Today's date:
Winter 2011

Domestic Inequality Is Root of US-China Conflict

Robert Reich is a former US Secretary of Labor. He is currently a professor at the University of California, Berkeley. His latest book is Aftershock: The Next Economy and America’s Future.

Berkeley, Calif.—President Barack Obama emerged from the G-20 Summit in Seoul in November saying the heads of state and finance ministers gathered there had agreed to “get the global economy back on the path of recovery.”

But where are the specifics? The three-page communique that also emerged from the session brims with bromides about the importance of “rebalancing” the global economy, “coordinating” policies and refraining from “competitive devaluations.”

All that sounds nice, but there was not a single word of agreement from China about revaluating the yuan—or from the United States about refraining from further moves by the Federal Reserve to flood the US economy with money by purchasing massive amounts of US Treasury bonds. Such purchases result in reducing interest rates, thus causing global investors to look elsewhere for higher returns and lowering the value of the dollar. Emerging economies in particular worry about “hot money” flowing in to their markets looking for higher returns.

China and the US are the only big players in the currency game. And with neither of them stepping up to bat, the game is in dangerous territory. Other nations will now do whatever they can to reduce the value of their currencies in order to stimulate more exports and therefore create more jobs. In economic lingo it’s called “competitive devaluation.”

The underlying problem isn’t just, or even mainly, an international imbalance between nations. It’s an imbalance within many nations—especially inside the US and China. In the US, more and more income is concentrating at the top, thereby reducing the relative purchasing power of the vast American middle class. That means more pressure on job-creating exports to fill the gap.

In China, more and more income is going to the productive sector of its huge economy rather than to Chinese consumers, thereby reducing the relative purchasing power of the Chinese relative to what the nation is producing. That means more pressure on exports to fill the gap.

It’s always nice to talk about international cooperation and to create global photo ops. But the truth is that much more needs to be done to ease tensions that are moving the global economy closer to the brink of outright protectionism. The key responsibility falls to China and America—both in terms of what they do internationally and also what they do domestically.

So far, both have failed.