Globalization Initiative

Via Calculated Risk, here’s what Council of Economic Advisors Chair Christina Romer had to say last week in testimony before the Joint Economic Committee about how the stimulus has and will impact growth in the near term:

In a report issued on September 10, the Council of Economic Advisers (CEA) provided estimates of the impact of the ARRA on GDP and employment. ...

These estimates suggest that the ARRA added two to three percentage points to real GDP growth in the second quarter and three to four percentage points to growth in the third quarter. This implies that much of the moderation of the decline in GDP growth in the second quarter and the anticipated rise in the third quarter is directly attributable to the ARRA.

Fiscal stimulus has its greatest impact on growth around the quarters when it is increasing most strongly. When spending and tax cuts reach their maximum and level off, the contribution to growth returns to roughly zero. This does not mean that stimulus is no longer having an effect. Rather, it means that the effect is to keep GDP above the level it would be at in the absence of stimulus, not to raise growth further. Most analysts predict that the fiscal stimulus will have its greatest impact on growth in the second and third quarters of 2009. By mid-2010, fiscal stimulus will likely be contributing little to growth.

In layman’s terms, when first comes online, it adds GDP growth that wouldn’t have otherwise occurred. Then, after a time, it props the economy up at a level it wouldn’t have otherwise seen. (Romer says we’ve seen the first part, and are about to see the second part.) Here’s the thing, when the economy isn’t growing on its own but is being propped up at a higher level than it otherwise would have been due to stimulus, GDP growth will sit at basically zero. That doesn’t mean the stimulus isn’t working – the economy is producing more than it otherwise would have. 

This also means that the stimulus going offline is a “drag” - or has a negative effect - on growth as that government spending is no longer in the economy. What it doesn’t mean as that it’s making the economy worse, and it’s worth inoculating against that misunderstanding of the GDP data that will inevitably arise. Rather, it will have as measurable a positive effect on the economy in the short term and will jumpstart sustained growth (at what level is still an open question). And the investments in the elements of sustained growth – infrastructure, smart grid, energy, education, R%D, etc – will continue to pay off for many years to come.

Paul Krugman weighs in on China’s continued policy of devaluing its currency to promote exports:

Senior monetary officials usually talk in code. So when Ben Bernanke, the Federal Reserve chairman, spoke recently about Asia, international imbalances and the financial crisis, he didn’t specifically criticize China’s outrageous currency policy.

But he didn’t have to: everyone got the subtext. China’s bad behavior is posing a growing threat to the rest of the world economy. The only question now is what the world — and, in particular, the United States — will do about it.

…

China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

And that’s a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand. By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere. The biggest victims, by the way, are probably workers in other poor countries. In normal times, I’d be among the first to reject claims that China is stealing other peoples’ jobs, but right now it’s the simple truth.

So what are we going to do?

U.S. officials have been extremely cautious about confronting the China problem, to such an extent that last week the Treasury Department, while expressing “concerns,” certified in a required report to Congress that China is not — repeat not — manipulating its currency. They’re kidding, right?

The thing is, right now this caution makes little sense. Suppose the Chinese were to do what Wall Street and Washington seem to fear and start selling some of their dollar hoard. Under current conditions, this would actually help the U.S. economy by making our exports more competitive.

In fact, some countries, most notably Switzerland, have been trying to support their economies by selling their own currencies on the foreign exchange market. The United States, mainly for diplomatic reasons, can’t do this; but if the Chinese decide to do it on our behalf, we should send them a thank-you note.

The point is that with the world economy still in a precarious state, beggar-thy-neighbor policies by major players can’t be tolerated. Something must be done about China’s currency.

Krugman makes an important point about beggaring thy neighbor policies on the part of major powers being unacceptable. In addition, they generally backfire. In this case, as domestic American frustration over China’s role in the global economy grows, the prospect grows of the American government taking major actions that affect China’s ability to prosper. (Which will in turn likely result in Chinese retaliation.) 

We’ve already seen a small step in this direction with the tire tariff spat, but if Americans begin to feel that China is a bad actor in the global economy – even though, as Krugman writes, most of the jobs impact is still being felt in other poor countries – both the United States and China will have tremendous problems on their hands. For China, modernity and prosperity rests on fully joining the global economic system, which means starting to better play by the rules; American policymakers face the challenge of convincing China of that.

