G-20 Doctors Prescribe Bad Medicine

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Trade: Hailed as a chance for nations to put their economic houses in order, the G-20 meeting of finance ministers turned out to be a lot of grand rhetoric and hollow promises that likely will be ignored.

In both finance and government, virtually everyone these days is worried about the rush to "competitive devaluation" by world nations in which each country tries to push down its currency to make its exports more attractive in global markets. A so-called race to the bottom has developed, with many countries trashing their own currencies while complaining that others - certainly not themselves - were cheating by letting their currencies decline.

The great fear was that, in the midst of the world's economic fears, some nations might actually start erecting old-fashioned trade barriers, reversing the free trade that began right after World War II with the beginning of the GATT trade liberalization.

In response, the G-20 finance ministers vowed over the weekend to "refrain from competitive devaluations of currencies" in order to bring their soaring trade gaps back in line. This was widely seen as a big win for Treasury Secretary Tim Geithner, who has pushed to "rebalance" the world economy.

Unfortunately, this deal won't do that.

To begin with, the agreement to avoid competitive devaluations has no teeth. Countries are free to pursue whatever policies they wish domestically, with no binding targets, goals or policies required. For another, one of the goals was to get countries with huge trade surpluses - especially China - to reduce them, by refocusing their growth on domestic consumers.

That's the kind of bloodless analysis that sounds good in a graduate school macroeconomic seminar, perhaps, but it won't happen. You see, China wants to sell to the world - especially to the still-rich U.S. It has 1.3 billion people, and more on the way, and they will all need jobs. The same is true of India - and Brazil, for that matter.

Germany, likewise, has a surging trade surplus. While its population is no longer growing, the foreign sector is the sole dynamism of its economy.

That's why the finance ministers said "no thanks" to specific targets for reducing their trade surpluses. They know that the U.S. government won't stop the gravy train anytime soon.

We run a trade deficit, broadly defined, of nearly $800 billion year. We can only close it by selling more abroad, or buying less from overseas here. A weaker dollar will give U.S. companies, especially those in commodities and manufacturing, a big boost.

But it will make things a lot pricier for U.S. consumers, who will have to pay top-dollar for anything made overseas. It will reduce Americans' standard of living, an unpopular thing in a country used to getting richer all the time.

Moreover, it's not even clear that a weaker dollar will help. Since our trade row with China began in mid-2005, the dollar has weakened by about 20% against China's yuan. Over that time, however, imports from China have soared from an annual rate of $217 billion in 2004 to last year's $355.5 billion. This year is on pace for a record $381 billion in imports.

The problem we have with all of this is that the U.S. can address its problems at any time - it doesn't need the PR forum of a G-20 meeting to pretend to be doing something.

Without even bringing the IMF or the G-20 into it, there are policies that will lead to more U.S. exports, stronger growth at home, rising incomes and many more jobs. They are:

• Cut government spending sharply.

• Revamp our tax code to make taxes flatter and fairer for all.

• Stop taxing savings and investment entirely.

• Cut the top tax rate on U.S. corporations from 35% to 24%, the average for the OECD. Better yet, stop taxing corporations at all.

• Stop penalizing U.S. multinationals for bringing profits home from abroad - as if that were a bad thing.

• Sign long-stalled free trade agreements with South Korea, Panama and Colombia.

• Most of all, stay away from feel-good trade protection of U.S. markets. Protectionism may make Democrats' union constituents happy, but it's a sure-fire way to set off a worldwide trade war, one that will have dire consequences for the global economy for decades to come.

 

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