Shuffle - Desmond Lachman Resident Fellow Desmond Lachman

As the G-20 heads of state ponder the policies that might be needed to support the global economic recovery, one consideration should be foremost in their minds. The U.S. consumer, long the world's consumer of first and last resort, is no longer going to be the principal driver of the global economy. This prospect should focus the G-20's attention on the critical issue of finding an alternate source of aggregate demand to keep the global economic recovery on track.

Two considerations would make one think that U.S. household consumption is all but certain to be very weak in the period ahead. The first is that with U.S. unemployment likely to remain at around 10 percent for a protracted period of time, U.S. wage growth is going to be flat at best and could very well decline by the end of 2010. The second is that households are almost certain to continue to increase their savings in reaction to their record levels of indebtedness and to the large losses they have recently suffered on their equity and housing wealth holdings. Trying to save more when income is stagnating could lead to an actual decline in U.S. consumption levels going forward.

Faced with the prospect of a more frugal U.S. consumer, the world economy has to find an alternate source of demand if the global economic recovery is not to peter out. In that context, one has to hope that the world's major surplus countries, like China and Germany, recognize their responsibility to promote household consumption in their own countries to offset the prospective slowing in U.S. consumption. Sadly, if recent history is any guide, one should not expect either the Germans or the Chinese to rise to the occasion and to run policies in the global interest even if they have most to gain from a well-functioning global economy.

Desmond Lachman is a resident fellow at AEI.