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.