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The leaders of the European Union were the latest to send a letter to others in the Group-of-20 laying out their agenda for the meeting. While all the members of the G-20 industrialized and developing nations say they are working together to sustain global growth and reform financial regulation, the different letters show substantial differences in approaches that can turn into deep fissures if not handled properly.
Consider the difference between President Barack Obama and his EU counterparts. The two top EU leaders — European Commission President José Manuel Barroso and European Council President Herman Van Rompuy — produced a three-page letter that argued that fiscal austerity is the way to produce “strong and sustainable growth” and said “substantial consolidation” should start “at the latest in 2011.”
“Europe is determined to ensure fiscal sustainability and achieve budgetary targets without delay,” the two said.
President Obama, in his three-page letter of June 16 laid out a very different way to “safeguard and strengthen the recovery.” Essentially he argued that the days of Keynesian stimulus were hardly over. “Should confidence in the strength of our recoveries diminish, we should be prepared to respond again as quickly and as forcefully as needed to avert a slowdown in economic activity,” he wrote.
Mr. Obama talked of the need to “restore sustainable public finances,” but he pushed that off to the “medium term” — which means three to five years from now. There was no mention of starting by 2011, as the Europeans want.
Essentially, the world's two largest economies — the U.S. and the EU –are addressing their biggest current and historical fears.
For the U.S., that's a repeat of the mistakes of the Great Depression when Presidents Hoover and then Roosevelt withdrew stimulus too soon, which prolonged and deepened the downturn.
For Europe, it's a fear of repeating the mistakes that produced the hyperinflation of the 1920s which gave rise to Nazism, added to the current fear of repeating the problems of Greece, which teetered on the edge of debt default before an EU-International Monetary Fund rescue package was approved. Hence, the European focus on austerity.
Both the U.S. and EU said they would push for financial-regulation reform too, though, that debate was largely settled at the November G-20 leaders meeting in Korea. But again, there were big differences in what the two economies want.
The EU focused on a bank tax, and brought up once again the possibility of a financial-transaction tax. Mr. Obama broadly endorsed a bank tax, and was silent on the financial-transaction tax, though the U.S. vehemently opposes it. The EU pushed for agreement on “strict compensation practices.” Not a word on the subject from President Obama.
For its part the U.S. laid out a broad regulatory agenda of “stringent” capital and liquidity requirements, stronger oversights of derivative markets and more transparency generally. The Europeans made scant mention of capital and liquidity requirements — and then mostly to warn that adding the requirements quickly could harm economic growth.
The EU was also more expansive about its goals. It devoted a paragraph to reinvigorating the Doha global trade talks and producing “real progress.” Not a word on trade by Mr. Obama, though the subject is bound to be part of the G-20 communique, because it always is.
The Europeans also pushed for reform in the voting shares of member countries in the IMF. Just a tiny mention of the issue by Mr. Obama.
The U.S. has pushed the Europeans hard to give up some of their voting power at the IMF by reducing the share held by small European countries. If anything, though, the small European countries now are likely to hold on more tightly to their voting power at the IMF. Having watched how Greece had to beg Germany and France for help at the IMF and EU, small European countries are far less likely to agree to reduce their power at the IMF when they may have to turn to it for loans some day.
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Perhaps Obama will turn out to be the Divine Conqueror after all. The problem is that Private Capital is not coming to save America. This has been going on for the longest time, but up to this point Public Capital has been used to subsidize the American Public for loss of jobs and income as Private Capital has gone overseas to cheaper labor markets, resulting in the US Great Recession. Remember that Deficit Spending is really the process of turning Private Capital into Public Capital - Private Investors buy Treasury-issued securities and their money then can be spent at the discretion of Public Officials. With the demise of Budget Director Orszag, who contested the Obama recovery plan because he joined the anti- deficit spending crowd, there is solidarity among the Obama Men presenting this coming weekend (June 26 - 27) before the G8 and G20 meetings.
In Toronto, Obama’s Men will present the fact that Private Capital is not creating an American recovery and that only Public Capital, accurately targeted, can perform the well-priming that will get the economy flowing again. Public spending, either through deficits (borrow-and-spend) or print-and-spend (inflation) will have to supplant the hoped-for Private Capital to recover the US economy. What is important is that this Public Capital be carefully targeted to create jobs and production and that it have a high multiplier factor that creates more goods and services than it does inflation and debt.
With $Trillions recently spent on saving the banks with the idea that they would then save US, it is clear now that the private money markets and banks on Wall Street will not suffice to restore the economy. Private money invests according to a profit maximizing equation that now tells them to invest in Asia and avoid investments in the US. The insider corruption within the private investment banks and private Capital markets discourages investment there by the Public. The interesting political issue now is how to change that. Carly Fiorina and Verizon CEO Ivan Seidenberg (Roundtable member) are now pushing the Government to change America to make it the place where Capital is most profitably invested. Seidenberg says “America is a Flyover Zone” for international investors. Fiorina has finally gotten the picture and is suggesting lower corporate taxes in America (as her last act at HP she fired 130,000 US workers.) Seidenberg is chastising Obama for not creating a more “business friendly” Government and “investment friendly” America. These people claim that, according to the profit maximizing equation of their investors, they are forced to do their primary production in Asia - and they insist the equation is sound and that Obama must change the parameters in America so that their equation works best here. Obama has tried to make these changes (e.g. make taxes greater on foreign operations of US corporations), but it is the multinationals themselves who have defeated him.
The results of Bush’s and Obama’s failed attempts at economic recovery trough a “Save the Banks and the Banks will save America” policy proves hat Private Capital cannot be forced to invest in America, and the equation of the monied class for determining where they invest their Capital cannot be changed either. (Typically those in the military culture fail to see this fact of an Objectivist monied class, and believe Money should and will somehow turn patriotic - but the truth is that it never has and is unlikely ever to do so.) There is only one other choice - Public Capital is the only possible source for investments in America that can lead to recovery. We cannot change the equation the monied class uses to determine where they invest their Capital (currently Asia), and the Government cannot recreate America in the image of the Asian labor market.
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