drawing down its privileges from decades of producing the world’s key currency, is able to maintain otherwise impossible external deficits, and these in turn impose low or even negative savings rates. (For details, read this.)
So Roach has it backwards when he says
Like their counterparts in Japan in the 1990s, American authorities may be deluding themselves into believing they can forestall the endgame of post-bubble adjustments. Government aid is being aimed, mistakenly, at maintaining unsustainably high rates of personal consumption. Yet that’s precisely what got the United States into this mess in the first place — pushing down the savings rate, fostering a huge trade deficit and stretching consumers to take on an untenable amount of debt.
Trying to solve the underlying cause of the current account/bubble dependency problem by allowing consumption to collapse is killing the patient to cure the disease. He then partially contradicts himself and gets it right when he immediately adds
A more effective strategy would be to try to tilt the economy away from consumption and toward exports and long-needed investments in infrastructure.
Investments in infrastructure, need we point out, also support consumption, especially if they are financed by an enlargement of public debt, but they do it the right way.
His other suggestion, a weaker dollar, is reasonable as far as it goes, but it would be an exaggeration to call it a policy. There is no magic wand anyone in the US can wave to make the dollar go down: it requires accommodation from those whose currencies have to rise. Moreover, the problem at the moment is that exchange rate flexibility is grossly uneven and doesn’t correspond to trade flows. Nearly all the burden of adjustment is being placed on the dollar-euro exchange rate. This is a big problem for Europe, particularly since the RMB is tied to the dollar. So the EU racks up an ever-bigger deficit with China: how does this help the US? A dollar initiative has to be multilateral, like the Plaza Accord of old. Failing that, or as an inducement to cooperation, the US can begin to explore unilateral options to manage its current and capital accounts.
Sectoral strategies can also play a big role. Emergency action to reduce oil consumption, and therefore imports, should be high on the agenda. We can dust off perfectly reasonable ideas that were shelved at the end of the 1970’s, beginning of course with much more aggressive fuel economy standards and support for residential insulation. For more particulars see organizations like ACEEE. The general point is that expenditure-switching is ultimately an investment program.
Incidentally, one of the paradoxes of this election season is the vast gulf that separates the economic pronouncements of the candidates from the actual condition of the country. No one is talking in a coherent way at the moment about the toxic stew of external deficits, bubble finance, and sputtering demand. Creative strategies that could link economic solutions to progress on climate change and other social goals are completely out of the picture. Do we expect sensible policies to just descend on us, like spores from outer space, in 2009?