G20 calls for coordination of economic policy

   AP Photo/The Canadian Press, Sean Kilpatrick

 (This article also appears on the Examiner.)

It was perhaps no accident that in the same week during which President Obama asked the United  Nations not to rely on the United States to lead the world from its problems, his administration pushed the “Framework for Strong, Sustainable, and Balanced Growth” at the G-20 summit in Pittsburgh.  The Framework is positioned in the G20 communiqué as “a compact that commits us to work together to assess how our policies fit together”1. 

This innocuous statement seems to contradict other parts of the agreement that commit to free market principles: to “phase out inefficient fossil fuel subsidies”, “promote energy market transparency”, and “fight protectionism … toward a successful conclusion” of the Doha Round of trade liberalization talks.

Yet, contradictions abound.  Buried in the G-20 final communiqué are cryptic notions of “shared objectives”, “rebalancing” of growth, and “collective implications” with “mutual assessment” of national policies.  What all this means might be inferred from a letter that White House senior aide Michael Froman wrote to his G20 counterparts two weeks before the meeting2, "As private and public saving rises, the world will face lower growth unless other G-20 countries undertake policies that support a shift towards greater domestic, demand-led growth."   The administration seems to be exporting their apparent distaste for capital formation—the by-product of savings and investment—as the catalyst of economic growth.   It is one matter to keep these notions within the borders of one’s country; it is quite another to plead them as universal truths.

Two disquieting premises emerge from this faith in 20 governments’ ability to do collectively that which has eluded any single country.  First, in this concept of rebalancing lies the assumption that governments actually exercise control over their economic activity. Elsewhere in the communiqué the members reveal their exasperation that the contrary is true.  The best they could do, for example, to address future bubbles was to debate without conclusion the effect of bank capital, derivatives markets, and employee bonuses as contributing factors of crises.  Are such microeconomic concerns governments’ best tools to prevent overexposure to risk in a financial system, what they refer to in the communiqué as macro-prudential policy?  They seem, instead, to be admitting ignorance of the causes of the present crisis or impotence in preventing the next one. No mention was made of monetary policy or how the risk exposure of quasi-governmental agencies, like Freddie and Fannie, distort prudent decision making in the private sector.

The second troubling presupposition in the G20 Framework is that governments have the capability to share economic management as a group and then subject it to peer review.  Without having established the first premise, the second is obviously false.  Imagine Communist China, where the savings rate is as high as 40% and industry subsidized, assessing or being assessed by the United States where markets are freer but which only recently emerged from a negative savings rate and continually runs huge budget and trade deficits largely financed by China.  After the meeting, both China and the U.S. acknowledged the difficulty3.

Most telling is the admission by Froman after the meeting that members avoided difficult discussions about currencies4.  China controls its currency to manage exports as the dollar floats freely to low points against the Euro. Without addressing these distortions and allowing currency pricing to serve its purpose as the market’s efficient balancing mechanism, the Framework seems only to globalize government activism.

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[1] http://www.ft.com/cms/s/0/5378959c-aa1d-11de-a3ce-00144feabdc0.html

[2] http://online.wsj.com/article/SB125348959155226421.html

[3] http://www.bloomberg.com/apps/news?pid=20601087&sid=ap4NN32IHVDA

[4] http://blogs.wsj.com/g20/2009/09/25/currencies-didnt-come-up-in-rebalancing-talks/