In his article "Reflections on World Cooperation" {Business, Feb. 21}, Hobart Rowen attributes to me the "simplistic" view "that the G-7 process should be scrapped, leaving basic decisions to market forces."

This is not what I said, whatever "scrapping the G-7 process" means. Briefly, I argued that accepting the widely held view that there exists an unsustainable global imbalance, it follows that in the United States the trade deficit must be phased out or, at least, sharply reduced. This implies that the traded-goods sector, export- and import-competing industries, be expanded.

This process, which seems to be well under way, means that aggregate demand is expanding. Since the U.S. economy now operates under conditions of full employment, it is essential that demand elsewhere be reduced, to prevent overheating, inflation and, sooner or later, recession. This is why the budget deficit should be reduced roughly parallel with the decline of the trade deficit.

This implies, of course, that the German (and Japanese) trade surpluses decline (unless they find other foreign outlets for their savings, for example, in the Third World). Thus the traded-goods sector in Germany must contract and release productive resources.

I criticized the widely held view that for Germany the only solution is to absorb the slack in the traded-goods sector by larger budget deficits. I argued that there are other possibilities and suggested that this is a problem that can and should be left to market forces. After all, shifts in demand are going on all the time, often on a large scale.

In a capitalist, free-market economy, market forces determine where labor and capital released in some sectors will go. The job of the government is to see to it that by appropriate monetary policy aggregate demand is kept on an even keel. And as I added, "the government can and should help adjustment by breaking down structural rigidities, especially in the labor market, many of which are of the government's own making."

I further pointed out that the American problem is different. In the United States the budget deficit is the culprit. Market forces cannot solve the budget problem.

All this has nothing to do with "scrapping the G-7 process."


Resident Scholar

American Enterprise Institute