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July 18, 1989
"What Economic Summit?"
San Jose Mercury News
By Timothy Taylor
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STRANGELY enough, the greatest hits at the just-completed economic summit didn't have much to do with economics. Instead, they were: 1) A pledge for more Western aid for communist nations making reforms; 2) A call for global environmental action; 3) Support for democracy in China; 4) Opposition to terrorism; and 5) A task force to track drug money.

These issues are important in their own ways, of course, but the world economy these days is not exactly running like a well-oiled machine. Enormous trade imbalances persist. Global inflation is heating up, threatening to bring on the next worldwide recession. The problems of trade protectionism and oversize U.S. budget deficits haven't exactly shriveled up and blown away.

So why were economic issues relegated to the fine print at the end of this economic summit, where the diplomats throw in the kitchen sink and everything else?

The cynical interpretation is that when the United States, Japan, West Germany, France, Britain, Italy and Canada get together for an economic summit, the pretense of cooperation and coordination are only a smoke screen for evasion.

But there are two more charitable interpretations for why an economic summit barely mentioned economic issues.

For example, perhaps the issues were discussed in private. Although this explanation is hypothetically possible, my imagination boggles a bit at, say, George Bush turning to Francois Mitterrand over croissants and espresso and asking for a quick rundown on French monetary policy.

Another possibility is that the participants in the economic summit didn't evade their responsibilities. Instead, they may have simply recognized that talking about international economic coordination is pointless, because it doesn't work very well. In fact, several economists have been coming up with similar gloomy conclusions about coordinating international economic policy.

For example, in a recent article in the American Economic Review, Jeffrey Frankel and Katharine Rockett of the UC- Berkeley economics department analyze a model where countries have different beliefs about how the world economy works. The countries will still be able to agree to cooperate, but at least one country will be wrong in how they expect the cooperative policy to work.

Even after accounting for situations where international economic cooperation has a beneficial effect due to simple dumb luck, Frankel and Rockett find that economic cooperation is only likely to benefit the United States about half the time.

Martin Feldstein, the Harvard economics professor who was an outspoken head of the Council of Economic Advisers early in Reagan's presidency, summarized the case against international economic coordination this way:

"Although international coordination of macroeconomic policy-making sounds like a way to improve international relations more generally, there is a serious risk that it will have the opposite effect. An emphasis on international interdependence instead of sound domestic policies makes foreign governments the natural scapegoats for any poor economic performance. Pressing a foreign government to alter its domestic economic policies is itself a source of friction, and the making of unkeepable promises can only lead to resentment." Feldstein does believe that communication between top leaders on economic issues is helpful. But he believes that the purpose of that communication is to help each leader formulate sensible domestic policy, not to pretend that domestic economic problems need international solutions.

International negotiations make sense when good policy depends to a considerable extent on how other countries behave. For example, cutting the U.S. defense budget makes more sense if the Soviet defense budget is being cut at the same time. Adopting costly anti-pollution policies that drive up the price of U.S. products is more attractive if, say, Japan and West Germany take the same costly steps.

But good economic policy often does not depend on what other countries are doing. For example, the fine print at the tail end of this "economic" summit called for the United States to reduce its budget deficits and for Japan and West Germany to reduce their trade surpluses. This message has been repeated at each summit since Tokyo in 1986.

But the massive U.S. budget deficits of the 1980s have been harmful not because they were disliked by other countries, but because they reduced the long-term growth of the U.S. economy, led to U.S. trade deficits, and will make it difficult for the United States to stimulate its economy when a recession eventually occurs. The United States should reduce its budget deficits whether or not Japan and Germany agrees.

In economic matters, a lack of international cooperation isn't usually the problem. Instead, whether one is discussing the anti-consumer policies of Japan, the anti-employment policies of Germany, or the anti-savings policies of the United States, the problem is that the political system of countries doesn't always seem capable of enacting sensible economic policy.

If domestic economic policy isn't working, then international economic cooperation is either a policy with a 50-50 chance of success (the Frankel-Rockett argument), a distraction and a scapegoat (Feldstein's argument), or a feel- good, milk-sop nothing-at-all (as in Paris last weekend).

This year's "economic" summit ran out of things to discuss and adjourned early. If the countries are determined to avoid discussing economic issues, then they should either change the name of the summit, or save even more time at next year's summit by adjourning before they begin.

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