November 27, 2013
Stephen Roach managed to get the basic economics 180 degrees backwards in his discussion of China’s turn to a more consumption based economy and its implications for the United States. After commenting that China will likely export less to the United States as it produces more for its domestic economy, he tells readers;
“The coming transition to a rebalanced China changes the rules of engagement in this co-dependent relationship. America seems unprepared for this possibility. Long dependent on China as the world’s ultimate producer, the United States may have a hard time waking up to the reality of a China that is less focused on enabling America’s excess consumption and more interested in spending money on social services rather than buying Treasuries and helping to keep United States interest rates down.
“The United States needs to liberate itself from the mind-set that it cannot afford to change its economic strategy. It must shift the fixation on consumption for today’s generation to greater focus on saving and investing for future generations. The sluggish recovery and unacceptably high unemployment make this shift difficult, but not impossible.”
Contrary to what Roach asserts the sluggish recovery and high unemployment make the shift to fewer imports easier not harder. This means that we have excess workers and capacity that can be diverted to producing items that we used to import. If the opposite were the case and we were near full employment then the loss of imports from China would mean a decline in the standard of living. In the current situation, increased net exports (i.e. fewer imports) could mean more employment and output, in other words a rise in the U.S. standard of living.
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