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Friday, July 5, 2019

Transcript: The G20 on Shaky Ground – A Project Syndicate podcast [feedly]


An 'insider', and brilliant, if you miss Summers' analyses, you will miss something important. In this case: 1) reports of US decline may be premature, and 2) Technology is the driver, everything else reflection, but its still not possible to predict its destination. A struggle between imagination and fear will decide it

The G20 on Shaky Ground – A Project Syndicate podcast
http://larrysummers.com/2019/07/05/the-g20-on-shaky-ground-a-project-syndicate-podcast/

Elmira Bayrasli: Last week, Japan hosted the G20 summit, which convenes leaders of the world's largest economies. While the G20 has been around since 1999, the first summit with world leaders took place just over a decade ago, in 2008, in the middle of the global financial crisis. Fair and Free Trade has been a guiding principle of the G20 since its outset. For the past several years, however, protectionism has re-emerged in many G20 economies, and is currently fueling a highly-damaging trade war between the world's two largest economies: China and the United States. What role does the G20 have to play in the age of Donald Trump, Populism, and powerful digital technologies? Larry Summers, one of the G20's architects, joins us to discuss. He served as US Secretary of the Treasury under President Bill Clinton, and as the Director of the National Economic Council under President Barack Obama.

Elmira Bayrasli: Secretary Summers, you and former Canadian Prime Minister Paul Martin conceived of the G20 back in the late 1990s. And at that point, the United States had emerged from the Cold War as the world's sole superpower, and at that time it seemed that the US economy was invincible. Why was it important to bring in additional players? Couldn't the United States simply have set the agenda for others to follow, as others had advocated at that time?

Larry Summers: We felt that many of the greatest economic challenges at that time involved emerging markets. We had just been through the Asian Financial Crisis, that, while it was a much less globally-traumatic event than the events of 2008, was at that time the most serious global financial crisis since the Second World War.

Larry Summers: Countries that needed assistance, and countries like China, that were not in the traditional G7 had been crucial in providing assistance. We thought it was crucial that if the international financial institutions were going to maintain their credibility, they couldn't only be steered by six Western countries, and Japan. So it was important to have a broader grouping. That was the first reason we did it.

Larry Summers: The second was, without being able to see the details of the future with clarity, we could see enough to understand that the center of economic gravity was moving to the East, and to the South. We could see enough to understand that over the next generation, more economic power was going to be concentrated outside the G7 than inside the G7, and that if that was going to be managed successfully, it was important that there be more stakeholders in the system.

Larry Summers: And I think we were aware at the time that the interaction, even if there were not concrete outcomes, would produce benefits in terms of greater mutual understanding. The interactions would, from time to time, contribute to resolving specific international issues. And in the same way in which it's usually a good idea to meet your cardiologist before you have a heart attack, it would be important for a grouping of this kind to be formed so that it was ready and functioning when the next global crisis arose.

Larry Summers: And in the event, that was about a decade later, with the great Financial Crisis, when the G20 countries were formed up, formed a communique that was really central to the resolution of that crisis, with its emphasis on collaborative efforts at stimulus, to get the global economy moving upwards rather than downwards, at strong fortification of trade finance, and the international financial institutions, so that emerging markets were not starved for capital.

Larry Summers: With the common G20 commitment to eliminate fossil fuel subsidies, which is probably the most constructive thing globally that has happened on global climate change over the somewhat disappointing last decade, and at that same London summit with the commitments to substantially fortify the resources available to the IMF, which added confidence and reduced the risk of panic.

Larry Summers: If there hadn't been a grouping like that, like the G20, and if it hadn't been previously established and developed some history of working together, I think forging those agreements would have not been possible.

Elmira Bayrasli: I want to pick up on the crisis in 2008, and as you just mentioned, the G20 was very critical in resolving that financial crisis. And you talked a little bit about the particular points that they came together on.

Elmira Bayrasli: Since you're somebody who is so close to this, could you just walk through a couple of the pivotal events and moments in that particular time?

Larry Summers: I think Gordon Brown and Barack Obama were the two central figures shaping the agenda of that summit, and I think they had a common philosophy, that stopping the bank panic that was causing an implosion of the world economy the first year of negative growth in 50, that it was important in addition to staunching the bleeding, to put in place measures that would accelerate recovery, and to put in place measures that would reduce the risk of subsequent crisis.