Via Mark Thoma, Atlanta Fed Senior VP and Research Director David Altig weighs in on the high likelihood of a jobless recovery. He brings to light an interesting number on the permanence of job losses, and the whole post is a good round up what will be a very scary subject:

The percentage of employee separations labeled permanent is at a recorded high.

Underneath the usual total unemployment numbers are the reasons an individual is unemployed: You are on temporary layoff; you quit your job; you have reentered the labor market and have yet to find a job; or you are entering the job market for the first time and have yet to find a job. Or, finally, you have been permanently separated from your previous employer, who has no expectation of hiring you back.

The last category is the dominant reason for unemployment at this time. That might not seem surprising, but it actually is. Never, in the six recessions preceding the latest one, did permanent separations account for more than 45 percent of the unemployed. The current percentage stands at 56 percent as of September and appears to be still climbing:

As Dr. Rob Shapiro tells us, the concept of a jobless recovery is scary, but even worse is that the term may overstate the case. We could be in for what is technically a recovery in which the economy actually loses jobs. 

Last week, I wrote about a David Brooks column that argued that the next great debate in American society is going to be about the best way to promote innovation in the economy. Indeed, innovation has been the lifeblood of the American economy, and it's heartening to see that much of the national conversation has turned to promoting innovation. But not all innovation is beneficial to society. Indeed, one of the sectors that has seen a great deal of innovation recently, some of which created sub-optimal results, was the financial sector. Calvin Trillin, writing in the New York Times, explains, in a sentence, why:

The financial system nearly collapsed…because smart guys had started working on Wall Street.

What Trillin goes onto explain is that smart people, instead of going into for example physics, started going into finance and started innovating. A lot - and much more than their less talented predecessors. (James Kwak at the Baseline Scenario says that this actually is probably true.) But, as Simon Johnson and Kwak have explained, much of the recent innovation in the financial sector hasn't necessarily been beneficial to anyone other than those doing the innovating. They differentiate between innovation that has made things better for consumers – the ATM for example – and innovation that involves easier access to credit, which isn't always as good:

In short, financial innovations whose sole function is to increase access to credit do not in and of themselves make the world a better place. They can help by providing the credit that people need to make the world a better place, but they can also make it possible for people to do irrational and economically destructive things. So when people say that innovation is the source of all progress, that may be true – but not all types of innovation are equal.

In the most recent Democracy Journal, which features a whole series of articles on innovation (incuding one by Johnson and Kwak), NDN's Dr. Rob Shapiro criticizes a proposal promoting the idea of utility capitalism, essentially government regulated monopolies or cartels. Michael Lind, the proponent of utility capitalism, argues that this framework would encourage innovation, which Shapiro debunks by explaining how, according to Nobel Laureate Kenneth Arrow, innovation really works:

Large, incumbent firms try to enhance the efficiency and reduce the costs of what they already do well. Younger firms have to establish a new place in the market, and since their size precludes competing on price, they have to compete in some area of quality, which often means innovation. [Cartels and monopolies, which preserve the incumbent status of large firms, therefore do not lend themselves toward innovation.]

Most of us can agree that for America to maintain its economic standing, our edge in innovation and the modern idea-based economy is crucial. Unfortunately, maintaining an edge in something so inherently dynamic as generating the ideas that create new and powerful companies, products, and services is difficult, and our ability to innovate is certainly not unlimited. 

Most would agree that it was a mistake in recent years to focus so much innovation on the financial sector as opposed to science, medicine, and making people's lives better, and Trillin's point paired with Shapiro's are crucial: America needs to create the incentives that move talented people into socially useful professions (like center-left Washington think-tanking) and create the economic incentives to produce socially useful innovation.

Since last week's the freak-out about a weak dollar, cooler heads have responded. Paul Krugman led the way this week with a strong (targeted) critique of the idea, coming from regional Federal Reserve banks, that the Fed's Open Market Committee should make "an early return to tighter money, including higher interests rates." Krugman doesn't think that the raising rates makes sense at all:

After all, the unemployment rate is a horrifying 9.8 percent and still rising, while inflation is running well below the Fed’s long-term target. This suggests that the Fed should be in no hurry to tighten — in fact, standard policy rules of thumb suggest that interest rates should be left on hold for the next two years or more, or until the unemployment rate has fallen to around 7 percent.

