The G-20 Summit in London promised to bring together the heads
of the world's leading nations to address the global financial
crisis. Instead, the summit agreed on measures that are by turn
weak, vague, and sinister.
When the summit dealt with the current crisis, it failed to move
beyond platitudes or to acknowledge the failure of most of its
members to live up to their past pledges. When it turned to the
future, it promised to implement measures that are, at best,
irrelevant to the fundamental health of the global economy. At
worst, these measures constitute a serious and sinister assault on
free enterprise and democratic sovereignty around the world.
The summit was a public relations success. But it was a
substantive failure. By refusing to stand up for economic freedom
and instead substituting a vision of centralization and
supranational control, the summit has not only done nothing for the
cause of global economic recovery today; it has set in motion
processes that could slow economic growth in the future, making
another crisis more likely. Like the other participants in the
summit, the United States must back away from the precipice of
ever-increasing government regulation and global bureaucracy and
turn instead to renewed faith in the economic and political power
of the free market.
The Summit's Mistakes
The summit's measures fall into two categories: (1) errors that
will waste money and expand the power of national governments to
interfere in markets, and (2) policies that could erode the
national sovereignty of the United States and other democratic
states around the world.
Errors That Waste Money and Politicize Markets. First,
the summit has agreed to treble the resources of the International
Monetary Fund (IMF) to $750 billion, support $100 billion in
funding for multilateral development banks, and increase trade
finance to poorer countries.
The summit claimed that these measures--including the
already-passed stimulus acts--will "by the end of next year, amount
to $5 trillion, raise output by 4 per cent, and accelerate the
transition to a green economy."[1] These claims have no basis in
reality. Apart from the poor record of both the IMF and the World
Bank and the conceptual fallacies of a "green economy," most of
this new funding is in the form of loans, which raises the specter
of yet another third world debt crisis.
Second, "central banks have pledged to maintain expansionary
policies for as long as needed ... consistent with price
stability." This amounts to an endorsement of bigger government
until those responsible for making the government bigger decide it
is time to stop. As such, it gives a license to any government to
grow the state under the guise of fulfilling its pledge to the
summit.
This is politically convenient for advocates of big government
but irrelevant to the current crisis. Finally, the summit's
argument that expansionary policies can be consistent with price
stability ignores the inflation after 1945 and,
specifically, the stagflation of the 1970s.
Third, the summit promises to implement principles from the
international Financial Stability Forum (FSF) on pay and to support
"sustainable compensation schemes" and "corporate social
responsibility of all firms." The FSF poses a serious potential
threat to national sovereignty, one that will remain in abeyance
only as long as national governments retain the power to reject the
FSF's principles.
But the idea that even national governments have the wisdom to
decide what compensation schemes are "sustainable" is entirely
false. Even more dangerous is the idea that governments should
regulate all firms to ensure they are "socially responsible." This
is simply a code word for politicized interference in markets. In
the 1990s, such interference helped to create the subprime mortgage
debacle in the United States that sparked the current crisis.
Policies That Endanger National Sovereignty. While these
errors will waste money and encourage national governments to
manipulate markets for political purposes, the remaining policies
are potentially even more damaging in the long run. For now, the
meaning of many of the measures adopted by the G-20 summit remains
obscure, but there is no mistaking their supranational drift and
bias against economic freedom.
First, the summit promised to create a new international
Financial Stability Board (FSB), with a "strengthened mandate," as
a successor to the FSF. The current FSF works on the basis of
information exchange and international cooperation, which are
sensible principles and entirely consistent with American
sovereignty. If the FSB departs from them, it will be making a
serious error.
Second, the G-20 states have pledged to extend regulation and
oversight to all systemically important financial institutions and
to ensure that credit rating agencies "meet the international code
of good practice." The question, again, is what "oversight" means,
what "international code" nations will be asked--or required--to
subscribe to, and whether they will be sanctioned for failure to do
so by a supranational organization.
More broadly, by placing its faith in regulation, the summit
ignored one of the basic facts about the financial crisis: It was
the regulated banks that failed. If regulation and oversight were
the cure-alls for the development of systemic risk the summit
implies, the financial crisis would never have happened.
Third, the summit's attendees promised to "take action against
non-cooperative jurisdictions, including tax havens. We stand ready
to deploy sanctions to protect our public finances and financial
systems." As a response to the international financial crisis, this
is nonsense. Tax havens played no significant role in the birth of
the crisis--which originated in the leading economies of the
West--and the world economy as a whole.
The attack on tax havens is, at best, a politically motivated
irrelevancy. At worst, it is the start of a broader campaign to
find new sources of money to tax and stigmatize as international
wrongdoers states that, as an expression of their national
sovereignty, have chosen to have lower taxes. These states are
using their political freedom to promote economic freedom: They are
benefactors, not malefactors.
The Summit's Missed Opportunities
The summit did one thing right: It called on all states to "to
refrain from raising new barriers to investment or to trade in
goods and services, imposing new export restrictions, or
implementing World Trade Organisation (WTO)-inconsistent measures
to stimulate exports." In a global recession, where mutually
beneficial trade is collapsing alarmingly, the last thing the world
needs is protectionism.
But since the last meeting of the G-20 in Washington in November
2008, which also defended free trade, virtually every G-20 nation
has passed protectionist measures. The London summit failed to name
and shame the violators of November's no-protectionism pledge. Nor
did it make a firm commitment to conclude the Doha Round of the
WTO.
Even more importantly, the summit made no serious effort to
address the fundamental problem: Many of the world's banks have
many assets on their books that are worth far less--or are thought
to be worth far less--than they were a year ago. The summit's
communiqué did refer to the (supposed) fact that all the
G-20 nations have "provided significant and comprehensive support
to our banking systems to provide liquidity, recapitalise financial
institutions, and address decisively the problem of impaired
assets." But by putting the issue in the past tense, the summit, as
the Financial Times observed, "ducked the important question
of bank rescue beyond a few meaningless and self-congratulatory
statements. ... [They] showed more interest in future crises than
in the current one."[2]
What the Summit Should Have Done
The first step toward solving a problem is admitting it exists.
The summit's failure to acknowledge the ongoing seriousness of the
banking crisis is therefore its most fundamental error. But all
told, the summit's policies are as irrelevant to the current crisis
as they are dangerous to economic freedom and political
sovereignty. Because it produced an agreed communiqué, the
summit was a political success. Its errors of commission and
omission, however, made it a substantive failure.
The summit should instead have embraced freedom. The
contributions of lower taxes, free trade, free markets, and
international cooperation on the basis of democratic sovereignty to
both economic growth and human liberty are well known and were the
basis of the world's recovery from the economic and political
crisis of the 1970s. Now more than ever, the United States and the
nations of the world urgently need to reject the failed policies of
the past and acknowledge that markets, not governments, are
responsible for building prosperity.
Ted R. Bromund is Senior Research Fellow in the
Margaret Thatcher Center for Freedom, a division of the Kathryn and
Shelby Cullom Davis Institute for International Studies, at The
Heritage Foundation.