Larry Summers: There was a common agreement that countries would pursue active fiscal stimulus, to enable the demand increase and the world economy to grow more rapidly. There was an important institutional innovation with the Financial Stability Board, that has done a great deal to establish higher common capital and regulatory standards for global finance.

Larry Summers: It looked on almost any important economic statistic like the Great Depression. But it was more important than anything else that the path after the first six months be very different than the path of the Great Depression. Yes, 10% unemployment in the United States was terrible, but it was nothing like the 25% unemployment that we had during the Great Depression. Yes, the magnitude of the interferences with trade were a serious issue, but they were nothing like the declines of 50% or more in the volume of trade globally that we saw in the Great Depression.

Larry Summers: Yes, there were big political shocks from a sense on the part of the electorates in many countries that elites had failed, but nothing, at least as yet, on the scale of Hitler, who came into power at that time.

Larry Summers: So, I think there was a clearly-posed problem, but a sense that collective actions would be both substantively better, and very importantly, psychologically better, and that was the mood of the time, and while battlefield medicine is never perfect, and there's much one could look back on and ask about ways in which it could have been done differently, I think historians will look back and give a sigh of relief for the existence of the G20, and what it was able to do.

Elmira Bayrasli: Collective action was the mood at the time about a decade ago, and when I take a look at what's happening today, there's a lot more nationalism, a lot more talk about protectionism. Do you think that the G20 could achieve that level of cooperation today?

Larry Summers: I think it would be much harder, for two reasons. The first is that, even though the American position is quite different than it was in the 1990s, people are talking much less about a unipolar world.

Larry Summers: The United States, for reasons of location, for reasons of scale, for reasons of technological prowess, for reasons of intellectual and cultural influence and leadership around the world, exerts a greatly disproportionate role in the international cooperation process.

Larry Summers: And under President Trump, the US concept of a "community of nations" working together to pursue each their own interests, but cooperatively, has been put to rest in favor of an alternative construct, in which the world economy as seen as a near-zero sum game, where nations simply struggle for advantage against one another, and one's gain is another's loss. And when the leading and most influential and agenda-setting nation is operating with that kind of philosophy, sustaining global cooperation becomes much, much more difficult.

Larry Summers: I think the second factor, which is part of what is going on in the United States, but that goes way beyond the United States, is that there is a sense of disillusionment with elite leaders. And some of this, perhaps much of this, has to do with rising inequality, and a sense that working people have been left behind.

Larry Summers: Some of it goes with a broader suspicion that regular people, people who, as Bill Clinton used to say, "work hard and play by the rules", that those people have lost confidence in elite experts in every sphere. And you see that in things, from the anti-vaccine movement in the United States, to climate denialism, to resistance, to international agreements of every kind.

Larry Summers: And I think that disillusionment with elite leadership at a distance, because of a suspicion that it's pursuing its own agenda rather than the people's agenda, has, I think, also made the global cooperative process more difficult than it had been previously. And some of that is related to the fact that elites turned out to be wrong about things. They told people there wasn't going to be any dislocation or disruption from trade, that didn't turn out to be true.

Larry Summers: They told people that a burgeoning financial sector that was free from the shackles of regulation would drive a more stable and efficient global economy, and that didn't turn out to play out as was predicted.

Larry Summers: So, I think it's American abdication, and what one might summarize as "disaffection with Davos", and the "Davos mentality", I think are two factors that make the cooperation process right now in these few years much more difficult.

Elmira Bayrasli: Secretary Summers, I want to turn to one of the major issues that loomed over this year's summit, and that is the resurgence of protectionism. At last year's meeting in Buenos Aires, the traditional pledge to fight protectionism was removed, at the Trump administration's assistance, from that final communique, and it was the first time that that happened.

Elmira Bayrasli: Since then, the trade war between the US and China has escalated into a serious threat to global growth and stability. Is there anything other member countries can do to counteract this trend?

Larry Summers: I'm embarrassed, as an economist, and as an American, by some of the things that our government has said and done about international trade. The focus on bilateral deficits and surpluses is not the stuff that passes in introductory economics courses.

Larry Summers: The unilateral pursuit of trade objectives, vis-a-vis all other countries, rather than the forming of alliances and coalitions to confront the most egregious trade sinners, violates the most elementary cannons of diplomacy, that you try to isolate your adversary, rather than to isolate yourself.

