Challenges for Future American Economic Policy
A Director's Forum with Lawrence H. Summers, U.S. Secretary of the Treasury
1. A strong U.S. economy is crucial for a strong global economy and a strong America. The economy has changed greatly in the past eight years due to the hard work and initiative of American workers and businesses and because of changes in fiscal policies. With so many countries dependent on American exports and because the U.S. is a major source of capital flows internationally, a strong American economy is important around the world. Therefore according to Summers, the first requisite of a successful American international economic policy is a strong domestic economy.
2. More open and integrated global markets are very important to a strong international economy, but the economies of scale case for trade is also important. The larger the volume of products, the lower the cost and the greater the efficiency. Another advantage of larger markets is the spread of fixed costs. Looking deeper still, Summers maintains that open markets contribute to peace between nations. In general, nations that trade together are less likely to come into conflict. Summers argued that the fact that Asia has experienced the most dramatic changes the most quickly in the relative balance of economic power and has done so peacefully, is due to the triumph of the GATT system and the expansion of global markets. He believes that what will be remembered the longest from this period in our history is the Chinese accession into the World Trade Organization, where a fifth of humanity has been brought into the global economic system.
3. A successful global economy requires a commitment to the active management, prevention, and containment of financial crises. According to Summers, when there is a crisis, there is no substitute for coordinated action to restore confidence based on the pursuit of sound policy. There must be willingness to support coordinated action in places like Korea, Brazil, and Mexico, while at the same time not neglecting the existence of moral hazards or the central reality that countries shape their own destinies. Summers concluded this point by saying that he does not advise closing off markets to prevent financial accidents. Instead we must build sound financial markets, maximize the capacity for prevention, and be prepared to act to contain crisis.
4. We'll all be tested for the billion people on this planet who live the least well. So often serious conflicts are rooted in severe poverty and frustration. When this exists, "we're not seizing the promises of a new global economy." Disease, environmental degradation, and overpopulation become exacerbated in situations of extreme poverty. According to Summers, "if we are to have a truly global economy, we all must think about the poorest parts of the world."
5. How the U.S. interacts with the global community will impact people everywhere in the 21st century. We should never ascribe American solutions to global problems. The U.S. way is not the only way. We must work closely with other nations, while recognizing the special responsibility we have due to our size and strength. In the end, international engagement is the least expensive and most potent way to defend America's interests. An engaged America is more moral and contributing and a safer place.
While noting the importance of engagement and open markets, Summers was careful to acknowledge that there are humanitarian, environmental, and other concerns with some of our trading partners, but that active engagement, in his opinion, remains the best option.