G-20 Summit: There is No One Size Fits All

There is one thing you need to remember as you listen to the debate about economic and fiscal policy at the G-20 Summit this weekend in Toronto: There is No One-Size-Fits All. There is not even a “One-Size-Fits Twenty.”

Back in 2001, I summarized the few things about finance and economics that most scholars agree will support a growing economy and healthy capital markets:

“Four strategies can be shown to generally promote stable national financial systems: 1) having independent rating agencies; 2) having some safety net; 3) minimizing government ownership and control of national financial assets; and 4) allowing capital market participants to offer a wide-range of services.”

As of today:

1) Our rating agencies are independent of government, but not from the financial institutions who buy the ratings (who also buy the government, but I’ll leave that story to Matt Taibbi over at Rolling Stone …); 2) we bankrupted the Federal Deposit Insurance Corporation in late 2009, before the end of the recession (and that doesn’t even count all the bailouts of Wall Street and Main Street); and 3) the government took ownership positions in all US major financial institutions during the bailout.

I’ll come back to #4 to another time – Congress has vowed to ruin even that one before the 4th of July recess by passing the Wall Street Reform Act.

The United States delegation to the G20 Summit consists of President Obama, his economic advisor Larry Summers and (your friend and mine) Treasury Secretary Tim Geithner. At least one of them should know better than to go around insisting that every nation at the meeting should have the same policy as the United States: damn the torpedoes, full speed ahead! In other words, just as Federal Reserve Chairman Ben Bernanke is firing up the helicopters, keep dropping dollar bills on the economy until something starts growing. In a letter sent to the G-20 leaders in advance of the Summit in Toronto, they made it clear that the rest of the G-20 countries should do the same. While President Obama writes in the letter that the G-20 should “commit to restore sustainable public finances in the medium term” the underlying context is that there should be more fiscal stimulus in the short term.

I’m not the only economist to have said this before: When it comes to developing robust capital markets and a vibrant economy, there is no "one size fits all". This lesson should be familiar to the US delegation. To make it clear, let’s look at the numbers.

The numbers in question are 2007 through 2009, those associated with the current recession. I include 2000-2002 in the table to show what happened in the last recession, for a little perspective. The players in question are US, UK, France and Germany – I include Canada as a courtesy because they are the host country for the summit,. The first thing you’ll notice is that the US is the only one among the group that did not see positive prices increases last year – hence, their continued willingness to employ the cash-dropping helicopters.

French Finance Minister Christine Lagarde is outspoken this week on the subject of getting the federal budget under control in France instead of expanding economic stimulus programs: she believes what’s best for France is to get the deficits under control, which means reducing the budget and not more spending. On this one, I’m with Minister Lagarde: Vive La Différence!

There’s one more thing you need to know about economic growth and that is this: It takes more than a 2.4% increase to make up for a 2.4% decrease. Think of this way: if you start at 1,000 and reduce by 50%, you are left with 500. Now, at 500 if you get a 50% increase, you are only back to 750. To get from 500 back to 1,000, you need a 100% increase. As I wrote back in January: “At this rate, it will take 11 quarters (nearly 3 years) to catch up.” More government spending, however, will not provide a healthy long-term solution.

Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. She will be participating in an Infrastructure Index Project Workshop Series throughout 2010. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets.

Photo by carlossg