> Yup. So the U.S. being the U.S., what will happen with the c/a
> deficit? I think this sheds some light on John Taber's cui bono
> question about boosting national savings: at some level, in some
> fashion, the U.S. elite realizes that it can't keep running c/a
> deficits of 4% of GDP. Normal prescriptions would be for an austerity
> program, but that's not politically likely, short of a serious
> crisis. So how to structurally adjust (is that a split infinitive, or
> is "structurally adjust" a compound verb?) the U.S.?
>
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Can I add a few conjectures?
Larry Summers says the world should "balance up" rather than "balancing down" (the world here meaning US, Europe, and Japan.) In other words, the US c/a should be balanced by European and Japanese expansion through domestic demand. *Of course* he says this -- he doesn't want a crisis.
But there are problems. In Japan, the economy *can't* be reoriented toward domestic expansion without virtually a revolution in political and economic life -- in a country where power is dispersed and no one is accountable. Moreover, any major fall in the dollar/rise in the yen could have a devastating effect on Japan's banking system -- Japanese reserves include huge deposits of dollar-denominated Treasury paper that never get repatriated due to Japan's cozy little understanding with the USA. Plus, exports would suffer. The effect of a dollar drop on Japan is unpredictable, but would certainly be awful.
That leaves Europe. First of all, it's not even clear that the US Treasury *wants* to see Europe undertake a major expansion of domestic demand without first scrapping its welfare state and associated "rigidites." Look at Summers' various pronouncements on Europe. Inevitably, he pairs a plea for "macroeconomic expansion" with a call for simultaneous "structural reform." For the US Treasury, the two are indivisible.
But let's say for the sake of argument that -- in a pinch, faced with an emergency, to keep the US afloat -- the US is willing to tolerate a major European expansion without prior "reform." The problem is that European elites *just* *don't* *want* to do it. There's a debate going on in Europe right now about whether the "New Economy" has arrived in Europe. That's just code for whether Europe can emulate the "Greenspan experiment" of the past 5 years. Wim Duisenberg recently made known his views on the matter: He says no. Labor market rigidities have kept the New Economy away, so expansion without reform would only bring inflation. (Today's FT editorial presents the opposite view, without naming Duisenberg. But to my knowledge, no big-cheese officeholders in Europe have publicly dissented from Duisenberg's "pessimism.")
This sets the stage for a serious US-Europe conflict over macroeconomic diplomacy. A *very* similar conflict took place under the Carter administration, when the US-proposed "locamotive strategy" was stoutly resisted by European leaders, notably Helmut Schmidt, whose well-known anti-American sentiments were hardened by the experience. (He and other European accused the US of trying to "export inflation" to the Old World.) The conflict continued into the early 1980's when Europeans viewed the high dollar as a US weapon forcing them to tighten more than they wanted to. The long-term outcome of the conflict was exactly as International Relations 101 would predict: Perceiving American financial hegemony as becoming a threat to Europe's interests, the countries banded together to form an economic counterweight -- the Euro.
Europe now has the Euro. But if the US again forces Europe to adjust to its c/a defecit in ways they don't feel like adjusting, it could produce a further push for European independence/autonomy from the US -- probably in the foreign affairs/defense sphere, where they're already moving quickly. It's hard to imagine European elites in such a situation *not* asking themselves how long they're willing to tolerate enormous, chronic US deficits that they end up having to adjust to.
Similar issues will arise in Japan, where the stakes are perhaps even higher. (The US-Japan relationship is often said to be the single most important bilateral relationship in the world.) The obvious move for Japan would be towards the creation of an East Asian "yen bloc" -- a direction Japan is already inching hesitantly towards in the form of the recent proposal for a regional currency swap system. For a rather extreme Japanese statement explicitly advocating a yen-bloc move to throw off the American yoke, read this Asiaweek article by Ishihara Shintaro, co-author of A Japan That Can Say No, and now mayor of Tokyo (http://www.geocities.com/Eureka/Concourse/8751/riwa/aw101001.htm.) Will Japanese elites be able to keep ignoring voices like Shintaro's if the US c/a deficit causes Japan to run off the rails? Of course, the alternative to Europe and Japan helping the US to "balance up" is for the US to "balance down" -- a dollar collapse, a Wall Street crash, a collapse of US imports, an end to the global emerging-market recovery, a Japanese implosion, who knows? The consequences are probably too frightening for European and Japanese elites to even contemplate, much less just say "fuck you" to Uncle Sam. But the resentment engendered by being forced to go along yet again with an American plan to clean up America's mess will probaly be too great for pro-American forces in those places to resist. Powerful global political changes could well be in the works. Of course, it's always possible that--for whatever reason--the US, Europe, and Japan will be unable compromise and cooperate and an epic crisis could come about. But that wouldn't be very much fun. Seth