Friday, 21 November 2008

Key Questions From the G-20 Summit

There are (at least) five fundamental questions that went unanswered at this past weekend's G-20 summit in Washington. In their attempt to show solidarity, the world leaders skipped over the complicated and contentious questions. But that's no long-term solution. Once they go home to their respective capitals, the finance ministers and other officials who met in Washington are going to be forced to make some tough decisions. Here are five puzzlers that will demand to be sorted out in the months ahead:

1. What is protectionism? The gathered ministers roundly condemned protectionism in all its forms and even agreed to take another stab at reviving the moribund Doha Round of global trade talks—if possible, by the end of this year. But it's hard to see how much progress they will be able to make when many of the efforts to revive national economies could be regarded as protectionism. For example, wouldn't extensive aid to the Big Three Detroit automakers constitute an illegal subsidy under the World Trade Organization's terms? For that matter, don't the massive aid packages flowing to banks, brokerage firms, and insurers in the U.S. and elsewhere constitute subsidies that are prohibited by the free-trade rules?

2. Should we be encouraging consumers to spend more, or not? There are two schools of thought on this central question. Many economists and ordinary people argue that a sharp drop-off in consumer spending is extremely dangerous, so government needs to help consumers find ways to keep spending. That's one of the reasons U.S. Treasury Secretary Henry Paulson revised the government's $700 billion troubled-asset relief program to support credit card borrowing, auto loans, and student loans. Yet other people, including some economists, say that excessive spending and borrowing got us into this mess in the first place—and that cutting back is exactly what Americans must do to restore balance to the global economy.

3. Is it important to put a floor under the prices of homes? There are two sides to this question as well. Treasury's Paulson has repeatedly argued that the financial crisis won't end until the decline in home prices reaches a bottom. So a lot of people want to stop them from falling further by providing financial incentives to buyers and by preventing more foreclosures. But other experts say that trying to prop prices above the level they naturally seek would merely delay the necessary market adjustment—keeping prices unaffordably high and making buyers afraid to step in because they anticipate further declines. It's hard to sort this one out because no one can reliably say what the "correct" level of home prices ought to be.

4. Should world leaders try to ensure that a financial crisis such as this one never occurs again? This seems like a no-brainer, but it's not. Sure, long-term reforms are needed. But there's a risk that clamping down on risky lending practices now could make matters worse in the short term. The G-20's communiqué instructs the various nations to report back by the end of March about the progress they've made on restructuring financial regulation. The danger is that in their zeal to show progress by then, government officials around the world will push lenders to tighten up, offsetting the elaborate efforts to provide fiscal and monetary support.

5. Do we need global coordination? This seems like another obvious yes. In the first paragraph of their declaration, the G-20 leaders said: "We are determined to enhance our cooperation and work together." Some cooperation is a good thing, of course. But notice that the leaders were quite vague about what they would do together in the short run. Most of their agreements were about long-term reform. This vagueness may be healthy. Each country's situation is unique. What the U.S. needs to do (consume less and save more) is precisely the opposite of what China needs to do (consume more and save less).

All in all, it's great that world leaders came together in an atmosphere of relative good will. Their intentions are good. But as someone once said, the road to hell is paved with good intentions. Hard thinking remains to be done.