Yet some Fed officials want to pull the trigger on rates much sooner. To avoid a "Great Inflation," says Charles Plosser of the Philadelphia Fed, "we will need to act well before unemployment rates and other measures of resource utilization have returned to acceptable levels." Jeffrey Lacker of the Richmond Fed says that rates may need to rise even if "the unemployment rate hasn’t started falling yet."

I don't know what analysis lies behind these itchy trigger fingers. But it probably isn’t about analysis, anyway — it’s about mentality, the sense that central banks are supposed to act tough, not provide easy credit.

And it's crucial that we don’t let this mentality guide policy. We do seem to have avoided a second Great Depression. But giving in to a modern version of our grandfathers' prejudices would be a very good way to ensure the next worst thing: a prolonged era of sluggish growth and very high unemployment.

Martin Wolf sees the dollar not as weakening, but as correcting itself in the wake of the financial crisis. Both he and Krugman point out that the reason the dollar’s value increased so much was because investors ran to it as the world melted down. Both think the correction is a good thing; Krugman because it means growing confidence in the stability of the global economy, while Wolf says:

The dollar's correction is not just natural; it is helpful. It will lower the risk of deflation in the US and facilitate the correction of the global "imbalances" that helped cause the crisis. I agree with a forthcoming article by Fred Bergsten of the Peterson Institute for International Economics that "huge inflows of foreign capital to the US facilitated the over-leveraging and underpricing of risk".* Even those who are sceptical of this agree that the US needs export-led growth.

Finally, what can replace the dollar? Unless and until China removes exchange controls and develops deep and liquid financial markets – probably a generation away – the euro is the dollar's only serious competitor. At present, 65 per cent of the world’s reserves are in dollars and 25 per cent in euros. Yes, there could be some shift. But it is likely to be slow. The eurozone also has high fiscal deficits and debts. The dollar will exist 30 years from now; the euro's fate is less certain.

…

The global role of the dollar is not in the interests of the US. The case for moving to a different system is very strong. This is not because the dollar's role is now endangered. It is rather because it impairs domestic and global stability. The time for alternatives is now.

Plus, Ezra Klein says language is the problem and the Economist says to leave the dollar alone right now.

It was an auspicious week for the touchy issues surrounding executive pay.  One after another, President Obama’s pay czar, Kenneth Feinberg, announced new restrictions for AIG executives; Goldman Sachs was reported to be putting aside $23 billion this year’s bonus pool, the largest anywhere, ever; and Elinor Ostrom from Indiana University shared the Nobel Prize in economics for her breakthrough work on how large companies organize themselves, often in ways that encourage executives to put their own financial interests before those of the shareholders.   

Starting with Goldman, it’s obvious that a sheaf of annual bonuses each equal to 10 or 20 times what an average American earns in his or her entire lifetime, coming from a firm which recently received huge, direct and indirect taxpayer-funded assistance, is certain to spark outrage.   That reaction isn’t misplaced, and there’s a sensible response to it based on the core tenets of capitalism which we will get to shortly.   There are other serious matters at stake here, too.   In particular, how does a financial services firm like Goldman Sachs earn such huge profits in difficult times?  And since the operations of Goldman and a few others like it matter so much to the economy – which is why they got their federal assistance – how do the arrangements which produce such huge bonuses affect those operations and thereby the rest of us?   The answers suggest that even as Goldman’s top executives and traders put away enough for a royal retirement, their decisions could lay the foundation for future financial turmoil that would leave the rest of us a lot poorer.  

We didn’t need this latest and most conspicuous instance of greed at Goldman to know that the compensation provided to the uppermost echelons of American business is out of control.  Since 1990, the pay of American CEOs has jumped from 90 times the average workers’ pay to 250 times – compared to 15 to 30 times for British, French and Japanese CEOs.   Nobel Laureate Ostrom’s work helps us understand why:  CEOs name their own top executives and strongly influence who ends up on their boards of directors – and consequently on the committees that set the terms for all of their compensation.  How much they decide to pay themselves, therefore, is essentially limited by the intersection of their own avarice and any vestigial sense of shame they might have.   And the shame is pretty easy to dispose of, since the terms of their compensation are rarely disclosed publically.

