Once again, Lawrence Summers is openly lamenting the failures of the United States government in engendering trust and demonstrating leadership. I have written about aprevious such episode, in which he focused on the domestic situation. This time, he is concerned about US standing in the global economy:
This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system.
One can only hope.
There is so much that can be written even about this one sentence: by what authority has the US taken on this role? Who benefits from this position? Who loses? All of these questions can be examined in detail, and even after all of that the answer can be simply stated: one can only hope.
…I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the US to persuade dozens of its traditional allies, starting with Britain, to stay out of it.
It seems to me that the roots of these events might be a) US military and economic actions taken after September 11, and b) the financial events of 2008. These, of course, have roots in the abandonment of the international gold standard in 1971 (which Summers does touch on), which has its roots in the US abusing its position coming out of Bretton Woods, which, of course, has its roots in the nature of power.
Largely because of resistance from the right, the US stands alone in the world in failing to approve the International Monetary Fund governance reforms that Washington itself pushed for in 2009….Meanwhile, pressures from the left have led to pervasive restrictions on infrastructure projects financed through existing development banks…
With US commitments unhonoured and US-backed policies blocking the kinds of finance other countries want to provide or receive through the existing institutions, the way was clear for China to establish the Asian Infrastructure Investment Bank.
Summers sees this all as a result of partisan politics in the US – as if there has been any fundamental disagreement between the parties in the last forty years.
Where has there been fundamental disagreement between the left and the right in terms of central banking, warfare, and welfare?
Where has there been fundamental disagreement about deficit spending and the role of the Fed in supporting this?
Where has there been fundamental disagreement regarding the draconian role the US has played in extending its regulatory regime over the entire globe?
Summers points to irrelevant details, when the reality is that on the issues that have caused the rest of the world to slowly and methodically move away from US hegemony there has been no meaningful political disagreement within the US.
He then offers three “precepts that US leaders should keep in mind” now that the AIIB is a reality:
First, American leadership must have a bipartisan foundation at home, be free from gross hypocrisy and be restrained in the pursuit of self-interest.
Let’s examine these one by one:
American leadership must have a bipartisan foundation at home…
American political leadership has a totally “bipartisan foundation” when it comes to precisely the issues that are driving the rest of the world away (inflation, warfare, welfare, economic and military interventionism abroad). Summers laments the lack of a bipartisan foundation on the things that are relatively irrelevant (details of trade agreements and the like). If the left and right did not disagree on the irrelevant things, how could they justify holding elections? (Oh, wait a minute…)
American leadership must…be free from gross hypocrisy…
This one afforded the biggest belly-laugh.
The land of the free, the leader of the free world, the exceptional nation…spends every single day devising and implementing new ways to restrict the freedom of and otherwise militarily and / or economically intervene against virtually every individual on the planet. The only way to be “free from gross hypocrisy” for the psychopaths who are the “American leadership” – who are incapable of acting in any way other than this – is for them to stop talking, as they are psychologically incapable to stop doing.
American leadership must…be restrained in the pursuit of self-interest.
By “self-interest,” Summers can only mean the self-interest of the political actors individually, as they are in no way pursuing the self-interest (to the extent such a thing exists) of the political body.
I can write a list a mile long on this one. I will offer only two examples: in the military realm, Ukraine and Russia; in the economic / financial, Swiss banking secrecy. Where is the restraint in either case?
Continuing with the first “precept”:
We cannot expect to maintain the dollar’s primary role in the international system if we are too aggressive about limiting its use in pursuit of particular security objectives.
I can think of two examples right off of the top of my head: 1) FATCA, and 2) a tax code that drags countless non-US residents into its net. The US government behaves as if its currency and financial markets are indispensable to the rest of the world. In the short-run, this is certainly true; in the medium-run, very likely to remain true; in the long-run – the steps being taken to slowly reduce reliance on the current system are visible around us every day.
