Robert Reich on US-China Economic Rebalancing

2009-11-25

Extremely good column written by Robert Reich in the New York Times. I will say first off that there is absolutely nothing new in this article, and regular readers of the New York Times, the FT, the Economist, or any number of blogs (including this one) will not really learn anything they didn't already know.

However, Reich's treatment of the challenges facing China and the US when it comes to rebalancing their economies (and the bilateral trade relationship) is so well written that it really deserves a read. For what it's worth, it is also an even-handed approach and doesn't single out one country or the other as being "at fault" in a moral sense for current problems. This is a bit unusual for China commentary, particularly from American Lefties like Reich. He criticizes specific policies and leaves it at that, which is refreshing.

Reich ties together the relationship between the consumer vs. capital spending problems in both the US and China with the trade imbalance very neatly. I particularly like the way he acknowledges the "traditional" explanations for China's high savings rate, yet explains that this only tells one part of the picture. He seems to be channeling Michael Pettis in this regard:

Many explanations have been offered for the parsimony of Chinese consumers. Social safety nets are still inadequate, so Chinese families have to cover the costs of health care, education and retirement. Young Chinese men outnumber young Chinese women by a wide margin, so households with sons have to accumulate and save enough assets to compete in the marriage market. Chinese society is aging quickly because the government has kept a tight lid on population growth, with the result that households are supporting lots of elderly dependents.

But the larger explanation is that China is oriented to production, not consumption. China wants to become the world’s pre-eminent producer nation.

Reich doesn't bring in the last piece of the puzzle, the exchange rate system, but talking about export policy implies the other anyway.

Very good stuff, especially if you usually don't pore over this subject on a regular basis. This will help you catch up quickly.

Tags: China Business & Economy, U.S.-China Relations