There’s a fascinating account of some of these pay packages in a current New Yorker article chronicling the efforts of Nell Minow and Robert A.G. Monks to reassert shareholder rights over these modern robber barons. Almost everywhere, most of the pay comes in stock or stock options, so they’re only liable for the 15 percent capital gains tax.  (The Goldman executives who will claim stock bonuses worth tens of millions of dollars this year will report taxable “salaries” of less than $300,000.)  And if the stock price falls under these executives’ leadership, their options contracts are often revised at a lower strike price.   These packages may also include huge “retirement” bonuses for CEOs that leave voluntarily – like the one federal contractor Halliburton gave Dick Cheney when he left to run for Vice President – and even “retention bonuses” for executives who end up in prison.  Then there are the extravagant perks.  It took public divorce proceedings against GE’s Jack Welch for shareholders to find out that on top of the many hundreds of millions of dollars Welch received in stock and salary, his friendly board had also awarded him lifetime use of the company’s 737 and helicopters; lifetime floor seats for the Knicks and lifetime box seats for the Red Sox, Yankees and the Metropolitan Opera; exclusive lifetime use of a sprawling Manhattan apartment, including fresh flowers, dry cleaning service and even the tips for the doorman; and a catalog of lifetime golf and country club memberships.   His and most other executive contracts also now include “gross-ups,” which means that the shareholders pick up federal and state taxes owed on the executives’ various perks. 

These are all examples of what economists call the “agent-principal problem,” in which the interests of agents – they’re the executives – diverge from those of the principals, who here are the owners or shareholders.  It’s pretty simple: They enrich themselves at the expense of the shareholders who they ostensibly work for – and those shareholders now include a majority of all Americans.  The simple democratic answer to all this, derived directly from the essence of capitalism, is to empower the owners by requiring that boards disclose all aspects of the compensation package of senior personnel and subject the terms of those compensation packages to mandatory shareholder votes, every year.  

Last week, I proposed this step on a CNBC business show.   The other guest predictably squawked about government control – and then the moderators also tried to dismiss the idea as “impossible.”  Come again?  Shareholders vote every year on lots of measures – check out your proxy statements.   And the mere threat that shareholders might publicly reject a CEO‘s payday should moderate the greed of at least some compensation committees.   The House passed a weak version of this proposal recently – annual, “advisory” shareholder votes on compensation.  The Senate should strengthen it with stricter disclosure requirements and an annual vote that actually decides the matter. Why, precisely, shouldn’t a company’s owners determine what their executives are paid?  And does anyone think that Goldman’s shareholders, including strapped pension plans and charitable institutions, are eager to see $23 billion in potential dividends go to the firm’s top tiers?

This particular agent-principal problem also affects the rest of us, since the stock and stock options that make up most of these compensation packages are often tied to the short-term gains associated with an executive or trader’s work, without regard to the transactions’ long-term returns.  So, hundreds of traders and executives at Goldman and other places on Wall Street have closed transactions and other deals that booked large paper profits this year – and will take home huge bonuses tied to them – but bear no consequences if those deals go sour next year or the year after and cost the shareholders billions.   These arrangements directly encourage them to take on enormous long-term risks for their firms and owners, in pursuit of the short-term paper gains that generate their own bonuses.   Since risk and return are closely related, these arrangements help explain how Goldman earned enough this year to dole out that projected $23 billion in bonuses.   And by creating such strong incentives for risky investments on a large-scale, these same arrangements were a core element of the meltdown that nearly pushed the U.S. and global economies into a genuine Depression, and cost shareholders and taxpayers trillions of dollars.    

To prevent a recurrence that could ruin almost everyone, these arrangements have to end.  J.P. Morgan Chase has said it will include new “claw-back” provisions that would reclaim part of the bonuses when a deal’s long-term returns are less than expected.   It’s a nice gesture, but it’s hardly enough.  We need laws and regulations that directly limit the risk levels of the portfolios of institutions deemed “too large to fail,” and specific, claw-back guidelines from the SEC that all public companies will have to follow.  The outstanding question is whether Congress has the cajones to force the country’s richest people and institutions to change the ways that made them so wealthy in the first place.

