Journal of Policy Modeling 33 (2011) 679–681

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Editorial

1. Part A: The United States in the World Economy

Part A of this Special Issue on “The United States in the World Economy” arose out of theSession that I organized and chaired at the Annual Meeting of the American Economic Association(AEA) held in Denver, Colorado, on January 8, 2011.

Recovery from the deepest recession of the postwar period that started in the second half of2009 in the United States was slow during 2010. Looking past the slow recovery, the questionasked the Panelists was “How rapid is growth likely to be in the United States during this decadeand the next, and how long it will be before China will overtake the United States as the largesteconomy in the world?” The topic is crucial and the Panelists most distinguished.

Dominique Strauss–Kahn could not participate in the Roundtable because, at the time, he wasin the process of deciding whether to leave his post as the Managing Director of the InternationalMonetary Fund to run as the President of France, but he sent John Lipsky, his first Deputy ManagingDirector, who contributed his paper to this Special Issue. Douglas North and William Baumolcould not participate because of illness, but Baumol submitted his paper (included in this SpecialIssue) while North did not. Edward Prescott and Martin Feldstein participated in the Roundtablebut did not contribute a paper to this Special Issue. Finally, Dale Jorgenson participated in theRoundtable and submitted his joint paper with Khuong M. Vu.

In the first paper of Part A of this Special Issue on “Trade, Education, and Innovation: Prospectsfor the U.S. Economy,” Ralph Gomory and William Baumol argue that in the face of mercan-tilist or protectionist practices by U.S. trade partners, efforts to increase innovations, withoutretaining manufacturing jobs, will not ensure prosperity in the nation, as the number of jobsentailed in the invention process is small compared with the number of jobs associated withmanufacturing innovative products for mass consumption. The authors conclude with calls forthe urgent rethinking of trade policy by the United States and other developed nations if theyare to balance their imports and exports, and ensure continued high economic growth in thefuture.

In their “The Rise of Developing Asia and the New Economic Order,” Dale Jorgenson andKhuong Vu predict that China will overtake the U.S. in terms of gross domestic product (GDP)during the next decade, ending more than a century of U.S. leadership as the world’s largesteconomy; Developing Asia will overtake the G7 countries; India will overtake Japan, Russiawill overtake Germany, and Brazil will overtake the U.K., leading to the following New WorldEconomic Order: China, the United States, India, Japan, Russia, Germany, and Brazil.

0161-8938/$ – see front matter © 2011 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.doi:10.1016/j.jpolmod.2011.07.001

680 Editorial / Journal of Policy Modeling 33 (2011) 679–681

John Lipsky, in his “US Fiscal Policy and the Global Outlook,” points out that IMF analysisshows that fiscal measures contributed about 2 percentage points to U.S. GDP growth in 2009,and another one percentage point in 2010, but it sharply increased the U.S. national debt, so thaturgent action is now required on the part of the United States in order to secure medium-termfiscal sustainability. The author points out that although this would depress near-term growth whenanalyzed in isolation, it would boost it over the longer term by providing a powerful example of thepotential benefit of global policy cooperation. He concludes that the process of the United Statesreturning to fiscal sustainability is facilitated by the G-20’s “Framework for Strong, Balanced andSustainable Growth,” launched at their Pittsburgh Summit in September 2009.

2. The Dollar, the Euro, the Renminbi and the International Monetary System

Part B of this Special Issue includes papers related to the Session on “The Dollar, the Euro,the Renminbi and the International Monetary System” that I also organized and chaired at theAnnual Meetings of the American Economic Association in Denver. It includes papers by MartinFeldstein, Peter Kenen, and Ronald McKinnon, who participated in the Denver Session, as wellas papers by Otmar Issing and Barry Eichengreen, who could not participate in the Session.

