At this year's G-20 summit in Toronto, the world's leading economies sealed their fate. Rather than reach a consensus on the need for fiscal consolidation or for more aggressive fiscal stimulus, the assembled officials have, in scrupulously diplomatic and often hilariously vague language, agreed to disagree on the future direction of the global economy. The U.S. will continue to borrow vast sums in an effort to keep demand afloat, a policy that will aid exporters in Europe and East Asia and the oil-rich states of the Gulf. Virtually all of the other G-20 nations will, in marked contrast, embrace fiscal retrenchment.
Many hoped that the last economic crisis would force policy elites to recognize that the U.S. could no longer sustain enormous current account deficits, and that we'd thus see a coordinated effort to move toward a more balanced global economy. China and Germany would consume more while the U.S. would consume less. But instead, coordination has broken down in all but name.
It is hard to blame America's G-20 partners for embracing fiscal consolidation. In Germany, for example, there is a profound sense of dread about the country's economic future. Many believe that the next decade will prove less prosperous than the last, and so there is a deep skepticism about policies that entail heavy deficit spending today. As for China, it remains a very poor and vulnerable country that can hardly be expected to lend the U.S. a helping hand when doing so means tampering with a growth model that, on the surface at least, has proved very successful. The global imbalances that exacerbated the last economic crisis will grow more severe, paving the way for the next crisis. Rather depressingly, the next crisis could very well resemble one of the calamities that felled Argentina or Mexico in past decades, only with the U.S. in the leading role.
Even if that next crisis can somehow be averted or at least delayed, there is a danger that the lack of a coordinated policy response will engender resentment and distrust within the G-20. Protectionist pressures will build, and zero-sum industrial policies will grow more brazen.
Behind this lack of coordination is a lack of leadership. The U.S. is not accustomed to being so economically vulnerable. During the Bush years, an intense focus on terrorism and rogues states allowed the country to play a dominant role commensurate with the strength of its military, despite the fact that U.S. external deficits expanded mightily. Now, as economic challenges come to the fore, it's clear that the U.S. is in no position to decisively and magnanimously lead. Rather, the country's leadership is desperate to address high unemployment rates and sluggish economic growth, even if that means taking every available shortcut. Ultimately, policymakers have no way of knowing whether unilateral fiscal stimulus efforts are proving effective or not. But the alternative--embracing austerity policies or standing pat--would invite charges of callousness toward the suffering of the unemployed. One can reject the Obama administration's approach while understanding that it faces a very challenging political environment.
What we need, and what we are very unlikely to get, is for other countries to pick up the slack and to share in the burdens of global economic leadership. For Germany, this is a decidedly unattractive prospect. In light of the enormous sums the German taxpayer will have to transfer to Greece in the wake of its debt crisis, it is easy to see why Germany has grown weary of self-sacrifice. And as I argued last week, Chinese officials recognize that a shift toward a more consumption-oriented economy could pose a political problem for the existing CCP leadership, thus making them wary of dramatic change. Even if the surplus countries decided to seriously address global imbalances by reforming their service sectors and encouraging more consumption, the rebalancing effort would take years to bear fruit. A report from the Boston Consulting Group found that it would take a 32% increase in Chinese consumption to make up for a 5% decrease in American consumption.
So what does this all mean for us? We can and should make the case for better economic policies from the G-20 governments. But we should also rethink how we approach our own lives and careers. While we can hope for the best, it seems prudent to expect slow growth for at least the next decade. A wide variety of consumer goods will grow less expensive, yet we should also expect that our net disposable income, which has grown slowly if at all for most Americans for years, will continue go grow very slowly. Though fewer Americans have changed residences in the wake of the housing crash, downshifting to lower-cost metropolitan areas might be a shrewd move in a more economically constrained era. Now might be the time to place a heavier emphasis on family and friends over consumption, as psychic income isn't as susceptible as cash income to the ups and downs of the global economy. As an added bonus, psychic income can't be taxed.