Cross-posted at The New Republic.

Policymakers and pundits who finally are worried about a "jobless recovery" should consider this: Our actual prospects are worse than that term suggests.  The initial expansion we may already be experiencing will be notable not for a lack of new jobs, as the phrase "jobless recovery" suggests, but for substantial, continued job losses.  Total employment will continue to decline for many months and perhaps as long as two years, as it did after the 2001 recession.  Nor will it be enough to aim for simply "recovery," if by that is meant a return to the conditions that preceded this recession, including unstable capital markets and stagnating real wages in the face of strong productivity gains.

The stimulus passed last February has helped to slow job losses – without it, we might well shed an additional one-to-two million more jobs.  But fiscal stimulus is a much weaker lever for creating jobs than it used to be, because of changes in the relationship between increases in economic demand (that's what stimulus does) and creating new jobs to satisfy that demand.  In the 2002-2007 expansion, private employment grew at less than half the rate, relative to growth, as it did in the expansions of the 1980s and 1990s.  So, Washington boosting demand and growth today has less than half the impact on jobs that it once did.

In the short-run, there's little we can do about this change.  Behind it lies large, structural changes, especially the emergence of more intense competition spurred by globalization, which now limits how much businesses can raise their prices when their costs increase.  The good news about this development is the low inflation that’s prevailed across most of the world for nearly two decades, or basically the time frame of modern globalization.  The bad news is that when health care and energy costs, for example, rise rapidly, businesses which can’t pass along those cost increases in higher prices have to cut other costs – and they often start with jobs and wages.  (These developments are also big factors in why wages now stagnate even as productivity increases.)

This means that the administration’s long-term economic agenda has to include serious steps to reduce how much health care and energy prices rise, or relieve business of some of the burden of those cost increases.  In short, long-term cost containment in health care and the development of alternative energy sources on a large scale both have to be part of the administration’s core economic agenda, with all of the political urgency that implies.  Otherwise – and here’s a scary thought – most Americans may fare no better economically under President Obama than they did under his failed predecessor.

There are still a few cards left to play for the shorter-term.  The most important jobs measure in the February stimulus was assistance to the states (and through them, to localities), so their own budget squeezes don’t force them to lay off so many teachers, police, and other public employees.  Their budget constraints are still growing worse – an important part, because unemployment is still rising.  The most efficient way for Congress and the President to limit additional jobs losses in 2010, then, is to provide perhaps another $100 billion in assistance to the states.

The other measure now getting attention is a tax break for businesses that create new jobs, an idea the President promoted in his campaign but which never made it into the stimulus.  Here's how it works: Businesses would receive a tax credit for the first year of payroll taxes on new employees or those moving from part-time to full-time, and a credit for half as much in the second year.  It's not very well targeted, since you end up subsidizing jobs that would have been created without any tax break.  (Keep in mind, falling employment is a net result, with some businesses adding jobs and others cutting them.)  But it is well focused on jobs, so long as we also include some conditions on those who claim it.  For example, a new business should have to be in place for at least six months before qualifying, to head off scams where people close down existing firms, reopen them, and then use all their existing employees to claim a big tax benefit.  And a firm’s total wage costs should have to rise, so employers don't just fire and rehire workers in order to qualify. 

We tried a version of this tax break in the 1970s, and most economists who've looked at it believe it did some good.  It should help again – but not as much as it did last time, because the economy's natural, job-creating dynamics are much weaker and more constrained under globalization than they were in the 1970s.

Beyond these two measures, the most important step for the administration is to set its political sights on the more difficult, long-term measures required to restore healthy and sustained job creation and wage gains – and to prepare the American people to wait a while for real results. 

Ryan Lizza has a new profile of Larry Summers in the upcoming issue of the New Yorker. A lot of the details about Summers’ time at Harvard are pretty well known, but it includes some interesting details about how decisions, especially around the stimulus and the banking programs, were made in times of crisis.