Larry Summers: I do think that there are profound issues with respect to establishing rules of the road between the United States and China. China has the habits of mind that go with being an adolescent, after it has grown up. And with the greater strength and capacity that comes with being a grown-up, mature economy, comes with a greater obligation and a greater expectation that they will play by the rules that everybody else is playing.

Larry Summers: And inevitably, comes with a greater degree of competitive concern about their success, from whatever source it comes, than existed when they were weak. And I don't think China has fully recognized and internalized that, and I think that's why there's a great deal that could be done collectively, through economic diplomacy and pressure.

Larry Summers: I think the unfortunate thing is that the Trump administration has squandered any opportunity to bring collective pressure on China by declaring many trade wars on so many other nations, that the Trump administration has acted with sweeping rhetoric and claims, in ways that could legitimately fuel Chinese paranoia, that the American objective was not a collectively-managed, fair, flat-street global economy, but one in which the effort was to suppress and hold down China.

Larry Summers: And I think the Trump administration's erratic behavior has made it more difficult to reach agreements, because of a sense that, if reached, they won't necessarily be adhered to or regarded for any reasonable horizon as being sufficient.

Larry Summers: And so, I think the role for an institution like the G20, or more importantly, for other countries, is to try to prevail on both sides to work through this, with a principle of strategic reassurance, in which China provides assurance to the United States that its goal is not to be a threat that undermines the American economy, or calls for the removal of the American presence in the Pacific, and the United States makes clear its expectation of fair treatment in economic competition with what is now a fully-matured trading partner, but also makes clear that it's not its goal to hold China down.

Speaker 5: And in Trump-bashing, Fed Chair Jay Powell, again, the President reportedly telling Republicans that the Central Bank leader has, "No feel for the economy."

Elmira Bayrasli: US rhetoric and attacks have not just been directed at China. We have seen Trump attack the US Federal Reserve quite a bit. Do you worry that this could affect the US Fed's policy response to fears of a global slowdown?

Larry Summers: I think there are multiple risks in what the President is doing with his overt scornful public pressure towards the Fed.

Larry Summers: One risk is that it's undermining the credibility and independence of important American institutions. Just as the credibility of the nation's laws depends on the credibility of the integrity of the courts that are charged with enforcing and adjudicating those laws, the credibility of a nation's money depends on the independence of the central bank that is printing and regulating that money, and less credible US money means less privilege for the dollar, which weakens the American economic position, means higher interest rates for mortgage holders, higher interest rates for consumer borrowers, higher interest rates for businesses that compete on global markets. Means more risk of currency competition, with respect to who's the reserve currency, which tends to lead to economic instability. I think that's the first risk.

Larry Summers: I think the second risk is that the Fed will listen, and that it will, at some point under this administration, or in the future, will pursue unsound short-termist policies in the way that very famously took place during President Nixon's administration, and in advance of his re-election, and that those policies will create a dangerous inflation, either in product prices, or in financial markets, which then will require substantial payment to undo.

Larry Summers: And I think the third risk, which is probably more pressing in the near-term, is that the Fed, when it is on the fence, with respect to easing policy will, out of a desire to project its independence, avoid easing policies that are in fact necessary.

Elmira Bayrasli: Staying on this topic, it strikes me that digital currencies, Bitcoin, have moved from the fringes of our financial system into the mainstream.

Elmira Bayrasli: Just last month, Facebook announced that it will launch its own global digital currency, Libra, perhaps even as soon as next year. How should policy makers and regulators respond to these new forms of private money?

Larry Summers: There are some who fear that some private money standard will somehow disrupt or dislocate the ability of governments to carry on monetary policy. I don't think that's a plausible concern for many, many years to come. Indeed, the Facebook currency, as it's described and promoted, derives its strength and its unique credence, as Facebook sees it, from being tied to existing central bank currencies.

Larry Summers: So, in a sense, the fixed exchange rate between Facebook's currency and other currencies, promotes the leverage and influence of those who issue other currencies, because Facebook money, then, is tied and influenced by the decisions they make. So, I don't fear for the capacity to carry on monetary policy.

Larry Summers: I do have concerns that technology companies have shown themselves to not always be in full control of their technologies, and all the ways in which they ramify, ramify in permitting political influence, ramify in influencing the psychologies of children, ramify in affecting privacy.

