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
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
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
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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