Rendezvous With Inertia
"This generation," Franklin D. Roosevelt said of his contemporaries, "has a rendezvous with destiny."
Our generation -- at least, its leaders, judging by the likely results of tomorrow's Group of 20 meeting in London -- is doing its damnedest to duck anything so momentous. Faced with the gravest economic challenge since the 1930s, with the urgency of shaping a more sustainable capitalism, the world's leaders have failed to agree on actions that would either arrest the economy's current swoon or build a regulatory system to limit future swoons.
The G-20 leaders haven't failed for lack of ideas. The Obama administration has made a compelling case that nothing short of a coordinated global stimulus can fix a global recession. The leaders of continental Europe, French President Nicolas Sarkozy and German Chancellor Angela Merkel in particular, have argued persuasively that the excesses of global finance require global regulations administered by global agencies. In the end, having duly considered each other's proposals for global stimulus and global regulation, the two sides reached a compromise. They would do neither.
Of all the G-20 summiteers, only the United States and China have committed themselves to spending programs big enough to put a dent in our proto-depression. Germany, the world's largest exporter and biggest proponent of fiscal discipline, remains adamantly opposed to countercyclical spending. If this were a normal recession, its opposition to deficit spending might make some sense. The Germans argue that their more social form of capitalism already mitigates much of the economic distress that we Americans experience when our economy goes south. In good times, the German government puts revenue from payroll taxes and employers into a special fund that it deploys in hard times to boost the incomes of workers whose hours have been cut back. Depending on how you look at it, this is socialist flummery or an application of Joseph's advice to Pharaoh to set aside resources in the seven fat years to get Egypt through the seven lean ones. Either way, it's an effective countercyclical program.
Another such German program has been so successful that President Obama all but adopted it Monday in unveiling his plan to save the U.S. auto industry. In February, while every other known economic indicator was tanking, new car registrations in Germany rose 21 percent from the previous February -- the result of a government offer to pay a little more than $3,000 to German car owners who traded in their clunkers for new, more fuel-efficient autos. Iowa Sen. Tom Harkin has proposed a similar plan in which owners of cars that are at least 10 years old could trade them in for new cars that get at least five more miles per gallon than their old ones and receive $10,000 in government funds to go toward the new purchase. "If you make $45,000 a year, you can't likely afford an $18,000 new car," says Harkin, "but the bank will give you an $8,000 loan on an $18,000 car." On Monday, Obama -- recognizing that our auto industry has a demand problem at least as severe as its supply problem -- called for a program similar to Harkin's.
So if Germany is providing us models for countercyclical spending, isn't it doing enough? Not if a projection by Commerzbank -- that Germany's economy will decline by a stunning 6 to 7 percent this year -- comes to pass. As the world's largest exporter, the Germans are excruciatingly vulnerable when other nations can no longer afford to buy their goods. They need to boost their economy so they can buy more of their own.
If continental Europe isn't keen on meeting a global stimulus target, neither is the United States keen on setting up global regulators for global finance. To its credit, the Obama administration unveiled an outline last week for regulating hitherto unregulated financial institutions such as hedge funds and creating a regulated market for derivatives. In an interview with the Financial Times, Treasury Secretary Tim Geithner admitted that national reforms would not work "unless we are able to bring others along with us." He added, however, that "we are not going to give anyone else the responsibility for deciding what balance between stability and efficiency is right for our markets."
In a pre-global economy, Geithner's caveat would be unexceptionable. But in a world where banks such as Citigroup or Goldman Sachs operate in scores of nations, uniform standards of leverage are both prudent and necessary. At a time when the global economy needs global rules, Geithner's anti-globalism is nothing less than a new form of protectionism.
But neither global rules nor global stimulus is likely to emerge from tomorrow's G-20 summit. This generation of world leaders has a rendezvous with inadequacy.