Economics, like life, is a balancing act. And the trouble with the global economy is that it’s badly out of balance.
That’s the view of economists Peter Temin and David Vines in their new book, “The Leaderless Economy.” They say the international cooperation needed to restore balance requires a hegemon -- a farsighted, 800-pound gorilla of a nation with a good grasp of Keynesian economics.
Sound like anyone you know? Before you start chanting “U.S.A.,” be forewarned: The authors consider the U.S. a hegemon on the way out.
The result is a book that is remarkable by being scary, enlightening and just a little bit dull at the same time. You can learn a lot by reading it, but you may not be convinced a single economic powerhouse is so necessary after all.
The notion that the world’s economic woes -- including, in the developed world, slow growth and heavy debts -- are the result of global trade and financial imbalances isn’t new. Paul Krugman, Barry Eichengreen, Michael Pettis and Martin Wolf have written about this issue.
The essential argument, as made by Temin and Vines, is that a nation’s balance of payments is inextricably connected with whether it can maintain full employment and run on all economic cylinders.
Thus, China’s export-oriented growth strategy, with its artificial suppression of the yuan, was likely to lead to unemployment in the U.S. absent dangerously low interest rates and excessive borrowing -- both of which we had in the years leading to the crash. These factors contributed to the housing bubble and the subsequent crisis -- and a great deal of unemployment.
What’s needed, Temin and Vines argue, is a dominant global power to sustain an international approach to bringing the world’s economies back into balance. It’s happened before -- in 1944 at Bretton Woods, New Hampshire, where 44 nations agreed to a new world monetary order under the aegis of what really was the almighty dollar.
For a long time the U.S. was the hegemon, albeit not always willingly or even consciously. But the authors see the financial crisis of 2007-08 and its aftermath as a pivotal end-of-regime episode, analogous to the terrible interregnum between British and American economic leadership -- a period otherwise known as the Great Depression.
Now, they argue, the U.S., weakened by debt and political paralysis, is no longer unquestionably pre-eminent. China, if it is ever to assume the mantle of leadership, isn’t ready yet.
“The Leaderless Economy” drags in places but has two great strengths. First, it recounts 20th-century monetary history with a sharp eye for parallels to our own time. History is a great teacher, and the authors offer a useful perspective on it, reminding us that politically inspired macroeconomic errors such as the Treaty of Versailles can have catastrophic consequences.
Second, the book draws strong parallels between two profound imbalances that pose hazards to the world’s economic health: the one between China and the U.S., and a similar lopsided situation between Germany and such struggling members of the European Union as Greece and Spain.
China’s insistence on an undervalued yuan, and in Europe the straitjacket of the euro, have both had the effect of preventing exchange rates from adjusting as needed in order to rebalance trade, resulting in slow growth, unemployment and excessive debt in the deficit countries.
The authors are commendably alert throughout to the economic and political complexities involved.
The case is far from ironclad, however, that our troubles really are attributable to the lack of a single nation serving as undisputed economic leader. The authors themselves acknowledge that “as China maintains the exchange rate between the renminbi and the dollar, it is not clear what even a more assertive United States could do.”
On the other hand, when the crash came the Federal Reserve and the Treasury acted decisively and internationally, just as a hegemon should. Since their effective interventions, inflation and policy changes in China have driven up the value of the yuan. Americans have been saving more. And sooner or later the Chinese will become more avid consumers.
The beginnings of a rebalancing, in other words, may already be under way. Whether it fully succeeds will depend on the politicians, who could do worse than to read this book.
“The Leaderless Economy: Why the World Economic System Fell Apart and How to Fix It” is published by Princeton University Press (315 pages, $29.95). To buy this book in North America, click here.
(Daniel Akst writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own.)
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