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Rebalancing the world economy after recession

If the US revives consumption and China revives exports, nothing will change.

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There is a fair amount of consensus that the world economy is in need of rebalancing. Countries like Iceland, Greece, Spain, and the United States overspent prior to the crisis, financing the spending with government or private borrowing, while countries like Germany, Japan, and China supplied those countries goods even while financing their spending habits.

Simply put, the consensus now requires US households to save more and Chinese households to spend more in order to achieve the necessary rebalancing. Indeed, many believe that if only the United States toned down its consumerist culture and its households tried to stay within a monthly budget instead of having a Micawberish optimism about the future, and if only Chinese households stopped fearing Armageddon and started spending more, all would be well.

Of course, it is simplistic to reduce global trade imbalances to a bilateral imbalance between two countries. But since this is how the popular debate is posed, it is useful to ask whether rectifying the imbalances is only a matter of US and Chinese households switching personalities.

Clearly, consumer behavior is driven by habits formed over time, many of which are culturally determined – driving a Hummer, the gigantic low-mileage SUV, used to be an acceptable means of signaling the size of your wallet in the United States before concerns about global warming spread. No longer! However, the focus on consumer behavior misses the deeper policy underpinnings of the behavior we see.

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