The imbalances that were at the root of the crash of 2008 remain to be corrected and the private sector is unable to do it on its own. The US still consumes more than it produces, running a chronic trade deficit. Consumption is too high at nearly 70 percent of GDP, compared to an unsustainably low 35.6 percent for China. Households are overindebted and need to increase their savings rates. The US economy badly needs investments that enhance productivity but the private sector is unwilling or unable to provide them. US corporations operate very profitably but instead of investing their profits they are building up their liquidity—accumulating money, not investing it. In these circumstances there is a strong case for government intervention. Admittedly, consumption cannot be sustained indefinitely by running up the national debt. But to cut back on government spending at a time of large-scale unemployment would ignore all the lessons learned from the Great Depression.
The obvious solution is to draw a distinction in the budget between investments and current consumption and to provide additional stimulus for investments but not for consumption. Such a stimulus program coupled with a gradual appreciation of the renminbi would go a long way toward correcting the prevailing imbalances. Consumers would spend less on imported goods because they would cost more and corporations would find it more profitable to invest at home, creating more jobs. The trade deficit would shrink. Prices would move toward the inflation target of 2 percent, removing the threat of a deflationary spiral. The economy could start growing its way out of the prevailing imbalances.