Friday, October 22, 2010

A Very Small Step

The 4% solution proposed by Tim Geithner—countries should try to keep their current account surpluses or deficits within 4% of their GDP—offers the glimmer of a beginning of a first step toward rectifying global imbalances. In its own terms, the proposal is largely empty: it is strictly advisory, and it doesn’t specify how the goal is to be achieved. Nevertheless, I feel a little twinge of optimism. Something is beginning to stir.

Global imbalances have been a threat to economic stability for decades, going back at least to the 1970s. We had a crisis in 1982, and then another in the late 90s, and now the current crunch, all attributable to the absence of any institutional or structural force capable of keeping trade and capital flow imbalances within reasonable limits. The scramble for unconstrained external surpluses, or to avoid unconstrained external deficits, has resurrected mercantilism as a dominant philosophy of development, and it exerts intense downward pressure on environmental and social standards. (This pressure shows up as a failure to raise standards as much or more than as a propensity to weaken them.) It’s a central problem that cries out for a solution.

The benchmark isn’t it, but it at least puts the question on the table. Perhaps the realization will dawn that a modification of the international economic architecture to keep imbalances within limits is worth some effort. How this could be implemented is a topic for investigation and debate: how much can we rely on automatic exchange rate triggers, capital control safety valves or tradeable import quotas? How to get the most stability with the least distortion? The bland suggestions in Geithner’s message (“increase/decrease your savings rate”) have little to offer in this respect.

Economists don’t have to wait for the politicians to lead; they can begin thinking now about how to construct mechanisms that can keep imbalances within safe limits.


Shag from Brookline said...

Peter, are you suggesting that economists can lead? Some examples, please. (Keynes seems to have been a leader, but look at the treatment he is getting today, especially in Europe. Surely Milt Friedman was not a leader. Yes, there is Paul Krugman today, but he is considered too shrill and too Keynsian.)

In my view, Globalization is on trial. How can justice and fairness be addressed by the world powers to benefit all nations? There is no real governance for Globalization, other than that of powerful nations.

jsalvati said...

What are the most plausible theoretical reasons to think that "imbalances" are bad?

TheTrucker said...

Imbalances are bad because the nation that polices the property rights necessary to the realization of profits and rents gets shortchanged by capital flight. As the USA defends markets and ownership all over the globe, the people "investing" outside the tax jurisdiction are making out like bandits while the US middle class is left with no way to make a living.

We have economic warfare between China and the rest of the world. The Chinese do not have an armada on the high seas and military bases all over the glob which they must support. And they take full advantage of that as do the Japanese. Disarmament and retraction of military posts is the proper solution, but then the rightarded will scream like tiddy babies.

China is not delivering the income from its production to the actual Chinese producers. Instead, the Chinese government is using the income to buy T-Bills and to invest in ownership of resources in the rest of the world. And this continues to happen because the rest of the world does not appropriately TAX imports. The value of the currencies cannot adjust because of dollar hegemony. This system sucks.