Sunday, May 07, 2006

Where the rubber meets the road

It seems to me, after reading the latest from Stephen Roach, that critiques similar to mine found their way to him. He acknowledges that deciding to do a thing is not the same as doing it or as he put it; It’s one thing to have a framework that allows for shared responsibility in fixing an unbalanced world. It’s another thing altogether for individual nations to do the heavy lifting on economic policies that such responsibilities require.

Yet, I still believe Mr. Roach's sanguinity on the expected rebalancing of international accounts is premature. I am less confident than he that the current US administration will allow financial solvency arguments to trump security arguments in their deliberations.

This perspective shifts the argument from one of policy recommendation, i.e. the job of a pure economist, to one of policy execution, i.e. where the rubber meets the road. I agree with Mr. Roach's prescription, the dollar needs to fall to a more realistic level, but I don't agree that such considerations will be very influential if President Bush thinks we are fighting World War III and Vice President Cheney thinks Reagan taught us deficits don't matter. The buck, after all, stops with them.

(Blogosphere debate note: whether they actualy said such things is less important than whether they believe them, as their policy choices seem to indicate.)

While the esteem in which Central Bankers are held has risen markedly during the Greenspan era, this was, I contend, mainly a function of his easy money policies. And even Greenspan's suggestions of fiscal discipline fell on deaf ears with this administration. They are, as they have repeatedly said, on a mission to which other concerns are subordinated. As Arthur Burns related in his Anguish of Central Banking, it is easy to accomodate in a monetary sense, very difficult to restrict.

This development is not unique to the Bush administration. Each President's focus varies. Moreover, the virtues accruing to the issuer of the world's reserve currency have lent empirical credence to the view that deficits are easily sustainable much as a few decades without major hurricanes lend empirical credence to the view that hurricanes aren't a problem. Of course, issuing the world's reserve currency is not a birthright.

It will, I contend, take both a fear of losing dollar hegemony and faith that restoring trade and fiscal imbalances is the best means of achieving this goal to generate a sustained rebalancing policy. In my view, while this faith is likely generally accepted in economic policy circles, it is not shared by the current executive or legislative branches. They have chosen another path to maintain dollar supremacy.

None of the above is meant to diminish the importance of the shift in economic policy circles. I applaud the exorcism of the "new economics" demon from official economics. But I believe it will take time and a crisis or two before this faith leads to anything other than cosmetic changes.

Some might recall the 1993 meeting between President elect Clinton, Robert Rubin and Fed Chairman Greenspan on budget deficits and bond rates. It was portrayed in the press as if sound economics had imposed its will on the executive. I just don't see Fed Chairman Bernanke and John Snow or any other Bush administration member laying down the economic law for President Bush.

Not yet at any rate.