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In this week’s Grumpy Economist Weekly Rant, John Cochrane examines the G7 Summit’s economic report and its diagnosis of the world economy. The report warns of “predatory competition,” “industrial overcapacity,” “unbalanced growth,” “reciprocal trade,” and the need for more international policy coordination. Cochrane argues that much of this language obscures rather than clarifies the central economic question: how countries actually achieve growth.
Cochrane challenges the report’s view that trade deficits, surpluses, and global imbalances should be managed through international institutions, surveillance, and coordinated intervention. Instead, he argues that countries grow by removing barriers to investment, work, energy production, and enterprise. There is one central economic issue: growth, and it depends less on international economic management than on policies that allow productive activity to expand.
Read more on this topic:
On a report to the G7, The Grumpy Economist
Crisis Cycle: Challenges, Evolution, and Future of the Euro, John H. Cochrane
Transcript
Hi, I’m John Cochrane, and welcome to my Grumpy Economist Weekly Rant.
Today, I’m ranting about the G7 Summit, and in particular, the economists’ report produced for the G7 Summit to offer suggestions on what the G7 Summit should do about the world’s economy.
What are the problems? Predatory competition. Oh no. We start with the first two words in the report, which are an economic fallacy. Hmm, let’s go on.
Industrial overcapacity and, simultaneously, underinvestment. I don’t know quite how you have both of those unless investment isn’t going to the places that the authors want it to go.
Excessive debt and deregulation. Excessive deregulation? Are you kidding?
The retreat of international solidarity. Well, this is happening in France.
We need balanced growth and reciprocal trade. What do those qualifiers mean? Well, reciprocal trade they define as trade that is mutually beneficial for countries.
Now, when I go down to Whole Foods and buy something, it’s mutually beneficial. How do countries trade when it’s not mutually beneficial? No one’s forcing them to trade.
The rise of excessive current account deficits and surpluses, which reflects increasingly unbalanced growth dynamics. Oh, there’s a problem to worry about.
Now, there is an issue here. A country that saves more than it consumes, like China, must do so by buying assets abroad. They have to send things on boats, and in return, they get stocks and bonds and other claims that they hope they can cash in later for us to put things on boats for them.
Conversely, a country like ours that consumes more than it saves has to sell abroad in order to get the investment and bring things on boats for us to consume.
So consumption leads to trade deficits, and savings lead to trade surpluses. But is this an excess?
Economists puzzled for years that countries get their own investment from their own savings rather than doing it abroad. The world starts to look like our models, and suddenly it’s all excessive.
Well, says the report, addressing these global imbalances requires rebalancing growth. China, in particular, should have more investment in people. They should have public support for health care, safety nets, and repairing balance sheets—that means big bailouts from the government.
China, I’m sure, is laughing. China should put in the kind of welfare state and other interventions that Europe has used to completely stop its economic growth. Thank you, no, says China.
If we don’t like it, perhaps we should think about doing less subsidizing of our consumption rather than yelling at China to do more of it.
The European Union, says the report, should raise its growth potential by implementing key parts of the Draghi report. Well, I agree with that. Having written a book about Europe, they leave out the important parts: deregulation, a sensible energy policy, and welfare states that pay people not to work.
All of this has to happen, of course, through policy coordination. Financial sector imbalances—there’s that word again—have to be addressed through enhanced IMF and Financial Stability Board surveillance and emergency liquidity provision, i.e., money from Uncle Sam and the great international policy blob running our entire financial affairs.
Exactly what hasn’t worked domestically, we will now try to do to the financial system internationally.
There is one and only one economic issue: growth, and we get it by largely getting out of the way.
What did I learn from reading this report? I learned the pompous emptiness of international institutions such as the G7.
No one’s going to listen to these kinds of recommendations or do anything about it, or hand so much power to an alphabet soup of international institutions.
We at Hoover are engaged in a commons project, thinking about how to replace institutions that have fallen apart, and this one certainly has.
I also learned, with some sadness, what can happen to economists. The authors of this report are excellent economists. Many of them are friends, and it pains me to criticize the report in public.
I guess the lesson is: be careful putting your name on a report written by a committee because such drivel can come out.
Thanks for listening, and if you like this Grumpy Economist Weekly Rant, don’t forget to click to subscribe.
John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow of the Hoover Institution at Stanford University. An economist specializing in financial economics and macroeconomics, he is the author of The Fiscal Theory of the Price Level. He also authors a popular Substack called The Grumpy Economist.