Tiptoe Through the Rebalancing Mine Field

The Economist has advice for the U.S., China, and Europe on how to achieve rebalancing, with the U.S. budget deficit high on the list of places to start.  This complements Greenspan's remarks and concerns on deficits and on rebalancing both internally and externally.  However, Greenspan expresses more concern than this article over the risks of the rebalancing process and the title of this post was chosen to emphasize the risks that rebalancing brings about:

Rebalancing Act: How to tame the thrift shift, The Economist: If the first step towards finding a solution is to agree on the problem, the world's policymakers are still a long way from solving the global imbalances. European politicians blame American profligacy, urging Mr Bush's government to cut its budget deficit. Chinese politicians echo those sentiments. Yet for American lawmakers on Capitol Hill, there is only one villain: China and its undervalued currency. The analysis in the White House is more sophisticated, but still tends to Mr Bernanke's view that America's current-account deficit is not “made in the USA”. ... All of this misses the bigger picture. The current pattern of global imbalances is the result both of thrift shifts abroad and of American actions. ... America's current rate of borrowing is excessive. Despite the advantages of having the world's reserve currency, an enviable rate of productivity growth and the world's most liquid capital markets, America cannot continue to borrow at an accelerating pace forever. More important, ... Most of that foreign money is going into consumption and housing rather than boosting investment in productive American assets. Building houses does not raise long-term economic growth in the way that equipping a factory does. And the current rate of consumption, fuelled by housing wealth, leaves many indebted consumers at risk... Unfortunately, there is little sign that anything will change very quickly...

What, then, needs to be done? For a start, recognise who has to be involved. Given the size of their saving surpluses, oil-exporting countries should be at the centre of the discussion. Yet they are rarely even invited to G8 summits and other global policy pow-wows. The rich countries have understood the importance of including China in their gatherings. ... But when politicians are discussing global imbalances, they will have to broaden the guest list further. More important, their “to do” list needs to be revised. Reducing China's saving surplus is about more than simply calling for a stronger yuan. It means creating the conditions that encourage more efficient investment and reduce the need to save quite so much. That requires more emphasis on corporate and financial reform ... It also means persuading China's government to spend more on social safety nets. ... Higher public spending—on hospitals, schools and helping the poor—will itself reduce China's national saving rate, and creating better health, education and pension systems will reduce the incentive to save so much. Japan's example suggests that there is no particular Asian propensity for thrift... Europe, too, would do well to adopt ... policy stimulus. The European Central Bank remains too reluctant to cut interest rates. Europe does not need, and cannot afford, a fiscal binge of American proportions, but the recent lesson from Japan is that if economies stagnate, government debts spiral.

If the rest of the world could do with a less puritan take on thrift, America needs to be reminded of its virtues. ... less government borrowing is still the most certain route to higher national saving. ... Convincing the American people to save more is trickier. ... There are plenty of reasons for America to carry on borrowing from abroad. It has better demographic prospects than the rest of the rich world, and indeed than many Asian emerging markets. It has nimble and productive firms. ... But the present deficit is excessive and dangerous. Left alone, it could end in a global recession, rampant protectionism, and even a disastrous financial crash. That is why policymakers need to act soon. With his “saving glut” speech, Mr Bernanke focused attention on the scale of the global thrift shift. Now, as one of Mr Bush's top economic advisers, he should persuade his boss of the importance of making the thrift shift safe.

[Note: The original article has a different picture.]

UPDATE:  Guest blogger Menzie Chinn discusses current account deficits at Econbrowser. 

Comments

[calmo]

You win the photo contest by a mile Mark.
I find the Economist article fair and balanced, --ie politically conservative and mainstream. (I identify the author of the article as the donkey immediately.)
Those who can entertain Bernanke's view of the matter as a case of the world's savings glut for even a second, need their behinds spanked good and hard.
Can I find enough tolerance to go back and find something in this article that might resurrect it?
Maybe: " Convincing the American people to save more is trickier." If only I could detect some sardonic humor here in this otherwise earnest article.
Let's take a flying leap at it:
Consume less. Pass on the 'super-size-it'. Pass on the immediate gratification. Give the Stuff a break so we don't all end up like that poor donkey.

