James Pethokoukis

Politics and policy from inside Washington

A Chimerica stimulus policy?

July 13, 2009

David Goldman of the great Inner Workings blog loves the Chimerica concept, a furthering of the economic relationship between China and America. He even thinks it would make a great stimulus and long-term economic recovery program:

We recommended a firm link between the US dollar and the Chinese yuan, in which the yuan would have full convertibility, with a solemn commitment by the two countries to maintain a fixed exchange rate forever. That would instantly link the two countries’ capital markets. The demographic problem that creates a Japan-style deflationary bias in the US would disappear, because the demographics of China would be open to the American capital market. … In effect, the world’s two largest economies would establish a full partnership. … The :trouble is that Americans can’t spend. They have to save. The combination of a catastrophic decline in wealth and a sudden bulge in retirements gives America the profile of Japan during the lost decade of the 1990s.  … If we follow Robert Mundell and throw out the single-country model of the Keynesians, it is obvious that Americans can save in another fashion, that is, by exporting. China’s underdeveloped interior is potentially the world’s biggest export market, flanked by similar markts in Asia and elsewhere in the developing world. The transition would still be painful, and the frictions considerable, but America could reorient itself to th global market. There would be a recovery. As matters stand we face a lost decade.

Comments

Exporting to China could theoretically be a great way to recover from the current recession and rebuild our economy. However, there are several unpredictable variables which make this strategy unattractive. First, the Chinese interior is poor and restless. They cannot afford to buy ipods, or chevys, etc.. Also, while the yuan is currently stable and China also relatively so, what happens if there is a destabilization? We would be effected profoundly. Ultimately, it is unwise to tie our currency to that of a country, which despite its recent development, is still fragile and developing. These issues were some of the main criticisms of the Chimerica concept. China may currently be a rising star, but things can change quickly, as has happened several times in the past century.

Posted by Greg | Report as abusive
 

The Inner Workings piece is completely backwards. It is China that has a much greater economic risk because of it’s demographics. Between 2008 and 2040 China’s old age dependency ratio skyrockets from 16% to 50%. Also, China’s gender skews are out of whack having 107 males for every 100 women. The problem worsens when you look at the skews in the younger age demos — for under 20 yr. olds it’s 116.5 boys for each (1) girl !!! At the least, this ratio will impede China’s ability to correct it’s ageing pop. skew.

By comparison, the US has the most enviable demographics in the entire world. Along with a demographic advantage we have unparalleled agricutural production & technology. Could wave the flag with a number of other important things. That’s not to say that we don’t have issues — aside from the economic meltdown, rocketing deficits, fragile employment outlook — unfunded liabilities like Medicare & Social Security loom large. But some issues are reversing on the ground floor level — the decade long consumption binge is now being unwound — savings are increasing dramatically.

The US partnership with China is already on a good footing. The best thing the US can do for itself & it’s partners is to exercise fiscal restraint & prudence and seek sensible solutions to our issues.

Posted by Siobhan Sack | Report as abusive
 

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