20 people with very different backgrounds are unlikely to reach consensus on anything substantial. To forge such a consensus requires leadership. This week’s G-20 meetings produced nothing of substance, which is no surprise because the United States did not lead.
First, let’s dispense with the idea that America can’t lead. The American economy is more than one-third larger than the second- and third-largest, China’s and Japan’s, combined. The dollar is the world’s currency. When they get nervous, central bankers all over the globe buy U.S. Treasuries, no matter how low the yield is. America, and only America, can lead.
But we didn’t and we haven’t. Our last G-20 initiative, to fight government intervention in currency markets, went nowhere. One reason it went nowhere was suspicion that the real American goal was not to uphold the principle of open competition but rather to devalue the dollar. This suspicion turned into open accusation when the Federal Reserve moved to dump yet more dollars into the international system.
So the U.S. switched from exchange rates to demanding limits on trade imbalances, as measured by the current account. This at least was mentioned by the G-20, but not a single action was taken by the group or any individual member. Nor should action be expected. Again, a key reason is lack of American leadership.
Global imbalances stem first from imbalances in the U.S., as by far the largest economy. We haven’t saved enough. The economic crisis spurred ordinary Americans into saving, but the federal government immediately spent more to make up for it. Efforts to limit global imbalances run headlong into huge American budget deficits and extremely loose money that are explicitly intended to increase the American demand that is the single biggest factor in imbalances in the first place.
Statists in the U.S. cling to the argument that, someday, huge budget deficits and wildly loose money will bring unemployment down. Even if you think the jury’s still out on that one, the verdict has come in another count: America has chosen to put aside its mantle of global economic leader.
To add insult to injury, the U.S. apparently can’t even lead in a bilateral context. The anticipated trade agreement with South Korea, known as KORUS, didn’t materialize either. KORUS would have been a signal to the world that America can move forward on trade. But either President Obama doesn’t want to lead or he’s so politically dependent on protectionists at home that he can’t. In any case, vague statements out of Seoul don’t obscure the clear picture of self-inflicted American weakness.