On the New York Times Room for Debate, Desmond Lachman responds to the following: If Americans don't start buying a lot of stuff again, can the world economy be saved? What's the global Plan B? These are fundamental questions at the summit of the Group of 20 industrialized and developing nations in Pittsburgh. In previous global downturns, Americans have come to the rescue, getting out their credit cards and buying up what the rest of the world produces. "Our spending is currently equal to the entire economies of China and India added together and then doubled," as Fareed Zakaria has pointed out, representing the single biggest chunk of the world economy. But the American consumption option may not be available anymore and may also not be desirable. Is there another model, like the one outlined by the Nobel Prize-winning economists Joseph Stiglitz and Amartya Sen? Why have consumers in other countries--like China and Germany, which produce far more than they spend--failed to step up to the plate?
Resident Fellow
Desmond Lachman |
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As the G-20 heads of state ponder the policies that might be needed to support the global economic recovery, one consideration should be foremost in their minds. The U.S. consumer, long the world's consumer of first and last resort, is no longer going to be the principal driver of the global economy. This prospect should focus the G-20's attention on the critical issue of finding an alternate source of aggregate demand to keep the global economic recovery on track.
Two considerations would make one think that U.S. household consumption is all but certain to be very weak in the period ahead. The first is that with U.S. unemployment likely to remain at around 10 percent for a protracted period of time, U.S. wage growth is going to be flat at best and could very well decline by the end of 2010. The second is that households are almost certain to continue to increase their savings in reaction to their record levels of indebtedness and to the large losses they have recently suffered on their equity and housing wealth holdings. Trying to save more when income is stagnating could lead to an actual decline in U.S. consumption levels going forward.
Faced with the prospect of a more frugal U.S. consumer, the world economy has to find an alternate source of demand if the global economic recovery is not to peter out. In that context, one has to hope that the world's major surplus countries, like China and Germany, recognize their responsibility to promote household consumption in their own countries to offset the prospective slowing in U.S. consumption. Sadly, if recent history is any guide, one should not expect either the Germans or the Chinese to rise to the occasion and to run policies in the global interest even if they have most to gain from a well-functioning global economy.
Desmond Lachman is a resident fellow at AEI.
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