[Lord]

Building houses does not raise long-term economic growth in the way that equipping a factory does.

This may no longer be true. Building houses creates a large demand for services which can mostly only be satisfied locally. Providing such services produces a locally based service economy. There is little that can be exported, but housing stores value and prevents it from being exported except as debt. Some high end services are exportable to pay for imports, but manufacturing is increasing looking like a low to no margin business in the future.

[calmo]

"Building houses creates a large demand for services..."
Outside of certain well-publicized disaster zones, what do you have in mind here?
It's not that these houses need continuous servicing to remain functional. The new houses require less servicing than the older stock. It's not that building the new houses require more local labor: labor productivity gains can be demonstrated in the industry. Fewer construction hours/square foot in that new house.

Maybe the line is that in lieu of manufacturing, folks have turned to manicuring, a little recognized service industry that cannot be shipped overseas.
This explains why California has more nail-polishers than any other state. With 1.4 annual sales per real estate agent, they have time on their hands so why not get even more accomplished with yet another service/skill?
Last thing: I will take this to my beautician for a consult on the presence of sarcasm:
"There is little that can be exported, but housing stores value and prevents it from being exported except as debt."

[Movie Guy]

Does anyone ever discuss the 2003 G7 Agenda for Growth? Most moves appear to be driven by this initiative and its follow up actions.

Department of Treasury international communications

[Bruce Webb]

Calmo I think the point is that it is the people in the house that require servicing and for that matter provide services. A good set of housing stock is an economic asset.

I am not familiar with New Orleans personally but everything I have read suggest that most of the residential housing was well past its expected building life. In the best of climates you can hardly expect middle class and working class housing to be functional for more than about sixty years. Mix in near tropical conditions and a resulting combination of wood rot and termites and the result is whole neighborhoods that probably needed to be torn down. But the economics were not there: whether these houses were rented or owner occupied it is not likely that either landlord or homeowner were in any position to simply tear down the house and start over. Well in this case Mother Nature served as the ultimate Redevelopment Authority.

For better or worse the building life clock is going to be reset in New Orleans. And examined dispassionately this may have come just in time to cushion the popping of the housing bubble. Construction jobs will shift away from some markets but the overall housing sector should remain pretty healthy: 500,000 destroyed houses represents a whole lot of wiring and sheetrock.

[brad setser]

Movie Guy -- my sense was that the 03 agenda for growth turned out to be a bit of a joke. it was the legacy of a John Taylor initiative from back in 2001 that sought to quantify the impact of the adoption of pro-growth policies, specifically trade liberalization. it became a list of every government's intended future policies. it guided subsequent actions in the sense that the basic deal was to list everything every government intended to do no matter what. to my mind, there was no policy coordination here -- everyone just laid out what they intended to do. and its impact was minimal.

[Lord]

Something like 1/3 to 1/2 of all small businesses in which most people work provide home services, from carpet cleaning to remodeling.

Equiping a factory no longer provides long term economic growth when it has to compete with emerging market labor. These investments don't make sense anymore. Trying to pretend they do is just wishful thinking.

[calmo]

Darn, and I was at pains not to be thinking wishfully. My view is that housing is over-represented in our economy. (That fraction of services devoted to housing is too large.) Energy and human effort is squandered here while other areas suffer.
General moral sentiments, but I have more specific economic prejudices as well:
that concentration of activity around real estate enhancement, may employ some local workers but it is not obvious that this is to their enhancement or increases their long term economic prospects. (The much ballyhooed 70% ownership society is a tiny increase in the fraction of mortgage payers/owners over the past decade compared to the increase in the real estate market.)
Maybe this is the real wishful thinking: the house really is worth THAT much and will continue to enhance my networth/finance my lifestyle.

[Schumacher Homes Press]

No one does seem to talk about the 2003 G7 Agenda for Growth and it's continued impact on the economic decisions made today, but I think many of the problems with our economy are a direct result of the faultiness of this plan.