Rest-of-world saving US from recession?

Time was, the US economy dominated the world economy to such a degree that economists would quip that if the US economy sneezed the rest of the world would catch a cold.
Things have changed.
While the US is still a huge player in the world economy, its total (ppp*) GDP is now less than that of the European Union. This great chart, that compares the GDP’s of the EU and its constituent states with those of the US and its constituent states, tells us that in 2006, the ppp GDP of the EU was $13.3 trillion, while that of the US was $13.1 trn. And this PDF chart from the World Bank tells us that in 2007 the ppp GDP of the US was $13.8 trn (21.2% of the world total of $65.2 trn) while that of China was $7.1 trn (10.9% of the world total.)
Recently, the veteran international economist Fred Bergsten has started talking about the “reverse coupling” of the economies of the US and of the rest of the world. At last January’s Davos World Economic Forum he defined that as occurring “when the others will help keep the US from falling too far.”
On July 1, Bergsten published a Financial Times op-ed titled Trade has saved America from recession. In it, he argued that “reverse coupling” had already started to occur.
He wrote,

Continued expansion abroad, especially in the emerging market economies, has in fact cushioned the [US] slowdown and so far prevented recession in the US. Hence we are also experiencing the first episode in history of reverse coupling, in which the rest of the world pulls the US forward rather than the opposite.

He explains what has been happening thus:

The improved US trade performance of the past two years is due partly to the substantial, if lagged, restoration of the country’s price competitiveness as the dollar declined by a trade-weighted average of 25-30 per cent since early 2002, reversing most of its excessive run-up during the previous seven years… Equally important, however, is the continued robust growth of the world economy. Every percentage point by which the rest of the world expands domestic demand faster than internal growth in the US produces gains of about $50bn (€32bn, £25bn) for the US external balance. Weighted by US exports, foreign growth exceeded US growth by about 2 percentage points in 2007 and will do so by an average of about 1.5 points this year and next as decoupling persists. Taken together, these currency and comparative growth factors have already improved the real US trade balance, and hence GDP, by almost $150bn since 2006, with gains of another $150bn or so likely through 2009. (The nominal US trade and current account deficits will not improve as much because of the sharp rise in the price of oil imports.)

His conclusion is this:

These international macroeconomic developments also provide another telling indication of the shifts in global economic power. As noted, the emerging market economies make up about half the world economy, so their growth of 6-7 per cent assures reasonably strong world output increases even if there were no expansion at all in the rich countries. China alone accounts for 10 per cent of the global total, so its annual expansion of 10 per cent generates a full percentage point of world growth all by itself. The steadily rising diversification of global economic leadership is paying huge dividends to all its participants, most dramatically during this episode to the US as export-led growth saves it from at least the worst ravages of its housing bubble and associated policy errors.

Bergsten is far from being alone among economists and policymakers in seeing the fortunate, “reverse coupling” effect that the economies of the non-US 95% of humanity have been having on the US economy.
In this piece of reporting from Washington (HT: Nazia Vasi of 2point6billion), Xinhua’s Liu Hong quotes Jim O’Neill, the chief economist at Goldman Sachs, as noting that China “is now contributing more to global demand than the United States.”
Liu cites IMF data showing that China “has accounted for about one-quarter of global growth over the past five years. Altogether “the BRICs”– that is, Brazil, Russia, India, and China– “have accounted for almost half of global growth and all the emerging and developing economies together for about two-thirds, compared with about half in the 1970s.”
Liu also quotes Bergsten as saying, “”China now plays a decisive role in the world economy as indicated by its dominant role in global economic growth.”
Well, evidently, China– whose population is four times that of the US– will still have to grow about sevenfold for its per-capita GDP to reach that of the US’s citizens. (If we’re committed to the equality of all human persons, we would want to see that happen– or to see the US doing some quite plausible “leveling down.” But if we’re committed to the survival of humanity on this fragile planet of ours, we need to work fast and hard to find ways for this to happen without carbon-emitting us all into overheated oblivion.) But for Americans who have long taken pride in their (our) country’s role as the motor for world economic growth it is important and interesting to recognize that right now, our economic world wellbeing is dependent on the economic performance of others around the world, not just on our own.
This gives us a lot of new ways to think about economic globalization. I completely understand the concerns of those in the US who worry about job-losses in our country when their functions are shifted to lower-paid workers elsewhere. And I am also very concerned about the horrendously destructive effects that the strongly pro-free-trade policies pursued by the “Washington consensus” over the past 20 years have had on entire societies and nations that are much more vulnerable than we are– in sub-Saharan Africa, Latin America, or Asia. The heartless, greedy way that economic globalization has been pursued in the past 20 years has inflicted huge damage on hundreds of millions of the world’s most vulnerable people.
But it has also had some benefits for world humanity. Crucially, the degree of economic entwinement that has been built up among the world’s major power blocs has made open warfare among them less likely– certainly a huge benefit to us all.
Also, there are many measures that can be taken even within the context of the world’s current, strongly pro-trade economic structure that can (a) straighten out the extremely unfair “tilts” in the world economic playing field that the rich nations have maintained in it– to their own clear advantage– for many years now, and (b) start to build into the world economic order the kinds of social protections for the world’s most vulnerable that nation-states have nearly always had for their own most poor and vulnerable.
Why not? If we all plan together and pull together on this, it is enitirely doable. To put it bluntly, there is actually quite enough basic material “stuff” (including food) to go around in the world today, and to offer all the world’s people the hope of a decent, meaningful life and the development of their capabilities… Provided we can start to really see each other– all around the world– as worthy of our care and concern.
(I note that when modern-day academic economics was launched by John Stuart Mill, Adam Smith, and others in the British empiricist school, it was pursued as a sub-branch of “moral philosophy,” that is, of philosophical ethics. We certainly need to honor and return to those roots as we ponder the challenges the world economy faces today.)
As I blogged here earlier this week, the present era is one of the “return of geography” to many dimensions of the world order that some people– neoliberals and others– have long assumed could be kept effortlessly “global.” And yes, the rise in fuel prices will undoubtedly change some aspects of what happens in the world economy. But this is far from signaling a retreat to isolationism and autarky in international economics. Russia, China, the EU, the US, and other international actors all strongly need each other, at the economic level, if their own economies are to survive and prosper.
And right now, we here in the US should just be very glad that the world trade system our country has dominated for the past 63 years has now grown strong enough to help cushion or support our own economy from effects of its gross mismanagement of recent years. Thank you, world!
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* “Ppp” is a unit called “Purchasing power parity dollars” that allows international comparisons of things like GDP among countries with different price structures. It’s not perfect but I think it gives a better picture than raw $ figures for GDP.