ROBERT SIEGEL, host:
From NPR News, this is ALL THINGS CONSIDERED. Im Robert Siegel.
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And Im Melissa Block.
Standing in front of a mix of Chinese and American flags, President Obama, then President Hu Jintao accentuated the positive at a news conference in Beijing today. They spoke of the importance of the U.S.-China relationship and about cooperation on a wide range of issues. On the big topic of the economy, they agreed to do something about the imbalances that helped bring about the financial crisis.
But as NPRs John Ydstie reports, change wont come easily.
JOHN YDSTIE: In the run-up to the financial crisis, the U.S. and China reinforced each others bad habits. Americans happily consumed more than they could afford using borrowed money, much of it from China. Meanwhile, China gladly kept Americans shopping by exporting products at artificially low prices. After his meeting with President Hu today, President Obama said the leaders had recommitted to taking a more sustainable approach to growth.
President BARACK OBAMA: A strategy where America saves more, spends less, reduces our long-term debt and where China makes adjustments across a broad range of policies to rebalance its economy and spur domestic demand.
YDSTIE: But how likely is it that the two countries will be able to make good on those pledges? First, lets consider what China needs to do, which is focus more on selling to its own people and less on exporting to the rest of the world. The first step in that process, says Ken Rogoff, a former chief economist at the International Monetary Fund, is for China to take its thumb off the currency scale. Virtually the whole world believes that Chinas currency, the yuan, is significantly undervalued.
Mr. KEN ROGOFF (Former Chief Economist, International Monetary Fund): They are flirting with allowing their currency to appreciate a little faster, but theyre very nervous about doing anything to throw off the export machine.
YDSTIE: If its currency rose in value, Chinas exports wouldnt sell as well. The countrys growth would slow and unemployment would rise. To pick up the slack, Shanghai economist Andy Xie, who used to be an analyst with Morgan Stanley, says Chinas government needs to give households the means to consume more. Right now, he says, Chinese workers are intensely focused on saving for retirement - thats partly a result of Chinas one-child policy.
Mr. ANDY XIE (Economist, Former Morgan Stanley Analyst): You have two parents, four grandparents and one kid, and obviously all these people are not going to depend on this kid for their retirement. So theyre all preparing for themselves.
YDSTIE: With Chinese households stuffing their mattresses, theres not much money left for shopping. The government has taken some steps, boosting pensions and health care. But Xie says the government needs to do more. He suggests taking government-owned shares in Chinese companies and giving them to individuals. That could boost consumption and make the Chinese economy less dependent on exports. But, Xie acknowledges, this would be politically challenging. Ken Rogoff says the U.S. faces its own hurdles in getting Americans to save more and spend less.
Mr. ROGOFF: It is massively difficult politically. We like to shop. We like to consume.
YDSTIE: Fear of unemployment and declining wealth has recently prompted Americans to save more, but Rogoff, now a professor at Harvard, thinks the U.S. needs financial reform to cement the progress.
Mr. ROGOFF: We have to prevent the situation where consumers are going nuts the way they did in the run-up to the financial crisis.
YDSTIE: That means discouraging risky lending by banks and eliminating things like no-money-down mortgages and government subsidies that supercharged the housing market. But Rogoff is doubtful theres the political will to do what needs to be done. As for the other step in U.S. rebalancing, reigning in our massive budget deficits, Rogoff says that may be even harder because it will require tax hikes.
Mr. ROGOFF: Its deeply embedded in the American psyche now that we dont need to pay taxes and yet we expect all these government services.
YDSTIE: And, says Rogoff, raising taxes only on the rich wont balance the budget and live up to the commitment President Obama repeated today. More likely, says Rogoff, a value-added tax or national sales tax would be needed. That would both reduce consumption and help balance the budget.
John Ydstie, NPR News, Washington.
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