The former UK prime minister is worth listening to
Gordon Brown is far from being my favourite politician. As economic Czar of Britain’s Labour government from 1997 to 2007 he started well – struggling hard and long to establish fiscal credibility – only to throw it all away. He then spent a miserable three years as prime minister to 2010 trying to contain the fallout. What a shame.
However, that was then and we are where we are. My eye was caught by a headline in Reuters, available on Project Syndicate here, that read “Stubborn national politics drag down the global economy”. How well put, I thought. After noting the byline with some foreboding, I read the column with growing interest.
Brown starts by pointing to the obstinate persistence of low animal spirits and lack of optimism:
“The reason the world is not moving fast enough out of recession is that we have failed to understand what a fast-changing global economy needs to do to sustain higher growth. And we will continue to perform badly if we stick to a model of the global economy where we rely on nations doing their own thing, attempting ”solutions in one country” devoid of any attempt at real global cooperation. That course doesn’t take us forward — only into a cul-de-sac of nativism and protectionism.”
“Here is the great and grievous disconnect of our times: that even as our economics have gone global, our politics have remained viscerally local.”
I agree with you, Gordon. But there is one big lacuna in your argument.
What is missing is something to convince governments, the business community and electorates that the results of a big global stimulus will actually be beneficial, in terms of sustainable growth and employment. Won’t they also splutter out, leaving heightened concern about inflation and even more debt and little real growth?
Without complementary action, such a Keynesian package could also trigger heightened exchange rate conflicts, as new monetary surges destabilise emerging markets in the search for yield and spark new cross-border currency and asset bubbles.
Sorry, but the international monetary system is simply not strong enough to contain the forces that such a boost would unleash.
What the global economy needs is a complementary agreement on a trade and currency regime – call it the Common Trade and Currency Area. This would embrace initially the euro, pound, dollar and would put in place a robust global, rule-based framework to limit – ideally, to eliminate – the useless and damaging volatility of exchange rates. Japan is a developed country that has suffered particularly from wild exchange rate swings, and should support such an initiative. China wants stability above all.
Global business would immediately respond to evidence that governments were indeed putting in place a strong global framework. Investment plans would be dusted off as the realisation grew that, at last, governments had understood the true dimensions of the problem.
Call it a new Bretton Woods if you like, though it would be a very different kind of pact. But something like it will be needed. And that is, also, the main conclusion of The Money Trap. It should be grafted onto Brown’s vision.
The politics of isolationism
Gordon Brown is at his best in conveying the dangerous temptations facing politicians. They have to make it look as if they are dealing with a purely domestic problem — one that they can cope with:
“Any politician who stands on a platform that does anything other than propose inward-looking, highly domestic-focused and often protectionist economic initiatives is at a disadvantage. Not only are there no votes in thinking and acting globally, but votes are actually lost unless you do the opposite of pursuing a global vision: You have, instead, to re-nationalize each economic problem and make it look as if you are dealing with a purely domestic failure.”
And again in his closing peroration:
“As (Robert) Skidelsky, drawing on his studies of Keynes, has brilliantly shown, this new wave of economic weakness is not the inevitable aftermath of a banking collapse: it reflects a crisis of global political leadership that is man-made.”
Unfortunately, it is not just protectionist pressures that militate against such international solutions. So do the central bankers, wedded as they are to the dogma that inflation targeting or similar policy models with flexible exchange rates are the best guide to monetary policy. Banks and other financial institutions also like the volatility that attends current monetary anarchy. There are big, powerful lobbies to confront. But you always did like a challenge, didn’t you?