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The world's leaders agree that the global economy is out of balance. Now, what will they do about it?
The communique issued Friday at the conclusion of the G-20 summit in Pittsburgh puts balanced growth squarely on the table by emphasizing the need to avoid the "reemergence of unsustainable global financial flows." In plain English, this means that a world economy in which countries like the United States and Britain chronically run large current-account deficits while other countries persistently ring up large surpluses is unhealthy. These imbalances have devastated manufacturing industries in the deficit countries and left chronic surplus countries with huge stocks of dollars. The G-20 communique suggests that the existence of those large dollar surpluses is partly to blame for the asset bubbles that underlie the financial crisis that began in 2007.
It was a considerable diplomatic achievement that President Obama convinced his counterparts to sign on to the principle that too much saving in surplus countries can be just as destabilizing as too much spending in deficit countries. But the communique does not alter the facts on the ground. Economic imbalances are easier to talk about than to correct.
Consider Obama's own situation. If the world economy is to come into balance, Americans will have to save a larger share of their incomes and spend a smaller share, so we can finance our government and our private investment needs domestically rather than borrowing so much from abroad. Economists of all political stripes agree on this point. But there is no button Obama can push to make America save more and spend less. Nor would members of Congress line up to support policies to that end. The political incentives favor consumption, such as subsidies for purchasers of cars and houses approved even though Americans have arguably consumed too much of both in recent years.
Much of the United States' international imbalance, of course, is related to the federal government's budget deficit. The deficit will hit $1.6 trillion this year thanks to the drop in tax revenues and the emergency stimulus plan enacted last winter, and is projected to decline only gradually over the coming years. Even congressional critics are unlikely to support faster deficit reduction if it means cutting favored programs, whether that means defense spending or payments to hometown doctors. Again, there is little constituency for concrete measures that would help reduce the imbalances in the world economy.
Most of Obama's counterparts face similar political realities. For Chinese President Hu Jintao, addressing international imbalances means accepting a smaller trade surplus, which could throw millions more workers in export-oriented manufacturing industries onto the streets. For German Chancellor Angela Merkel, encouraging consumer spending means discouraging investment in the capital-goods industries that have played such a critical role in the country's economic revival. For Japan's new prime minister, Yukio Hatoyama, a more balanced world economy would imply further weak export growth at a time when Japanese manufacturers already are struggling due to weak foreign demand.
The Pittsburgh declaration notwithstanding, coordinated action to bring the world economy into better balance is unlikely. It is more realistic to expect that unilateral actions by the United States and some European countries will eventually force adjustments by other countries. Serious reductions in oil consumption would erode the large current-account surpluses of the oil states in the Middle East. More balanced government budgets would reduce the need for large inflows of capital and discourage surplus countries from piling up dollars. But such policies will be slow in coming and gradual in effect. World leaders may want a more balanced world economy, but they are in no great hurry.