Larry Summers: And money is a very, very sensitive thing. And so, assuring financial stability and integrity of accounts in which consumers store their money, assuring that there's no erosion of money-laundering, capital flight, tax evasion, potentials, fair-lending rules, and the full panoply of protections that surround our financial system, we can't permit a system with respect to large sums of money, based on asking forgiveness rather than permission.

Larry Summers: That may well have been a reasonable initial strategy for allowing the Internet to get started, and I think there's quite a strong case to be made that, if there had been an excessive effort to regulate the Internet at the beginning, it would have choked off more good than whatever bad would have been prevented.

Larry Summers: But now that we're talking about institutions that, for the first time in human history, have billions of people formed into networks, and we're talking about large amounts of financial exchange, I think we cannot have an approach based on forgiveness rather than permission, or even an approach based on punishment for bad outcomes as a deterrent to permitting bad outcomes.

Larry Summers: I think we need strong systems of Ex-ante monitoring and regulation, and I've been gratified that in many of the things they have said, the originators of this currency have been mindful of various scandals and scams, even murders, thefts, and all of that, that have been associated with first-generation crypto.

Larry Summers: This needs to be the opposite of, "Move fast and break things". This needs to be a case of, "Move prudently and protect essential principles, rights, and interests."

Elmira Bayrasli: So, if we're going to move prudently, does it make sense to bring in companies like Facebook, Google, or even Chinese tech giant Alibaba, to have a formal seat at the G20 table?

Larry Summers: Absolutely not. Absolutely not. I think it's a profoundly dangerous idea. I think a central issue, both for the legitimacy, and for the propriety, wisdom, of the economic approaches that come out of global fora, is that there's excessive representation of wealthy interests that are concentrated, rather than middle-class consumer interests that are diffused across middle-class people, billions of middle-class people, all over the world.

Larry Summers: I am much more concerned with giving more representation to those anguished about money laundering, or those concerned about employment disruption, or those concerned about mobility of capital around the world being used to facilitate tax evasion. They are all much more in need of representation, and possibly, and certainly, access to the top table, than are global corporations.

Larry Summers: I think the idea of giving global corporations seats on the top political bodies that are in charge of deciding whether they should be subject to anti-trust regulation, or increased penalties for tax evasion, or alternative tax regimes that discourage tax evasion, is dystopian.

Elmira Bayrasli: Secretary Summers, we end each episode with this question: What gives you hope?
Larry Summers: What gives me hope, is two things: First, the history of the United States, is a history of self-denying prophesies of doom. Whether it was Jimmy Carter's malaise, the suggestion at the end of the 1980s that the United States was about to be surpassed by Japan, the Sputnik panic of the 1960s, the history of the United States is a history of prophesies of huge problems, that then call for dynamic response.

Larry Summers: And so, in all of the anxiety about the many consequences, which I regret as much as anyone, of the Trump administration, I see a pattern of resilience and response repeating itself, and that prospect gives me hope.

Larry Summers: The other thing that gives me hope is, looking at the events outside the news, that are driven by technology, and what it enables. Most of what happens in the world is driven by broader trends with technology and human imagination as an impetus. Technology's a large part of it, but if you think about examples like the easy acceptance of a gay, married Presidential candidate in the United States with his being gay being very much a tertiary issue with respect to his candidacy, only a decade after it was unacceptable for a President of the United States to endorse gay marriage as a conceivable option, there's enormous progress through power of human thought, and we see it year after year, even in moments when there's much in politics that is less than uplifting.

Elmira Bayrasli: Secretary Summers, thank you so much.

Larry Summers: Thank you. It's been a pleasure to be with the Project Syndicate podcast.

Elmira Bayrasli: That was Larry Summers. He is the Charles W. Eliot University Professor, and President Emeritus at Harvard University. He served as Secretary of the Treasury for President Clinton, and as the Director of the National Economic Council for President Obama.

Elmira Bayrasli: And that's it for this episode. Thanks for listening. We'd love to hear what you think about it. Please rate and review our podcast. Better yet, subscribe on your favorite listening app.

Elmira Bayrasli: Until next time, I'm Elmira Bayrasli.

Elmira Bayrasli: Opinion Has It is produced and edited by Kasia Broussalian. Special thanks to Project Syndicate editors Jonathan Stein, Stuart Whatley, and Rachel Danna.


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