Published: August 21 2009 09:37
Central bankers in Jackson Hole for their annual retreat this weekend may find themselves watching the debate over healthcare reform on US television. Perhaps they should ponder the power of endowment effects – how cost and uncertainty deter change. For the main problem for the global economy is the fragility of the status quo.
The US government already has a difficult trick to pull off. It must finance spending this year that will be almost double tax receipts, while reassuring buyers of Treasuries that printing dollars is only a temporary measure. But as consumers save more of their income, consumption will be structurally lower, potentially requiring years of heavy stimulus spending to fill the gap. If so, retaining the confidence of debt buyers worried about unsustainable borrowing will require cutting entitlements to Social Security and healthcare for America’s ageing population. Not something that the fight to reform healthcare suggests will be easy.
Alternatively, the US could export more. But the structural reforms to encourage consumption in Asian countries – such as better Chinese social welfare and healthcare – will be slow and difficult. Nor should the magnitude of the required change be understated. The IMF notes that even if emerging Asia took all of its imports from the US, to increase US output by 2 per cent would require Asian countries to adjust their current account by 4 per cent of output. Such a major rebalancing will surely be gradual.
So where will the pressure be directed? A lacklustre recovery might prompt calls for additional government borrowing or lend support to those calling for US trading partners to be pushed toward adjustment. Both risk destabilising the dollar and international trade. Or perhaps it will prompt politicians to address long-term challenges in a concerted manner. To believe that requires a hefty endowment of optimism.
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