Summers played the role of "the ultimate murder board," according to Sperling, making the Treasury officials defend their ideas the way a Ph.D. student must defend a dissertation. He challenged and provoked Geithner to make sure that he had thought through every aspect of the plan. They argued back and forth, as they had done in the Clinton Administration, and their intensity was often jarring to the other Obama advisers. Summers didn’t trust the regulators, and was particularly worried about whether the stress tests designed by them were sufficiently tough on the banks. He pointed out that, in the days before Lehman, Bear Stearns, and Washington Mutual crashed, the same regulators had said that capital at those institutions was more than adequate.

In the end, though, Summers acknowledged that there were no better options, and Geithner’s plan survived intact. On March 31st, Summers sent the President a page-and-a-half memo outlining the reasoning behind the decision not to nationalize any banks. Obama was on his way to the G-20 meeting in London, and he wanted to be prepared with the best case against it.

Another piece with an interesting thesis, despite its muddled premises and pot-shots at liberalism, was Ross Douthat's column from the New York Times yesterday that argued:

So it's fair to say that if a period of Democratic dominance doesn’t close the gap between the rich and the rest of us, it will represent a significant policy failure for contemporary liberalism.

I don't really want to examine the recent policy failures of conservatism, and Douthat's argument is in many ways very wrong, but that one sentence is right. One way to close this gap is to retrain workers to be qualified for high skilled jobs that are currently, even with 9.8 percent unemployment, unfilled:

Even with 15 million people hunting for work, even with the unemployment rate nearing 10 percent, some employers can't find enough qualified people for good-paying career jobs.

Ask Steve Jones, a hospital recruiter in Indianapolis who's struggling to find qualified nurses, pharmacists and MRI technicians. Or Ed Baker, who's looking to hire at a U.S. Energy Department research lab in Richland, Wash., for $60,000 each.

Economists say the main problem is a mismatch between available work and people qualified to do it. Millions of jobs with attractive pay and benefits that once drew legions of workers to the auto industry, construction, Wall Street and other sectors are gone, probably for good. And those who lost those jobs generally lack the right experience for new positions popping up in health care, energy and engineering.

Seems like a national commitment to prepare the future workforce and train the "army of unemployed" referred to in this article is necessary. NDN took a first step in this, offering a proposal that would offer free computer training to all Americans through the nation's community colleges. More broadly, as Simon has argued, increasing the wages and incomes of every day Americans is the primary governing challenge facing policymakers today, a challenge made even more pressing given the severity of the great recession.

Writing in the Financial Times about the four things that stood out to him about the G-20 Summit, Philip Stephens points first to "China’s, albeit reluctant, embrace of multilateralism:"

Beijing is at last owning up to the fact that it is a leading actor on the global stage. A year or so ago, China was still clinging on to an essentially passive role in international affairs. Western injunctions for it to act as a responsible stakeholder in the multilateral system were met with protestations that such demands were premature: China was still a developing country, and it prized non-interference above western concepts of mutual dependence.

The global economic crisis upended that strategy by showing that Beijing cannot detach its domestic from its international interests. True, China has had a good crisis, demonstrating that it can continue to grow while the west is in recession. But the collapse of its exports has served as a potent reminder of the inextricable ties woven by globalisation.

This interdependence is taken for granted in western capitals. For Beijing it carries the uncomfortable implication that states have a legitimate interest in the framing of others' domestic policies.

This interdependence led to, as Stephens points out, China's headline grabbing climate change announcement, an important marker on the road to Copenhagen. Frankly though, that work by China, in the interplay between domestic and international politics, was a fairly easy calculation. China has already made a strategic decision to develop a home-grown renewable energy industry, this was a logical move.

Rather, the heavy lift for China will come in the commitment to balanced growth from the G-20. China’s consumers are notoriously reticent to, well, consume. And it's virtually entirely due to policy. As Michael Pettis, a professor at Peking University, writes in the New York Times:

The Chinese save such a high fraction of their income largely because of long-standing policies aimed at promoting and subsidizing domestic investment and manufacturing.

These policies inevitably require households to foot the bill, primarily through sluggish wage growth, low interest rates on their bank deposits, an undervalued currency and a weak social safety net. Since total savings is just the difference between what is produced and what is consumed, subsidizing producers at the expense of household consumers necessarily causes savings to rise.