I don’t envision the dollar crashing to zero; I don’t envision a situation where the US economy will not be a valuable market for companies located elsewhere. However, this is not the same as hegemony. It’s more like Germany…well, Germany with the Deutsche Mark.
Back to the “precepts”:
Second, in global as well as domestic politics, the middle class counts the most. It sometimes seems that the prevailing global agenda combines elite concerns about matters such as intellectual property, investment protection and regulatory harmonisation with moral concerns about global poverty and posterity, while offering little to those in the middle. Approaches that do not serve the working class in industrial countries (and rising urban populations in developing ones) are unlikely to work out well in the long run.
It is difficult to create a “balance sheet” for the middle class – does it gain or lose in the current schemes? In any case, the “middle class” is not a homogenous body.
I think it is safe to say that the wealthier members of society benefit most from the distortions offered by money-printing and government largesse, while those on the economically lower rungs of society consume resources that they have not earned via their own labor.
The wealth is in the middle class; it is this group targeted for plucking, it seems to me. Summers can wish for better treatment of this group, however to achieve it he would have to become libertarian…and Austrian.
I won’t hold my breath.
Third, we may be headed into a world where capital is abundant…
No one individual can know the right amount of capital – there is no “right” amount. Capital – real assets backed by real savings – is never “abundant.” It is also never lacking. It is always a result of the excess produced by the market, this driven by the actions of each individual market actor. There is always capital equivalent to savings, and the amount of savings is based on individual decisions. It cannot be abundant or lacking – if there is too much, the market will adjust; if there is too little, the market will adjust.
To the extent markets are unable to adjust, it is only due to external, non-market distortions – government regulations, taxes, etc. Interest rates should provide a proper signal – yet even this signal is distorted, in this case by central banking.
Bringing me to that which is abundant: credit. Central banks exist toward a bias of artificially lowering the cost of credit – is it possible that governments and international bankers want central bankers to act in another way? Make credit, on average, more expensive than the market would price it? To ask the question is to answer it.
It is the supply of credit that is abundant. It is abundant because it is created artificially – not through voluntary trades by market participants, but through manipulation of markets by central banks granted sanction by governments.
This is at the heart of all that ails the economy. But this is another topic, and one far better covered by people such as Mises, Hayek, and Rothbard.
The present system places the onus of adjustment on “borrowing” countries. The world now requires a symmetric system, with pressure also placed on “surplus” countries.
There is, and once was, a system that automatically provided this balance, this symmetry: settlement in gold. But then what would Ph.D economists like Summers do for a living?
These precepts are just a beginning, and many questions remain. There are questions about global public goods, about acting with the speed and clarity that the current era requires, about co-operation between governmental and non-governmental actors, and much more.
There won’t be speed and clarity in government action – either domestically (in any major country) or internationally. The words “government” and “speed and clarity” have never gone together, other than in totalitarian regimes (see Stalin or Hitler, as two western examples). Is this what Summers is advocating?
There won’t be cooperation where domestic politics stands firm against it – Summers offers many criticisms of the gridlock that is US politics; has he looked at the issues in Europe? Brussels can barely hold Belgium together, yet somehow will maintain and increase a hold on all of Europe?
Cooperation toward failing systems and failing policies, the roots of the current situation that Summers laments – is not possible to achieve, “cooperation” implying a voluntary act. Again, a totalitarian can get there, at least for a time.
There is no solution that, in the medium to long-run, continues either a) maintaining the US leadership role in the world (economic and military), and b) further centralization toward one-world government (actually, both are the same thing), because there is no possibility of the US government acting in any other manner than the manner which Summers laments – the manner that is preventing and will prevent the US government from maintaining and achieving these objectives.
What is crucial is that the events of the past month will be seen by future historians not as the end of an era, but as a salutary wake up call.
It will be seen as the end of an era. It will take years, if not decades to evolve and manifest, but this era is ending.
My view on this era coming to an end? I will end this post with the exact same ending as my last post on Summers’ lament:
Hip hip hooray!