The G-20 summit communiqué has been released. As we predicted, it has something for everyone, though rather more for the Europeans than the Americans, and even less for the Chinese. And there are constructive points in it, though whether they will amount to much remains to be seen. But by and large, the communiqué marks a large step in the wrong direction for the U.S. and the world.
First, the summit has agreed to treble the resources of the IMF to $750 billion, to support $100 billion in funding for multilateral development banks, and to increase trade finance to poorer countries. The summit claims that these measures – presumably including the already-passed stimulus acts – will “by the end of next year, amount to $5 trillion, raise output by 4 percent, and accelerate the transition to a green economy.”
Most of these claims have no justification. Increased IMF funding will require action at the national level, and it is difficult to believe that most nations will follow through on their commitment. More fundamentally, IMF aid is at best a band-aid that does not address the basic problems of the financial system. At the more likely worst, it gives more money to an ineffective organization that until this crisis was fading out of existence. Development aid has been tried repeatedly since the 1940s: it has failed so many time that there is no reason to believe that it will work now. And claims that any of this spending will bring a ‘green economy’ into being ignore the conceptual sloppiness and economic fallacies of the concept.
Second, “Central banks have pledged to maintain expansionary policies for as long as needed and to use the full range of monetary policy instruments, including unconventional instruments, consistent with price stability.” But “credible exit strategies” must be adopted for these measures.
The only part of this that sounds good is the mention of an ‘exit strategy.’ If you want to win a war, that’s the last thing you need. But if you’re trying to spend your way out of debt, stopping at some point – preferably now – is an excellent plan. Unfortunately, what the communiqué comes down to is an endorsement of bigger government until the people in charge of big government decide it is no longer necessary. We predict that will be never. And the idea that the inherent trade-off between fiscal expansion and inflation can be fudged in this easy way ignores the entire history of inflation since 1945.
Third, “a new Financial Stability Board (FSB) with a strengthened mandate, as a successor to the Financial Stability Forum (FSF)” will be created. The devil here is in the details – specifically, the details about the “strengthened mandate.” The current FSF works on the basis of information exchange and international co-operation, which are sensible principles, consistent with economic good sense and American sovereignty. If the new FSB departs from them, it will be making a serious error against we have repeatedly warned.
Fourth, to “extend regulation and oversight to all systemically important financial institutions, instruments and markets,” including “to Credit Rating Agencies to ensure they meet the international code of good practice.”
There is obviously an important place for regulation in a properly-functioning market. The question, again, is what “oversight” means, what “international code” nations will be asked – or required – to subscribe to, and whether they will be sanctioned for failure to do so by a supranational organization. Much of this language ignores one of the basic facts about the financial crisis: it was the regulated banks that failed, and governments are now trying to clean up the mess by encouraging less-regulated investors in hedge funds to step in. If regulation and oversight were the cure-all for the development of systemic risk the summit implies, the financial crisis would never have happened.
Fifth, “refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports.”
Sounds great: it’s what they committed to do in Washington last fall. Why don’t they get on and do it? Since the Washington meeting, virtually every nation in the G20 has promoted protectionism. The mention of the WTO is close to meaningless, because many protectionist measures are WTO-consistent as long as they are taken in response to a crisis. And the call to avoid stimulating exports is inconsistent with the EU’s placing export subsidies on cheese, butter, and milk powder, measures that will hurt European consumers and Third World farmers alike.
Sixth, “To endorse and implement the FSF’s tough new principles on pay and compensation and to support sustainable compensation schemes and the corporate social responsibility of all firms.”
This is where the communiqué moves from difficult to interpret and wrong-headed to simply bad. The idea that national governments should play a role in setting pay scales is an unacceptable expansion of political authority into every area of the private sector. The argument that the government has the wisdom to ensure that pay promotes “sustainable” behavior is even worse. Governments are not that smart, and, in any case, the idea that “all” financial activity should be sustainable is a fallacy. And the claim that “all firms” must exercise corporate “social responsibility” is a further unlimited license for politically-motivated, intrusive mandates.
Seventh, “To take action against non-cooperative jurisdictions, including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems.”
The only comfort to take out of this final item is that it does not call on nations to sanction tax havens to force them to raise their taxes: it is (for now) only about information. But as a response to the international financial crisis, it is nonsense. Tax havens played no significant role in the birth of the crisis, which originated in the financial and property sectors of the leading economies of the West, and the world economy as a whole. The attack on tax havens is, at best, a politically motivated irrelevancy. At worst, it is the start of a broader campaign to find new sources of money to tax, and to stigmatize as international wrong-doers states that freely chose to have lower taxes.
In short, the G20 communique contains something for everyone. The Europeans get regulations, the Americans get a watered-down endorsement of stimulus spending, the Chinese get a bigger role in international financial institutions old and new, and the developing nations get more poorly-spent and politically corrupting development aid. But the parts of this communiqué that are clear are not good, and the few parts that are good will likely amount to little in practice.
Of course, the aftermath of the summit will bear close watching: there are a lot of details for the devil to lurk in. But even now, the results of the summit look almost as destructive of political and economic freedom as the aspirations of the protesters skulking in the streets of London.