Since, as NDN's Rob Shapiro writes, there is little chance of the U.S. bailing the world out of the great recession, there is, as Pettis says, a scary possible outcome to rebalancing:

As the U.S. rebalances its economy toward higher savings rates, China has no choice but to rebalance toward higher consumption rates. This can happen either because of a sharp pick-up in consumption growth or, more likely, a sharp slowdown in GDP growth. I worry that China will find it difficult to generate the kind of consumption growth that will take up some of the American slack, and we may be locked into a period during which the world adjusts by growing more slowly.

This G-20 seems to have been more successful than many would have thought, but the real crux of the global economic recovery may lie in getting the world's rising powers to connect their people to the global marketplace. As China adjusts to the responsibilities that come with others having a stake in their domestic economic policies, it will inevitably do what everyone else does: balance that responsibility with domestic politics. (Perhaps Chinese leadership will see fit to develop a social safety net in the form of universal healthcare; all the socialists are doing it these days.)

More from the G-20:

20 heads are better than 7 – NYT: Global Economic Forum to Expand Permanently

FT: World Leaders to Expand G20 Powers:

Rich countries will agree to give up 5 per cent of the total voting shares to be distributed to under-represented countries, including rapidly growing emerging economies such as China. The aim is to increase the legitimacy of these institutions. The leaders have agreed to put aside disagreements over the representation in the governing bodies of these institutions.

Lula – Rising powers doing their part (let them do more by concluding Doha):

Policies adopted by countries in the Global South have created tens of millions of new consumers, who will drive the recovery of the global economy.

WSJ Environmental Capital blog - Fossil-fuel subsidies to be phased out in the "medium run."

Developing countries—many of the same ones that are demanding that rich countries underwrite their transition to a clean-energy economy—spent $310 billion in 2007 to subsidize fossil-fuel consumption, the International Energy Agency says.

Stop spending so much to keep gasoline, diesel, and electricity artificially cheap, in other words, and you’ll have the cash to promote clean energy at home.

With the G-20 approaching next week, I'm pleased to present this backgrounder on some of NDN's most important thinking on the changing global economy. We are at a decisive moment in the global economic debate - a truly international recession rife with structural imbalances, climate change, and a U.S. - China trade spat are all likely to be at the top of the agenda. Here are some of our recent thoughts on these and many other important economic issues.

• Bhagwati Weighs in in Chinese Tires; China Plays U.S. Politics, September 14 - Jagdish Bhagwati joined NDN and the New Policy Institute on September 8 to discuss the future of the global economy. He discussed his opinion of the tire trade issue and the administration's response.

• The Key to the Fall Debate: Staying Focused on the Economy by Simon Rosenberg, September 3 - Huffington Post. Simon argues that in order for President Obama to reverse his and the Democratic Party's recent decline in public approval, the President must make the struggle of everyday people his primary rhetorical and governing concern.

• The Fault Lines in the U.S.-China Relationship by Dr. Robert Shapiro, July 30 - Shapiro argues that the divisions between the world's most powerful nation and most important emerging power matter a great deal, and, while they often remain unseen, can flare up at anytime. This relationship, an adversarial symbiosis, will be crucial to the future of global prosperity and security.

• Trade and Carbon, by Michael Moynihan, July 22 - Moynihan writes that we should be wary of using trade policy as a tool to combat climate change.

• Shapiro Speaks on G-20, Need for Global Economic Action, April 1 - At an NDN event on "The G-20 and Beyond: Challenges Facing the Global Economy," Shapiro delivered wide-ranging comments on the global Great Recession, its causes, and the global leadership necessary to combat it. The event also featured U.S. Rep. Adam Smith, Foreign Policy magazine Editor-in-Chief Dr. Moisés Naím. 

• U.S. Rep Adam Smith at The G-20 Summit and Beyond, April 1 - Ahead of the G-20 Summit, Smith, a Congressional leader on trade, terrorism, and international development, speaks on international trade and the need for a globally coordinated development strategy.

• The Fallout of the Great Recession for Trade by Dr. Robert Shapiro, February 11 - Shapiro argues that the world is currently experiencing the economic symptoms of protectionism without actual protectionist measures being put in place, which could have dangerous consequences for the global economy.

• Recovery Without E-verify and Buy American by Simon Rosenberg, February 10 - Rosenberg advocates for the removal of "Buy American" and E-verify provisions from the stimulus, provisions that will not stimulate the economy and will do more harm than good.