Asymmetrical Information

From the desk of Jane Galt:

Everyone wants to go to heaven, but nobody wants to die

This was the weekend for spring meetings in Washington. The IMF, the World Bank, and the G-7 all met to hash out the problems facing the world, and suggest what might be done about them.

They didn't exactly come up with any surprises. The developing world is less poor than it used to be, thanks mainly to economic growth in India and China, but still a lot poorer than it ought to be, with billions of people living on less than $2 a day. Many people think that debt relief would help things a great deal, but though governments agree in principle, they're having trouble implementing it in practice; the US is blocking a scheme to sell off half the IMF's gold reserves in order to pay for all that relief. Why, I'm not exactly sure, since as far as I know the IMF isn't really using the gold for anything except the aesthetic pleasure of having a lot of shiny things crowded together in a vault.

[Many other people think the World Bank is the problem, not the solution. They spent the meetings camped out on the Mall, selling genuine replica Che hats and/or Club For Growth bumper stickers]

There was a great deal of fretting about oil prices. That's all people can really do--fret--since the causes of high oil prices, such as high demand in China, offer limited scope for even multinational action. Of course, the US could slap a whacking great carbon tax on, the way Europe has, but the political prospects for such an action seem remote at best.

To me, the most interesting part of the meetings is where the various government personnel confronted the problem of large and growing imbalances in the global economy. Basically, everyone knows what needs to happen. Europe and Japan need to kick up economic growth. America needs to kick up its national savings rate through some combination of tighter fiscal policy and household savings. And Asian banks need to stop flooding us with cheap capital in order to subsidize their export sector.

Unfortunately, while everyone knows what needs to happen, no one knows how to do it. Japan has been stuck in an economic quagmire for a decade, and hopes are fading that it has finally made its way out of the Slough of Despond. [There's an even bigger, scarier worry, which is that Japan is what a country in demographic decline looks like, and Europe will follow suit. But that's another post.] Europe has run into the fact that the one-size-fits-all monetary policy of a single currency can have disastrous effects when labour and capital aren't mobile; France and Germany, the eurozone's biggest economies, are stuck in nasty recessions, but the ECB, which wants to establish its street cred on inflation, seems to be preparing to raise rates this fall. And there is little political support for the kinds of broad-based microeconomic reforms that might goose growth at the cost of cushy employment protections.

China, meanwhile, feels it needs a low currency in order to keep its export sector workers happily labouring in their factories, instead of angrily converging on Beijing with torches and pitchforks. And it will take a braver politician than George Bush to tell Americans that they can't have their tax cuts and their government programmes. Everyone recognizes that the world has a big problem. Everyone is in favour of doing something about it--as long as someone else does the doing. No one is in favour of telling a restive citizenry that things can't go on as they are. And in some cases, it mighten't do much good. For example, it won't help to rein in America's budget deficit if Chinese central banks just start lending the money to Fannie Mae instead, touching off another wave of home refinancings.

The longer we wait to correct these imbalances, the more likely the correction is to be catastrophic. That doesn't mean that disaster is inevitable. As James Surowiecki points out, when you owe the bank $1 million, you have a problem, but when you owe the bank $300 billion, the bank has a problem; China and the other Asian central banks have every incentive to let us down easy, if they can, if only to prevent their huge portfolio of American bonds from, er, accelerated depreciation. But with every passing day that our leaders collude to do nothing, the darker scenarios grow more plausible.

Posted by Jane Galt at April 18, 2005 01:47 AM | TrackBack | Technorati inbound links