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  • The Week on the Hill

This weekend's meeting in Washington of the leaders of the G-20 nations should have been a world-historical moment. The biggest rich and emerging economies are represented, accounting for nine-tenths of global output. A global slump has started, brought on by the worst financial crash since the onset of the Great Depression. So there is plenty to talk about and a lot to do. People are calling for a "new Bretton Woods," recalling the international conference in 1944 that laid the institutional foundations for the postwar world economy.

Heady stuff -- except that the timing is off by about nine weeks. America's next president, attentive to constitutional propriety, will not be there and promises to keep a low profile during the meeting. George W. Bush no longer has much pull with this group and will not be around to honor any commitments he might make. Many of the visiting presidents and prime ministers will think they are talking to the wrong man. Why deal with a leader on his way out?

Ordinarily, it would not matter. Leaders of the G-7 countries (the richest members of the G-20, sometimes with the addition of Russia, which makes it the G-8) get together in a picturesque location every summer for a photo opportunity and to issue a bland communique that changes nothing. But this meeting is different -- or should have been. Effective international coordination is needed to get the world through the current emergency. Looking further ahead, it is indispensable if the world is to lessen the risk of a recurrence. This was a moment for the United States to provide leadership. The timing makes it impossible.

This point was underlined -- deliberately, no doubt -- by an announcement that China made a few days ago. Its government outlined a colossal fiscal stimulus of nearly $600 billion -- about 15 percent of China's gross domestic product. Barack Obama and congressional Democrats are hesitantly debating a second stimulus for the United States and seem to be thinking of numbers between $100 billion and $200 billion -- which, at the top end, is not even 2 percent of U.S. GDP.

Until recently, you may recall, many on Capitol Hill had been pressing the White House to take a tougher line with China, complaining that it was holding down the value of its currency to help its exporters at other countries' expense and demanding that Beijing act to stimulate domestic demand. Well, it is about to, and how: The figures are off the chart. China's premier, Hu Jintao, can tell the G-20 that his country has taken the lead in stabilizing the world economy, so the United States can take a little more time to decide who is in charge. Really, anything to help.

Whether China's fiscal arithmetic withstands scrutiny remains to be seen. There is a lot of double counting in that $600 billion: Not all of it is new money. What Beijing says it will do and what actually happens may not be the same thing. But when all is said and done it is still an enormous stimulus, a diplomatic coup. It will be interesting to see what China expects in return.

China was owed something in any case. This is a situation that the G-20's leaders should put right this weekend. Even if a comprehensive response to the crisis is unlikely -- that requires a detailed plan for coordinated fiscal and monetary expansion, and concrete proposals for a new international system of financial regulation -- the summit can take the necessary first steps. Agreement on some basic principles and a schedule for nailing down the details ought not to be beyond reach. And those principles need to include a seat for China at the head table.

The old G-7 of rich countries has outlived its purpose -- and what better forum to say so than the more broadly representative G-20? Big emerging economies such as China and Brazil need to be brought into the inner councils of global economic management. China's pivotal significance in dealing with the current emergency only makes it more absurd, and more shaming, that it has not already happened.

However, 20 governments do not constitute an ideally compact group for coming to fast decisions. Europe's governments will resist this, but France, Germany, Italy, and the United Kingdom should surrender their separate seats at the G-7 and instead anoint a new G-8 -- of the United States, the European Union, Japan, Brazil, China, Russia, India, and Saudi Arabia. This weekend, it would be good to see the governments of these countries commit themselves to further meetings on managing the emergency and its aftermath.

The IMF will have to play a bigger role and be given more resources. The G-20 should say so.

Beyond this, they should announce some specific next steps. China has already unveiled its remarkable fiscal plan. The other governments, including America's, should also promise big new fiscal packages and commit themselves to additional monetary easing as well. As long as interest rates are above zero, there is room to cut them again. No doubt, some countries are in a better position to stimulate demand like this than others. China, for instance, has a balance-of-payments surplus, high public and private savings, and vast reserves of foreign exchange. Its fiscal position is strong. Not every economy -- certainly not the United States -- is so well-placed.

Nonetheless, the U.S. can afford a bigger stimulus than the plans currently under discussion. Its public debt is not high, and the government is still a creditworthy borrower. Provided the stimulus is designed in such a way that the budget will shrink quickly and automatically as the economy recovers -- as it would, for instance, if most of the extra spending was devoted to unemployment assistance and nonrecurring capital projects, rather than to expanding ongoing entitlements -- an injection of $500 billion or more is easily justified under the circumstances.

As part of these commitments, the G-20 should also announce an increase in the resources available to the International Monetary Fund for rescue operations. At the moment, the IMF has about $250 billion available for the purpose -- far too little when you recall that the first installments of the U.S. financial rescue will add up to nearly $1 trillion. Poorer or smaller economies are going to need a hand. The ability of any government to mount a big financial rescue is limited, in the end, by its tax base. America's is huge. But an economy does not have to be that big to own large international banks whose failure would have global repercussions. Bailing them out may literally be beyond the means of such countries (think of Iceland). The IMF will have to play a bigger role and be given more resources. The G-20 should say so.

The hardest question is how to reform global financial regulation. If regulators are going to do a better job, they will have to cooperate more closely across borders: This much, at least, is clear. Big banks and financial firms are global enterprises. Currently, they are regulated through a complex blend of home-country and host-country controls. Things fall between the cracks. Also, governments need to move in formation and be about as strict as each other. If some jurisdictions are much less demanding than others, banks and finance companies in the more tightly regulated countries will be put at a disadvantage. A regulatory race to the bottom might ensue.

On paper, the neatest solution would be to have a single global regulator, at least for big institutions with international operations. But this is unlikely to happen: Few governments, least of all the United States', will want to outsource this role. At the other extreme, governments could simply try harder to cooperate -- talking more and sharing information. But this is something they already do. How do you like the results?

The best approach is the middle way. They should create a new oversight body -- or else grant new oversight powers to an existing one, the IMF -- whose job would be ensuring that differing national regulations conformed to some basic principles. There would be no global regulator. Governments would be free to tailor their regulations to their particular national circumstances, but subject to supervision and all in accordance with norms they had agreed to. Banks that were regulated in jurisdictions that failed to meet these minimum standards could be barred from operating internationally. We will see whether the G-20 have anything useful to say on this subject.

One last thing. Before this economic breakdown arrived, the Doha Round of multilateral trade talks had been more or less written off for dead. Nobody should need reminding that an upsurge of beggar-thy-neighbor protectionism could make a very bad economic situation even worse -- just as the notorious Smoot-Hawley tariffs did in the 1930s. With President-elect Obama and the new Democratic Congress none too keen on trade and intent on keeping jobs at home and all of that, protectionist backsliding is a real danger. The G-20, if they do nothing else, can promise that there will be no new trade barriers, and preferably that they will strive to bring Doha back to life.