Vain Hopes for International Policy Coordination

Brad Setser quotes from Martin Wolf--and I find that Martin Wolf's reactions to the BIS are (a) very smart, and (b) close--embarrassingly close, in fact--to what I have written in a column that has not yet appeared...

Brad Setser's Web Log: More wisdom from Martin Wolf: More wisdom from Martin Wolf Having laid out the problem on Monday, Martin Wolf offers his solutions in tomorrow's Financial Times. He presents three answers to the question "what is to be done":

One answer... nothing. Let each country choose the policies that make sense to it.... The problem: Without big change in policies, the situation seems certain to deteriorate: US net liabilities will continue to rise in relation to GDP; and so, quite possibly, will the current account deficit. The longer this goes on, the larger the ultimate adjustment will be.

Option 2... the US would bully China into making a big adjustment of its exchange rate and macroeconomic policies. The problem: First, China is far from the only country that needs to change its policies... the Chinese... would almost certainly do the bare minimum, which would exacerbate ill will without rectifying the situation.

Which leaves only one viable policy course:

Serious multilateral discussion in which the US leads but does not attempt to dictate... discussing their responsibility for the health of an open world economy on which all depend. As a rising power, China should be invited to share in these discussions, by both exercising its voice and implementing its share of policy changes. Those changes must be large. They should include reform of the International Monetary Fund, to make it relevant to today's world, and a radical restructuring of the increasingly absurd Group of Eight. A forum must be found, together with a permanent secretariat, that makes possible serious discussion of how to proceed among the players that matter.

[...]

The US cannot dictate the policy changes or the pattern of global payments it desires to its partners. It must rely on institutions of co-operation, instead. The exchange rate and macroeconomic policies of east Asia are indeed destabilising. But a... successful response... [requires] a shared recognition of the dangers.... [and] determination to reach an agreed solution. US leadership is missing in action but remains indispensable....

That strikes me as right.

The odds of it happening strike me as low.

The difference between me and Wolf is that Wolf believes in institutions and secretariats whereas I believe in pressure to get the hegemon--the United States--to fulfill rather than ignore its leadership role. I am, after all, a student of Charlie Kindleberger.

The failure, in my mind at least, is not that we lack international institutions. It is that we here in the U.S. lack a Treasury and an OMB who are powerful and committed to fiscal sanity; it is that we lack economic advisers within the White House willing to say "worry a lot: be very unhappy" about the budget outlook and its consequences; it is that we lack finance and banking legislative committees that take their oversight-of-economic-policy role seriously; and it is that we have no political advisors who dare tell Bush that he should think about how the political careers of Carlos Salinas de Gortari and Suharto came to an end.

Comments

[Ken Houghton]

Perhaps the next White House screening should be of _The Year of Living Dangerously_?

[piotr]

Good thing about "secretariat" route: I presume that a number of countries have very similar interests to us, and certain policies make sense only if they are coordinated.

Bad thing: the above means absolutely nothing unless we can say with some clarity what our interests are. Even better, with some clarity and correctness.

In general, in any international forum the hegemon can achieve most of what it wants, provided it is not some arrant non-sense and provided that it makes sense to other countries as well.

One increasingly attractive option is to use our military forces to extract tribute from all other countries. Say, every third supertanker has to deliver to USA, free of charge. One third of the cargo living Asian ports belongs to US treasury. Etc. That way we will maintain our role as the stimulator of the world demand, but without incurring such an unpleasant thing as debt. If I undertand Bernanke and others, our role as the world consumer is hugely valuable to the countries with a surpluss of savings, tribute would do very nicely to dispose of this atrocious glut.

Other options make no sense without a modicum of international consensus.

[Ottnott]

Uh-oh.

Other Brad says that the only viable course of action requires "serious multilateral discussion in which the US leads but does not attempt to dictate"?

What's the Plan B if the US president believes that leaders dictate?

Host Brad says the only viable course of action requires that the president's advisors and the GOP congressional leaders, most of whom have been handpicked for their loyalty to the president, convince him that he is going down the wrong path and needs to make changes.

What's the Plan B if your president believes that the ultimate act of disloyalty is to tell him that he needs to alter a decision?

[SqueakyRat]

Ottnott's got it. Any policy recommendation that includes the words "The US cannot dictate" is going to have to wait a while.

[wkwillis]

The problem with piotr's approach to hegemony is that the US could have it's entire armed forces (100 military bases) and it's entire munitions manufacturing capability (100 cities) wiped out for about two hundred million dollars worth of basement nukes.
Get over it folks, the gunpowder revolution has occurred, cannon are for sale, and all those castles are so much masonry recycling projects.

[piotr]

Not that I advocate "my approach*", but we have more than 100 bases, and it is a bit hard to install "200 hundred basement nukes".

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* The approach is increasingly attractive as we announced already (e.g. using Bolton as a mouthpiece) that we do not care about international law, that we can intervene anywhere solely on the basis of national interests and that we borrow probably more than we can conveniently repay. In that case, shouldn't we use our military in a way that, for a change, gives some discernible gains?

I also conjecture that our military is better adapted to intercepting cargoes on high seas than to occupying culturally distant countries.

However, if you want to conclude that there is no possibility of getting a decent return on our military spending... you could try to prove it by the way of contradiction. Suppose not. Suppose that we could get a return on our military investments that would be roughly equal to 1/3 of our total import. It would require that we levy a tribute on...