Pittsburgh Summit Blog: Strong, Sustainable and Balanced Growth

The Pittsburgh Summit 2009

Strong, Sustainable and Balanced Growth

By Brad Setser | Tuesday, September 22, 2009 | 10:01 AM EST | 3 comments

Pittsburgh is a city that has transformed itself from the city of steel to a center for high-tech innovation – including green technology, education and training, and research and development.

Pittsburgh’s own transformation serves as a powerful example for the work of the G-20. The Pittsburgh Summit comes at a turning point, as the world moves from crisis to recovery. The G-20 countries will take stock of their efforts so far to address the crisis, where we are on the road to recovery, and review their efforts to deliver on the promises they made when they met in London in April. They will discuss the need to promote greater responsibility in our financial system and ways to coordinate the international reform of banking regulation. They will focus on how to strengthen the coming economic recovery, and lay the groundwork for strong, balanced and sustained growth going forward. And they will discuss the central role the G-20 needs to play in future international cooperation, as it is the premiere forum bringing the advanced economies and the increasingly important emerging economies together.

Pittsburgh will not be another trillion dollar summit. That is a good thing. The Pittsburgh agenda is fundamentally about putting in place policies to reduce the risk that the world’s leaders will have to confront the sharp decline in activity and trade that followed last fall’s financial crisis.

Just a year ago, our economy was in a freefall. Some economists worried about the risk of a second Great Depression. A host of indicators pointed to the deepest recession of the postwar era. Global industrial production was shrinking at rate not seen since the 1930s. Immediate action was required to rescue the U.S. and the global economy.

In the United States, we passed an historic Recovery Act that quickly put money in the hands of working families and is putting Americans to work – in Pittsburgh, in the surrounding area and all across the country.

The steps that we took in the U.S. to jumpstart growth were coordinated with steps that others took; the G-20 countries committed to do “whatever is necessary to restore confidence, growth and jobs.” The IMF now estimates the G-20 countries will collectively deliver a fiscal stimulus of close to 2% of their combined GDP this year. And the G-20 worked together to provide the global financial institutions the resources they needed to limit the spread of the crisis. Thanks to this action, the first signs of global recovery are increasingly easy to find. Industrial production in the G-20 has either stabilized or is growing. Global trade is expanding. Financial institutions are raising needed capital.

But we also know that our work is far from complete – too many of our people are still looking for work.

And we, and the leaders of the world’s largest economies, also know that they have a responsibility to work together to produce a strong, durable recovery that restores job growth while putting in place the rules of the road that can prevent this kind of crisis from happening again. That means avoiding cycles of bubble and bust and steering clear of the imbalances of the past while still achieving the growth we need to put people back to work.

• We will press the G-20 to agree on a framework for strong, balanced and sustainable growth. As the U.S. starts to act more responsibility, it will borrow less and spend a bit less on the rest of the world’s goods. That means borrowing by U.S. households cannot be the main source of global demand growth in the future. Olivier Blanchard has observed that the world will need to transition from public to private sources of demand and rebalance the global pattern of growth in demand, “with a shift from domestic to foreign demand in the United States and a reverse shift from foreign to domestic demand in the rest of the world, particularly in Asia.” We hope to agree on the policies needed to avoid a return to the sort of imbalances that contributed to this crisis and put in place a process for encouraging all countries to live up to their commitment to support a transition to a more balanced pattern of global demand growth. Many the policies that would support this transition would also strengthen the overall pace of global growth.

• We will urge the G-20 to act to avoid a return to the irresponsibility and reckless behavior – to use President Obama’s words – that weakened financial balance sheets. We are pushing forward an aggressive regulatory reform plan in Congress that we aim to see signed into law this year. We will encourage the G-20 to put in place the policies needed to create a fundamentally stronger and safer financial system. We expect to make progress setting deadlines for dealing with some of the unfinished business of the regulatory agenda. We will urge other countries to take the same steps we are taking to prevent the excessive risk taking of global financial institutions from prompting another crisis.

As Secretary Geithner observed earlier this month, requiring banks to hold more capital and better-quality capital is central to preventing future crises – and to our ability to hold firms to account for the risks they take. We have put forth ambitious proposals to raise capital requirements, limit leverage and deal with other major issues of regulatory reform. We are equally committed to curbing the influence of excessive executive compensation; those who work at regulated financial firms should not be paid well for reckless risk-taking that can generate short-run profits but creates dangerous fragilities in the long-run. The Recovery Act in February ushered in the most sweeping reforms of excessive executive compensation in history, and we have implemented that law aggressively. Aligning individual incentives with long-term risk is a key part of any effort to strengthen financial stability.

• We will not ignore the challenges of climate and energy security. Subsidies for fossil fuel-based energy sources encourage over-consumption of fossil fuels and discourage investment in alternative energy. There are a number of countries that have taken bold steps to replace energy subsidies with more targeted subsidies that make sure the poor in their countries are able to secure access to energy. We hope the G-20 will be able to build on those steps in some way. This would have a significant impact on climate change; some of the studies have shown the impact of energy subsidies on greenhouse gases is rather significant.

Pittsburgh is known as the city of bridges. The G-20 is about building bridges among the world’s advanced economies and the world’s dynamic emerging economies. It is the forum of the future. We expect that the G-20 countries will come together at Pittsburgh to advance their shared interest in a strong, sustainable and balanced global recovery.

About the Author: Brad Setser is Director, International Economics at the National Security Council and the National Economic Council.