Tuesday, March 31, 2009

How the G-20 Could (Unwittingly) Help America

This week's G-20 meeting will resemble a game of musical chairs. Everyone will think of themselves and scramble for a limited number of seats. Germany and other Western European nations want greater contributions to the International Monetary Fund, to help out Eastern European nations and former Soviet satellite states which today are major export markets for them. China, Japan, India and South Korea want to protect their export markets, the largest of which is America, and their dollar denominated investments. Canada and Mexico would want to maintain the stability of their biggest trading partner, the United States. Saudi Arabia and Turkey, the Middle Eastern members, are close U.S. allies and do not benefit from seeing America weakened. Even Russia, which wants to bluff America away from former Soviet republics, would lose out if America weakened so much that the world's economy nosedived, depriving Russia of desperately needed oil revenues and damaging its substantial holdings of dollar denominated assets.

A meaningful program of increased IMF funding requires American participation, since America would be the largest potential source of funds. The Asian export nations have little choice but to prop up America, or they lose export markets and suffer investment losses. Other G-20 members need a strong America much more than they need lectures from Western European nations about prudence and cowboys. Whether or not any of the G-20 will admit it, they all have an interest in American success at the meeting. Being the world's only superpower places singular burdens on the United States (most recently exemplified by President Obama's decision to ramp up U.S. military strength in Afghanistan while Western European nations look for quiet ways to slip their forces out of the country). But it also provides an occasional situational advantage.

The world's current economic problems are so severe that a meeting like the G-20's cannot accomplish much. It will take years of hard work and sacrifice to work through our problems. President Obama cannot hit a home run at this meeting. Indeed, he will have endure scoldings from a number of other participants, because much of the world feels the need to blame America. (So what's new?) But he may be able to bunt his way onto first, since just about everyone will, at least quietly, have an interest in seeing him succeed. A few small successes and no major blowups would be a good result--for other nations as well as America.

America's current advantage isn't necessarily permanent. When the President returns, he should focus on strengthening the nation's industrial base and increasing its worker productivity. We need to produce more wealth; we cannot continue to derive wealth by taking out second and third home equity loans or peddling incomprehensible derivatives contracts to investors. America's prowess in manufacturing, agriculture and other production were crucial to its rise in the 20th Century, and are the key to future prosperity. The U.S. produces a number of high value goods and services--such as aircraft, entertainment, computer software, and medical technology--as well as massive quantities of food, all of which serve domestic and foreign markets. In addition, America has the best university system in the world and can provide higher educational services to numerous foreign students. Ultimately, we can't borrow or use printed money to work our way out of our economic problems. The wealth of nations derives from creating things that other people want to buy. We're really good borrowers right now. We need to become better producers and sellers.

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