JUDGMENT CALLS

Robert J. Samuelson

It’s Really a Global Crisis

As Americans save more of their incomes, Asians should save less, and spend more, to generate growth as opposed to exports.

Published Jan 24, 2009

From the magazine issue dated Feb 2, 2009

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We should all want President Obama to succeed in reviving the economy, but that shouldn't obscure the long odds he faces. We need to recognize that we're not grappling with a single economic crisis. We face three separate crises, which are interwoven but which are also distinct and different. The solution to any one of them won't automatically resuscitate the larger economy if the others remain untreated and unchanged.

Here are the three.

FIRST: the collapse of consumer spending. American consumers represent 70 percent of the economy. Traumatized by plunging home values and stock prices—which have shaved at least $7 trillion from personal wealth—they've curbed spending and increased saving. That's led directly to layoffs and higher unemployment. In December, auto and light-truck sales were down 36 percent from a year earlier.

SECOND: the financial crisis. Lending has atrophied, depriving the economy of the credit to finance new factories, homes and costly consumer purchases (cars, appliances). The deepest cuts involve "securitization"—the sale of bonds. Investors have gone on strike. In 2008, the issuance of investment-grade corporate bonds dropped 35 percent, reports Thomson Financial. Bonds backing credit-card loans fell 41 percent, and those backing car loans, 51 percent.

THIRD: the trade crisis. There's a mismatch between national spending and saving patterns. High-saving Asian countries relied on export-led growth that, in turn, required American consumers to spend ever-larger shares of their income. Huge trade imbalances resulted: U.S. deficits, Asian surpluses. But as Americans shift from spending to saving, this pattern is no longer sustainable. Asia is tumbling into recession. China may grow 6 percent or less in 2009, half its 2007 rate.

Overcoming any of these crises alone would be daunting. Together, they're the economic equivalent of a combined triathlon and Tour de France.

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Posted By: martialguy @ 02/07/2009 11:00:24 PM

It is time for Asian countries to encourage government spending, domestic investment, domestic consumption to increase GDP. Doing so also helps stablizing the world income and economy by helping other nations' export; which in turns will ultimately raise all countries' export . United we prosper; divided we falter. China alone has 2000 billions of dollars of foreign reserve
( compared with 70 billions for the US) to do that.

Asian countries are in an advantageous economic position. Proof is below:

Economists use purchase-power-parity adjusted GDP ( Not exchange-rated GDP or nominal GDP) as one realistic indicator to compare national economies. It is simply because a Big Mac (or cost of living for that matter) could cost, for instance, 3 times in NY compared with that in Beijing in a specific currency.

To truly compare three current (2008) largest national GDP, we need to look at several indicators:

Current 2008 Purchase-power-parity adjusted GDP (top 3 countries; in trillions of dollars): US 14 / China 8 / Japan 4.5
(https://www.cia.gov/library/publications/the-world-factbook/rankorder/2001rank.html)

PPP GDP 2013 projection (in trillions of dollars): US 17 / China 14 / Japan 5
( http://en.wikipedia.org/wiki/List_of_countries_by_future_GDP_estimates_(PPP)

Current export (in billions): US 1377 / China 1465 / Japan 777
Current external debt ( in billions): US 12300 / China 400 / Japan 1500
Current foreign reserve ( in billions): US 70/ China 2033/ Japan 954
Stock of money ( in billions): US 1374 / China 2300 / Japan 4370
Current deficit (-) or surplus (+) (in billions): US -568 / China +368 / Japan +188

If we divide by a factor of billion; a more useful comparison goes like this:

The US currently earns $14,000 (projected $17,000 in 2013) and shortfalls $568 a year; owes $12,300; and has $1,374 in the bank
China earns $8,000 (projected $14,000 in 2013) and surpluses $368 a year; owes $400; and has $2,300 in bank
Japan earns $4,500 (projected $5,000 in 2013) and surpluses $188 a year; owes $1,500; and has $4,370 in the bank
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Posted By: severed2009 @ 01/28/2009 2:44:53 PM

Pell Grants to college students enable them to go to school while working less or not at all. By thereby making their work hours available to others, the grants increase the number of available jobs by enabling present workers to withdraw from the labor market. From the standpoint of number of jobs and number of jobseekers, now out of balance, isn't it really the same thing?

If we hired people to computerize the land records of the United States, this would create jobs and be an investment that pays off by decreasing the cost of title searches and title insurance by making title searchers more productive so that some of them would have to find other ways to earn a living after the computerization was up and running (we would hope that during this time the economy would improve so the ex-title searchers would be able to find employment).

If we hired people to paint decorative murals on blank walls, this would create jobs and leave us with perhaps a more attractive environment.

If we hired people to go to school (another way of looking at Pell Grants, I think - please tell me why if it isn't), we would create something for these people to do that would leave the country with a greater supply of workers with more supple minds, knowing more about how to learn and being better at it, and perhaps knowing something (such as preventing bedsores) potential employers (such as hospitals) would be able to use directly. Some people think that the US is setting the stage for its own decline by not making sure that enough investing of this sort is taking place.
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Posted By: Rodger Hardy @ 01/28/2009 12:17:02 AM

True, Pell Grants to college students do not create jobs, but have you considered how many students could join the ranks of the unemployed if forced out of school?