Adam Posen, a leading practitioner of the dismal science of economics, gave an unusually upbeat overview of the economy–both global and American–to The Chicago Council on Tuesday evening.
“We [the US] aren’t doing as well as we should be, but we’re grappling with it,” Posen, the president of the Peterson Institute for International Economics, said. “China’s development is a good thing for humanity. The threat from China is exaggerated.”
Posen was the second speaker of the Council’s spring Global Economy Series. A regular media commentator, he advises governments around the world and, although an American, served on the Bank of England’s Monetary Policy Committee.
“We’re moving into a world of more normal economies,” he said. In his writing, he has explained that a half-century of American dominance is ending, but is being replaced by a more balanced world with rising middle classes, low inflation, and multiple reserve currencies, similar to the Victorian Era at the end of the 19th century.
Many of our biggest worries are more problems than crises, Posen said. He cited five major issues:
- Emerging markets, especially the so-called BRICS–Brazil, Russia, India, China, and South Africa.
- The American economy and the debt.
- Financial stability. Is another 2008-style crash coming?
- World trade–the one area where he expressed real worry, even anger.
Starting with China, Posen said that “even if they want to be a threat, they’re not.”
China’s 30-year boom “has been a miracle,” but it’s got “trouble continuing along the same path now.” The Chinese must reform their banking system, reverse dominance by heavy industries, and, in general, just slow down. It sounds like a big job, but Posen was hopeful.
“Slowing down China is not easy,” he said, “but it’s easier than, say, in the United States. The Chinese slow-down now is through intentional policy, so therefore it will be temporary.”
In the long run, he said, the outlook for China is “pretty good…We’re broadly bullish on China.”
Not so for the BRICs, or the “Spare Ribs,” as he called them–the BRICs minus China. All suffer from too much boom and too much easy money that have taken them too far too fast.
“But this is solvable,” he said, comparing the situation to earlier ones, such as the Latin American sovereign debt crisis of the 1980s. “We’ve been there before.” Political pressures make it hard for policymakers to do what they need to do, but he seemed confident they would.
There will be “a bad stretch,” he said, “but not a global problem.”
In the meantime, other important emerging economies–much of Latin America, for instance, or Poland and Indonesia–“are sticking to pro-market policies, so the prospects for them are very good.”
Washington is beset by political “games-playing,” Posen said, but “the fundamental economic situation of the United States is very strong.”
The federal debt is a manageable problem, he said. There is a relatively narrow gap between federal spending and taxes, “so some very incremental changes to the tax code could make a difference.”
The government’s structural deficit is about 2.5 to 3 percent of gross domestic product, he said, “and that’s not a very large deficit when the economy is growing by 2 percent per year.”
The American health system “is really stupid,” Posen said, but there’s no reason to think it’s “inherently unstable.” Already, he said, Obamacare “is helping. It’s not solving the problem. But it’s helping.”
Another 2008-style financial crisis is unlikely, he said. “We’ve made good progress” on forcing banks to build adequate capital reserves. Finding a proper balance on financial regulations is still elusive, he said: “we’ve made decent progress on regulation, but it’s still spotty.”
Americans tend to see many threats from China–low-wage competition for jobs and intellectual property theft, for instance – “but I don’t think these threats are very threatening.”
Posen argued that “American workers don’t compete on price,” but rather are passing on low-wage jobs to foreigners “who are willing to do this and get richer.”
The fear that American jobs are moving to low-wage places “is a labor fallacy. It’s just not true.” Instead, he said, 1.2 billion people in China, India, and Eastern Europe now enjoy decent living standards, “and this came without any real cost to the United States, or to American human beings.
“That’s a triumph,” he said, and the United States “is richer now.”
Posen reserved his greatest anger for politicians, especially “people on the left of the Democratic Party,” who oppose fast-track authority for President Obama in negotiating new trade pacts with Asia and Europe.
The Administration is “capitulating” to Congressional fears of free trade, he said, and “it’s shameful. It’s shameful for America’s global strategy. It’s just so shortsighted and a shame.”
Richard C. Longworth is a senior fellow at The Chicago Council on Global Affairs. Read more of his program summaries and recent publications or follow his blog.