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.
Then there are cases that require a mixture of cooperation and competition, among them competition policy itself. It is important for enforcement authorities to keep each other informed of studies of various markets, to share data when they can, and generally to cooperate in developing an understanding of how complex markets work. But it is equally important for them to compete with each other in developing ideas as to what constitutes market dominance and anti-competitive behavior. Thus, when antitrust enforcement lacked vigor during the reign of the elder George Bush, the European Commission continued its pursuit of anticompetitive acts, to the consternation of many U.S. politicians and the benefit of consumers. Competition among competition enforcers proved to be a good thing for the consumer.
So, too, when it comes to trade. Cooperation is required to set the rules of the game, but competition is required if consumers are to benefit from the efficiencies that flow from having the nation with the best, most competitively priced products win the game. Thus, it might be a good idea for nations to cooperate in setting health standards to govern trade in foodstuffs, or safety standards for automobiles. But it would be a bad idea for them to cooperate in determining which country will be allowed to sell which food and which auto products, in what amounts and at what prices.
Which brings us back to currency wars. Nations try to lower the exchange rate when they think that by devaluing their currency they make their goods cheaper in foreign markets. That, they reason, will encourage exports, spur economic and job growth. And they are right. Until their trading partners retaliate, or until their cheaper currency drives up the cost of imports, hitting consumers in their pocketbooks. As one prominent British merchant told me a few days ago, if the cheap pound means he can sell more to foreigners, he won’t complain if it also means paying more for imported cheese and wine. The teacher who has nothing to sell, but likes a bit of imported cheese and wine, might see devaluation a bit differently.