One of my favorite things about reading Martin Wolf, the economist and Financial Times columnist, is his unwavering analytical style. Only he writes things like “We are all in the world economy together” without sounding wishy-washy and idealistic. Instead, the words reflect cold, hard realism. For example, in this column from December 2008, Wolf argues that global imbalances between consumer economies (e.g. the US and UK) and savings economies (e.g. Germany and China) must accommodate shifts in the other before they themselves can stabilize and any sustained recovery can occur.
In short, if the world economy is to get through this crisis in reasonable shape, creditworthy surplus countries must expand domestic demand relative to potential output. How they achieve this outcome is up to them. But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy.
According to Wolf, surplus countries need demand, and since they are going to get less over time from their usual partners, they will need to prop up demand in their own economies or accept lower growth or even contraction. Deficit countries need to rein in their own spending, both household and government, and in the positive, save, invest, and produce. Both actions depend on the other, hence the ‘we are the world’ perspective.
We are all in the world economy together. Surplus countries must willingly accommodate necessary adjustments by deficit countries. If they decide to sit on the sidelines, while insisting that deficit countries deserve what is happening to them, they must prepare for dire results.
The interesting thing to me, once you accept Wolf’s premise, is what this means for domestic investment in US institutions going forward as its consumer class gets eclipsed by the enormous potentiality of, say, the China and India middle classes.
Wolf’s premise suggests little economic motivation for funding the kinds of domestic investments (education, energy, infrastructure, jobs, etc) that in history acted as the foundation of the US consumer-oriented middle class.
Wolf’s premise, then — that the capitalists of today’s world economy, including US world capitalists, will increasingly find their consumers outside the US — makes sense out of something like the Ryan budget plan, and explains the full endorsement by Romney and the GOP. For, if the Ryan plan does anything, it turns de-invest-in-the-middle-class into top governing policy. This de-investment matches the interests of the GOP’s main clients — US global economic elites — who see billions of cheaper, unmined consumers elsewhere. The issue is whether small businesses and middle-class families will find a way to prosper in an increasingly ignored domestic economy.