Tuesday, October 26, 2010

John Cochrane on Geitner's Proposal at the G-20

Today's WSJ has an interest op-ed piece by John Cochrane. Secretary of the Treasury Geithner called for G-20 countries to undertake policies that would reduce external imbalances below some specified share of GDP. It appears that Geithner is most concerned about China's trade surplus with the U.S. However, the U.S. has a trade deficit with many countries other than China.

China saves a lot more that the U.S., partially because China lacks a social security system. The only way middle-aged adults can plan for retirement is by saving today. It often appears that Americans believe social security provides a better retirement than it does since so many don't save much. However, one positive outcome of the recent financial and economic crisis is that Americans are saving more and borrowing less.

Cochrane points out several problems with Geithner's proposal. First, how does anyone know the proper amoung of saving any given country should have? Second, countries at different levels of development will have different outcomes with respect to trade balances. The U.S. borrowed abroad to fund the railroads in the 19th Century. Cochrane also points out that promises to fix our long-term problems later are hardly enforceable. Finally, there is a strong notion of an ability for government and international agencies to plan the operation of modern economies.

Cochrane's piece is worth a read.

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