The Entrepreneurial View

The G-20 and the Global Economy

by Raymond J. Keating

When a group of high-powered politicians get together to talk about economic issues, it's time to cross your fingers and hope nothing egregious results that will stymie entrepreneurship, investment and economic growth.

That was the case with the G-20 meeting that wrapped up on Sunday (June 27) in Toronto.

For the most part, it was good news because these politicians failed to agree on anything concrete that would negatively impact the economy.

The headline issue coming out of the meeting was that leaders from the nation's top economies signed on to a nonbinding agreement to cut government budget deficits in half by 2013, and to stabilize their public debt by 2016. In each case, the measurement would be relative to GDP. This was a victory for Canada, German and Britain, as opposed to President Obama who came into the G-20 gathering still touting government spending as some kind of economic stimulus, and warning not to rein in such spending too fast.

It's worth noting the following from a Wall Street Journal report: "German Finance Minister Wolfgang Schauble used an interview in the French newspaper Le Monde to throw a jab at the U.S., saying Mr. Obama's giant stimulus spending has had little impact on the country's jobless rate, which remains well above 9%." In fact, the vast expansion of government spending has been a clear negative for the economy, as it pulls resources away from productive private sector ventures, and creates private sector paralysis due to the current reality and future threats of government regulation and taxation.

It's disturbing that Canada and various European nations are trying to be more fiscally responsible than our own governmental leaders.

The emphasis on reducing government deficits and debt at the G-20 could be an economic plus depending on how this is achieved. If it's through higher taxes, then it will be a clear negative for the economy. If efforts are focused on cutting the size of government, then the benefits for domestic and global economies will be clear.

Another case of this G-20 gathering being positive due to nothing negative happening is seen in the lack of action on a proposed global bank tax. The U.S., Great Britain and the European Union are supporting the tax, while Canada, Australia and developing nations, like Brazil and India, stand opposed. The bank tax would, in effect, fund a bailout fund. This would raise costs and institutionalize the government bailout mentality, and the accompanying moral hazard.

Michael Casey of the Wall Street Journal noted: "Essentially, the failure to resolve this high-profile Europe-driven idea reflected concerns from developing nations and others that the tax would impose an unnecessary additional cost. They feared it would put their banks at a competitive disadvantage, or at least would reduce the advantage they would gain if, as expected, European Union countries and the U.S. go ahead with a tax on their own."

Beyond the U.S. going down the path of self-inflicted wounds, there is still much to worry about regarding upcoming international gatherings of politicians. The next G-20 meeting comes in November in Seoul, where agreements will be sought on financial regulation, including capital and liquidity standards, as well as on the bank tax issue. That is a scary agenda, whereby if substantive agreements are reached, the threat to global capital, credit and risk taking would be quite substantial.

Unfortunately, it again must be noted that where the U.S. once provided positive leadership in international settings, we are now one of the nations advocating destructive economic ideas and policies.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.