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These proposals present what is perhaps the most serious macro risk to the US standard of living in our history.
It is truly the blind leading the blind.
Seems they’ve all forgotten none of us are on a gold standard,
That exports are real costs, and imports real benefits, and that taxes function to regulate aggregate demand, and not to ‘raise revenue’ per se.
While this has never been understood by the mainstream, but it has never mattered as much as it does today:
# [ The focus is on a U.S. proposal, called the “Framework for
Sustainable and Balanced Growth,” whose details haven’t been previously
disclosed. If implemented, the framework would involve measures such as
the U.S. saving more and cutting its budget deficit, China relying less
on exports, and Europe making structural changes to boost business
investment.]
# [ But U.S. and European officials say that this time China is on board
because it recognizes that its export-driven model won’t deliver
sufficient growth in the future, and because the new framework would
potentially spread the political pain to trading partners too.]
By Bob Davis and Stephen Fidler
Sept. 22 (WSJ) — The Group of 20 nations is scrambling to finalize a plan before this
week’s Pittsburgh summit that would commit the U.S., Europe and China to
make big changes in national economic policies to produce lasting growth
as the world recovers from the worst recession in decades.
The G-20 summit, the third such gathering in a year, is shaping up as a
test of whether industrialized and developing nations can function as a
board of directors for the global economy.
The focus is on a U.S. proposal, called the “Framework for Sustainable
and Balanced Growth,” whose details haven’t been previously disclosed.
If implemented, the framework would involve measures such as the U.S.
saving more and cutting its budget deficit, China relying less on
exports, and Europe making structural changes to boost business
investment.
“As private and public saving rises,” in the U.S. and other countries,
“the world will face lower growth unless other G-20 countries undertake
policies that support a shift towards greater domestic, demand-led
growth,” senior White House aide Michael Froman wrote to his G-20
colleagues in a letter dated Sept. 3. In the missive, which has not been
made public, he called the framework “a pledge on the part of G-20
leaders” to press new policies.
The proposal has set off political wrangling among the G-20, with
European countries arguing that the U.S. may be unrealistic about how
rapidly the global economy can grow and with China only reluctantly
agreeing to participate. The U.S. helped bring along the Chinese by
endorsing Beijing’s view that developing countries deserve a bigger
stake in international institutions such as the International Monetary
Fund.
The G-20 countries have yet to decide how detailed to make their pledges
to change. And the U.S. and Europe have different ideas on how to
enforce them. “Implementation is always the issue,” says Timothy Adams,
a former senior Bush Treasury official. “If we wait even one more year,
it may be too late.” The sense of urgency will have faded, he says.
Past efforts to remedy these issues have collapsed, especially after a
sense of crisis had passed. In the 1980s and early 1990s, the Reagan,
Bush and Clinton administrations regularly pushed for rebalancing —
although Japan was the target then — and never made much headway. Once
Japan plunged into a decade-long slump, the U.S. eased off.
In the days leading up to the Pittsburgh summit, representatives of the
G-20 nations have agreed how to dodge one big issue: devising an “exit
strategy” to withdraw the monetary and fiscal stimulus deployed to fight
the global recession. The solution is to promote such a strategy as
necessary, while stopping short of articulating specifics. Any
prescription to phase out various economic programs could spook markets
into anticipating a quick pullback, G-20 officials say.
A compromise is emerging on another, two-pronged issue: How best to keep
financial excess and corporate compensation in check. The summit is
likely to produce support for new limits on compensation, a theme bing
pushed by the Europeans. The G-20 is also expected to approve new
requirements sought by the U.S. that banks hold more capital to
discourage risk-taking and absorb big losses.
G-20 officials say they are counting on sense of camaraderie to keep
them working together rather than pursuing conflicting national goals.
“In this age of deeper globalization, international coordination is
critical,” says Il SaKong, a prominent South Korean economist who
oversees that country’s G-20 effort. “The leaders learned this lesson;
they felt it.”
China, meanwhile, has pressed for more voting power for developing
countries at the IMF. In response, the U.S. is pushing the G-20 to agree
to change IMF voting, so that it’s split nearly 50-50 among
industrialized and developing countries, rather than the current 57% to
43% lineup. Although much of the lost power would come at the expense of
Europe, the European Union leaders said at a recent meeting that they
are willing to support some degree of change.
The move to give developing countries a bigger voice has built a degree
of trust within the G-20 and helped give impetus to make the framework
for growth a central focus. If approved, the framework would require
countries to make specific proposals promising significant change.
Those countries running current account deficits, most notably the U.S.,
would have to define ways to boost savings. Nations running surpluses —
China, Germany and Japan, among others — would detail how they propose
to reduce any reliance on exports. The U.S. would likely need to commit
to a sharp deficit reduction by government.
Europe would need to commit to improving competitiveness. That could
mean passing investment-friendly tax measures and reopening the debate
about making it easier to fire workers — viewed as one way to encourage
employers to hire more freely.
China would face perhaps the biggest challenge: remaking its economy so
it relies far less on exports to the U.S., thereby running up huge
foreign exchange reserves. In the past, China has shied away from such
“rebalancing” efforts because of the magnitude of the changes and
because it believes it’s being singled out for the world economic woes,
which it feels were caused by regulatory lapses and other failings in
the U.S. and Europe. “They don’t want fingers pointed at them,” says
Nicholas Lardy, a China expert at the Peterson Institute for
International Economics, a Washington D.C., think tank. “It comes up
over and over again.”
But U.S. and European officials say that this time China is on board
because it recognizes that its export-driven model won’t deliver
sufficient growth in the future, and because the new framework would
potentially spread the political pain to trading partners too.
In 2006, the IMF tried its hand at rebalancing by convening talks among
the U.S., euro-zone nations, Japan, China and Saudi Arabia. Specific
proposals were made, but nothing was implemented, as Treasury Secretary
Henry Paulson figured he’d have better luck bargaining bilaterally with
China. He didn’t, especially when each country’s economy was expanding.
“The really hard part is getting an agreement of what the rules should
be and what the penalty is” for breaking them, said Anne Krueger, a
former IMF deputy managing director. G-20 officials argue that if they
don’t succeed this time, the world will remain stuck in economic
patterns that could reduce potential growth and perhaps produce another
crisis down the line.
Any new framework hinges on proper enforcement. To that end, European
sherpas, including the British, are pushing for a “trigger” mechanism.
If country’s current account surplus or deficit goes over a certain
limit, for instance, that would require negotiations to get the country
back in line.
The U.S. is pressing for what it calls a “peer review” process, by which
G-20 countries, with the help of the IMF, would assess whether each
other’s policies are working.
None of the countries, though, are calling for specific redress, such as
trade sanctions or foreign-exchange penalties for countries that don’t
live up to their promises. Threats of penalties have frightened off
Asian nations in the past and would likely sour any deal.
Instead, the G-20 officials point to how they have dealt with
protectionism as a model. Each country regularly pledges it won’t take
any protectionist action. The World Trade Organization calls out
countries that violate their pledge. Generally, G-20 officials believe
the pledges have had a restraining effect on governments.
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