Correction: An earlier version of this editorial incorrectly said China’s growth model was based on an overvalued, rather than undervalued, currency.
THE GLOBAL economy faces a deep crisis — deeper, in some ways, than the panic that struck financial markets in August 2008. At least then there was the prospect of short-term government action: tax cuts and spending increases, quantitative easing, and the like. Those measures averted total meltdown, yet the United States, Europe and Japan failed to restore strong, self-sustaining growth, leaving governments so deeply indebted that aggressive new policy interventions are probably not feasible for now. Indeed, what seems to have sent markets panicking last week is a dawning sense that capitalist democracies may have made more promises than their economies are capable of fulfilling — without significant growth-generating structural reforms. Or so it would appear from the recent dramas over bailing out Greece and raising the U.S. debt ceiling.
For Americans, a dead-in-the-water economy would be not only a colossal waste of productive potential but also a human tragedy, as Friday’s announcement of another U.S. unemployment rate above 9 percent cruelly demonstrated. “We need to create a self-sustaining cycle where people are spending, companies are hiring and our economy is growing,” President Obama said.
Well said. But how? There is no shortage of proposed “job creation” remedies — a dose of tax relief here, more infrastructure spending there. Some measures under discussion may indeed help a bit, such as the free-trade agreements with South Korea, Colombia and Panama, which at last seem poised for final passage now that the Senate has agreed on a bipartisan plan to vote on them.
But the markets are right to worry. The United States, like its trading partners, is paying the price for years in which our political and economic systems failed to correct festering structural flaws: a poorly designed currency union in Europe; an over-dependence on exports in Japan; and excessive consumer borrowing, financial manipulation, and health-care spending in the United States. Even China seems near exhaustion of a growth model based on an undervalued currency and inefficient, state-determined investment. Economists warned that the longer we postponed the day of reckoning, the more painful it would be; now, perhaps, that day is here.
The next time someone tells you that this predicament is all the fault of a) Wall Street b) President Obama c) the Republicans or d) China, respond with this number: 138 percent. That is the ratio of U.S. household debt to disposable income as of 2007. There’s no way to restore robust consumer spending until that ratio returns to a more sustainable level; it’s now down to 110 percent, which is still far above historical averages. No matter what politicians or foreign countries may do, ordinary Americans still have their work cut out for them.
What leaders can do is start the systemic overhaul that the markets brutally but correctly demand. It must take many forms: streamlining the loophole-plagued income tax system, corporate and individual; putting entitlements back on a sustainable footing; eliminating regulations that cripple growth; improving the quality and cutting the cost of education; ensuring a better match between workers’ skills and businesses’ needs; patching holes in the safety net so as to protect the most vulnerable during whatever tough times lie ahead.
The bond markets are understandably skeptical about this country’s political capacity to meet the challenge. It will take more wisdom, patience and unity than our two parties have shown so far — but the job can be done because it must be done.