Stephen Roach: Three Key Elements of a Rebalancing Agenda

Excerpt from Morgan Stanley economist Stephen Roach's September 8th essay:

There are three key elements of a rebalancing policy agenda: First, US authorities must act to temper the consumption excesses of an asset-dependent economy. Tax policy should be used to alter the tradeoff between consumption and saving. Some form of a consumption tax -- either a national sales tax or a VAT -- would make good sense in the current climate; not only would it encourage saving but it would also broaden the tax base and lower the budget deficit -- thereby boosting national saving and reducing the US current account deficit. The US must also run a tighter monetary policy aimed at curtailing the expansion the excess liquidity that has long fed its multi-bubble syndrome.

Second, the non-US world must move actively to embrace policies that boost private consumption. This will wean the world from excess dependence on the American consumer -- tempering the damage from a US-led export compression scenario. A stimulus to global consumption won’t work without structural labor market reforms in Europe and Japan. China also needs to boost consumer demand; pro-consumption elements of the newly enacted 11th Five-year Plan are actually quite encouraging in that regard.

Third, the stewards of globalization -- namely G-7 finance ministers, the IMF, and the world’s major central banks -- must remain committed to rebalancing. So far, so good. The IMF recently moved to implement a new multi-lateral surveillance and consultation process that initially includes the US, Europe, Japan, China, and Saudi Arabia. Major central banks seem firm in their resolve to withdraw excess liquidity. And German Chancellor Angela Merkel, the new head of the G-8 for the next year, seems determined to focus the policy debate on global rebalancing.