Coming Together . . . for What?
9:30 AM, Feb 16, 2013 • By IRWIN M. STELZER
All of the fuss by the G-7 and the G-20 at their meeting this week about whether Japan should be condemned for attempting to end decades of stagnation by easing monetary policy, with the effect of driving down the yen, makes for good copy. Especially since the various G-7 spokesmen put on a Keystone Kops performance after the meeting. One said that the agreement to let markets set exchange rates was aimed at Japan, its new Prime Minister Shinzo Abe having talked its currency down by 20 percent against the dollar since September. Then another spokesman said it wasn’t aimed at any particular country. No matter, those hurling the first brickbat had to be careful: both Britain and America have presided over policies that have driven down the value of their currencies.
No matter what a G-something communiqué says, Japan has no intention of preventing a further fall in the yen, Britain is delighted that sterling has fallen against the euro, Federal Reserve Board chairman Ben Bernanke will continue printing money that has the unintended (?) effect of keeping the dollar lower than it would otherwise be, and the bleats of French president Francois Hollande about an over-valued euro are falling on deaf ears in Berlin. When it comes to policies that affect the exchange rate, a nation’s politicians will do whatever they believe will increase their nation’s growth rate and lower its unemployment rate.
The more important policy question concerns whether the world is always better served by international economic cooperation of the sort that is supposed to result from meetings of the Gs and other such gatherings, or by competition among nations for economic advantage. The unfortunately complicated answer is that it all depends.
Consider the financial sector. Since Lehman Brothers imploded we know that when it comes to the financial sector the effects of failure are tsunamis rather than ripples. Inadequately capitalized banks in one country are a threat to the stability of the entire international banking system, either because their IOUs prove worthless, or because a bank failure shakes investor and depositor confidence in others. Then there is an interconnectedness that becomes visible only in a crisis—some dicey mortgage loans by our banks created real problems for banks around the world that buy mortgage-backed securities. Not quite the flapping of a butterfly’s wings in Brazil that might change the weather in Texas, but close. So here is an area in which cooperation of regulators, banks, and other financial institutions—cooperation that does not extend to cartel behavior such as the Libor fiasco, however—serves a useful purpose.
So, too, with some but not all environmental problems. Absent cooperation from other nations, it avails a country nought to reduce its carbon emissions, unless satisfying some ideological green politician is considered a public good. International cooperation is required lest cuts in emissions of the sort sought by President Obama are more than offset by the construction of new coal plants in China, India, and, lately, Germany. All in all, 1,000 new coal-fired power stations are being planned worldwide -- unless Beijing’s recent sooty cloud has caused a re-think by the regime.
Taxes are a different matter. When it comes to fraud, cross-border cooperation of law-enforcement authorities is useful. But when it comes to setting tax rates, competition among nations serves the public better than would a tax-setting cartel. Were it not for the threat of an exodus of transactions from the EU, the so-called Tobin Tax on all trades would already be in place. And were it not for its low corporate tax rates, Ireland would not be on the cusp of a recovery. Moans heard from Paris, London and Berlin. Dublin is saying to international companies, come here and keep more of your earnings for your shareholders rather than turning a large portion over to some government’s tax man. Our politicians are coming to realize that, but so far have done nothing to make our firms more competitive.