The comment pages of the Financial Times included a rare moment of humour – in a geeky economist way – last week. Ricardo Hausmann, the director of Harvard University’s Center for International Development, observed at the start of an article: “The same voices that supported tough macroeconomic policies to deal with the excesses of spending and borrowing in east Asia, Russia and Latin America are today pushing for a significant relaxation in the US to deal with the so-called subprime crisis.”
He is right. The same people who demanded that emerging economies impose austerity when they got into difficulties are now calling for America to boost its economy. It is hard to resist the charge of hypocrisy.
But there is a more fundamental point to appreciate. The blame for global economic imbalances is increasingly being pinned on Asian countries. The revisionist idea of a “global savings glut”, devised by Lombard Street Research in 2004 and adopted by Ben Bernanke of the Federal Reserve a year later, has become mainstream. It contends that Asia’s dynamic economies are causing havoc in the world thanks to their excess savings.
But this charge gets things the wrong way round. It is not excess Asian savings that are the point of weakness in the world economy but relative economic sluggishness in the West. The lack of a strong economic dynamic in America, with correspondingly low investment, is at the root of the imbalance.
This is not to make a moral point. It is not that Asia is good and America bad. Rather, in objective economic terms, there is a disproportionality caused by a combination of strong Asian growth and relative sloth in America. Of course, in absolute terms America is still richer and more productive than Asia. But the gap is closing as Asian output surges.
Although Britain is a minor player in global terms, it shares many of the economic characteristics of America. Indeed there is a strong argument that Britain’s lethargy is more advanced. Britain also has a large current account deficit, although, as a proportion of GDP, it is substantially smaller than America’s.
Britain also depends heavily on its income from the City of London to keep it in the black. Finance can be a lucrative business, but Britain’s heavy reliance on it leaves the economy particularly vulnerable to problems in the financial sector.