In his “The Renminbi as an International Currency,” Barry Eichengreen points out that Chineseofficials are fully committed to the internationalization of the renminbi and to making Shanghaia leading international financial center, on par with New York and London, by 2020. Achievingthis requires creating a deep and liquid financial market open to foreign investors. According tothe author, the Internationalization of the renminbi will be a good thing for the world and forChina – For the world because countries seeking to accumulate international reserves would thenhave alternative to accumulating dollars – for China because Chinese firms and investors wouldbe able to limit their foreign exchange exposures and China will be able to follow an independentmonetary policy tailored to domestic conditions.

In “The Role of Currency Realignments in Eliminating the US and China Current AccountImbalances,” Martin Feldstein suggests that public and private actions in the United States andChina are likely to lead to the reduction or even the elimination of their current account imbalancesin the next few years. He points out that although government actions in both countries haveactually contributed to their persistence and prevented market forces from correcting the problemin the past, the expected increase in the rate of savings in the United States and reduction in Chinaare likely to resolve those imbalances in the future without the need for any specific governmentpolicies.

Otmar Issing, in his “The Crisis of the European Union—Lessons to Be Drawn,” provides ananalysis of the present crisis of European Monetary Union (EMU) and how it could unfold in anenvironment of national policies lacking discipline and control. Issing points out that the presentEMU crisis is not a crisis of the euro itself but a crisis of the Union. In particular, he points out thatthe cumulative divergences that have developed in the EMU over the years should have warnedpolicymakers of the looming crisis, even before the global financial crisis occurred. The authorthen outlines remedial actions required to deal with the current EMU crisis and the institutionalreforms necessary to avoid similar crises in the future.

In “Beyond the Dollar,” Peter Kenen points out that the international reserve regime basedmainly on the US dollar has served the world well for decades, but it faces an uncertain future asthe economic hegemony of the United States is increasingly challenged by the emergence of neweconomic powers, particularly China. Kenen states that the present international monetary systemhas a fundamental flaw due to the fact that additions to the supply of dollars require the United

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States to run balance-of-payments deficits, which tend to undermine confidence in the dollar. Theauthor proposes the Special Drawing Rights (SDRs) issued by the International Monetary Fundas the main reserve asset, in substitution to the U.S.dollar. He suggests that an orderly transitionto such a new system would be achieved by creating a Substitution Account into which officialholders of dollars could deposit them in exchange for SDRs.

Ronald McKinnon, in his “Beggar-Thy-Neighbor Interest Rate Policies,” states that by beingthe center of the international monetary system, U.S. monetary policy strongly affect its neighbors.Beginning with the Nixon shock in 1971, American policy makers have frequently ignored foreigncomplaints that by ignoring this fact, the United States has made both the American and the worldeconomies less stable. The most recent example is the Fed’s policy of setting short-term interestrates close zero since mid 2008, and then compounding this effect in late 2010 by “quantitativeeasing” designed to drive down long rates as well in order to stimulate economic activity andrestart growth in the United States. But this led to strong complaints by foreign officials at theNovember G-20 meeting in Seoul that hot money inflows from the United States created stronginflationary pressure in their countries.

In the last paper, this author states that reforms are required in order to solve the most seri-ous problem facing the present international monetary system, which is the large and persistentmisalignments among the world’s leading currencies (dollar, euro, and renminbi). Currency mis-alignments disrupt the pattern of specialization and trade based on comparative advantage, andthey can lead to dangerous trade disputes and protectionism. Correcting currency misalignmentsand asymmetries in the system, requires the elimination of the deep structural imbalances thatexist among the major economies areas, especially between the United States and China, as wellas allowing exchange rates to move toward their equilibrium level by the leading countries. Someof these adjustments are already taking place, but the process must be institutionalized.

Dominick Salvatore ∗Department of Economics, Fordham University, Bronx, NY 10458, USA

∗ Tel.: +1 718 817 4045; fax: +1 914 337 3355.E-mail address: salvatore@fordham.edu

Available online 7 July 2011