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Former chief Obama economic advisor & Clinton Treasury Secretary Larry Summers has almost uniquely come quite a way in analyzing the major problems caused for the American economy by U.S. trade and other globalization policies. But the latest of his widely syndicated newspaper columns shows that in the most crucial respects, he has a long way to go, suggesting that the rest of the America’s economic policy establishment undoubtedly has even more rethinking to do.

Once a prominent champion of trade deals that have needlessly sent so much of the nation’s productive economy overseas, Summers has had at least two important second thoughts. Lately, he’s been pushing the idea that an American economy unquestionably shaped by Washington’s international economic policies is suffering from “secular stagnation.” This malady is defined as an inability to grow adequately without inflating dangerous financial bubbles. Although Summers doesn’t blame America’s recent approach to the international economy, it’s an especially striking indictment given how significant the globalization strategies he favored were supposed to be in shaping the country’s economic future – not to mention how much triumphalism they fostered.

In addition, as I’ve reported, Summers now agrees that unless it responds effectively to currency manipulation by foreign governments, proposed U.S. trade agreements like the Trans-Pacific Partnership could be more bane than boon for America.

His newest offering adds another useful insight: Too many participants on both sides of the debate on trade and globalization policies are neglecting the needs of the middle and working classes in the United States and other industrialized countries. As he writes:

It sometimes seems that the prevailing global agenda combines elite concerns about matters such as intellectual property, investment protection and regulatory harmonisation with moral concerns about global poverty and posterity, while offering little to those in the middle.”

Summers strangely adds “rising urban populations” in developing countries to the list of overlooked constituencies, but I fully agree with his claim that approaches that remain so blinkered “are unlikely to work out well in the long run.”

But the larger point made by Summers here shows that he remains utterly clueless as to the real dangers created by U.S. trade failures. Indeed, his proposed solutions would make matters far worse. According to Summers – who’s now back teaching at Harvard – China’s successful creation of a new infrastructure financing bank over American objections shows that “This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system.” Consequently, “a comprehensive review of the US approach to global economics is urgently needed.”

As Summers sees it, the United States must reestablish its bona fides for global economic leadership by encouraging, not resisting, the creation of a “new global economic architecture” that reflects the rise of China and other emerging market countries; and by subordinating itself to the same international rules that it insists others obey.

I have my doubts as to whether an objective as gauzy as “global economic leadership” deserves any priority in Washington – if it’s defined, as Summers seems to, as the ability to steer the world economy toward goals that would benefit all countries. Not that I object in principal to win-win global outcomes.  But where’s the evidence that even America’s allies are interested in anything more than free-riding on U.S. economic largesse, and in continuing to grow mainly by wracking up trade surpluses with the United States? China and the rest of the so-called emerging world, more growth-starved than ever these days because their own economies are slowing dramatically, are even further off the reservation.  

Moreover, as dreary as its performance has been since the financial crisis struck, the U.S. economy has been the world’s pace-setter among industrialized countries and it’s outgrown even many developing countries. Combined with its still decent outlook amid a weakening international recovery, this development keeps strengthening the case that the United States is “decoupling” from the rest of the world – and by extension, that any form of leadership is less and less necessary.  

But if I did value leadership, I’d be mindful, unlike Summers, that the only dependable foundation for this role is the kind of unquestionably superior economic and financial strength that the United States has spent nearly a quarter century squandering – largely through offshoring-friendly trade policies. This kind of predominance is essential either to lead through historically traditional muscle-flexing, or to lead in line with Summers’ conception – which happens to have been Washington’s general approach for most of the post-World War II period – by providing “public goods,” like wide, asymmetrically open import markets and lots of liquidity. Without such a margin of superiority, Leadership Version Number One will be all too easy to resist, and Leadership Version Number Two will founder for the very reasons it’s failed since the early 1970s – its over-magnanimity will degrade its material basis.

Further, as I’ve argued here, giving developing countries – especially China – more authority in international institutions is bound to deepen the economic woes faced by not only America, but by the entire world. For it will strengthening the forces of the secular stagnation that so alarms Summers. After all, in their understandable but shortsighted determination to grow at all costs, these countries will surely use organizations like the International Monetary Fund like they’ve used the World Trade Organization.  They’ll enable ever more economic free-riding, mainly by curbing Washington’s ability to respond. The inevitable result will be ever more third world export-led growth at the expense of America’s manufacturing base, and a deepening need for U.S. leaders to sustain phony prosperity through easy money.

As a result, even more ominously, this Summers strategy will contribute to fueling the kinds of global imbalances that triggered the last financial crisis, ensuing Great Recession, and current feeble recovery.

The lessons couldn’t be more clear. Whether you favor a broader or narrower view of U.S. leadership, there’s no substitute for rebuilding American wealth and power. And if you’re interested in creating a global economy that’s more stable, less crisis-prone, and better positioned to foster the greatest prosperity for all countries over the longest run, an America capable of administering some tough love, and of course wise enough to do so, is your very best bet as well.  

By the way, Summers, former Fed Chairman Ben Bernanke, and many other leading economists have been engaged in a vigorous blogging debate over both the global and domestic implications of secular expansion, and the related issue of whether the notion is valid to begin with.  Although they and the commentary they’ve inspired has generally ignored this dimension, these new writings bear strongly on the trade deals Congress is evaluating, and I’ll put my two cents in as soon as I digest their analyses.

 

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