Many of the news reports on Argentinean President Cristina Kirchner's landslide reelection victory this past weekend contained a healthy dose of skepticism on the sustainability of her populist economic model. The skepticism is well-founded. We've all seen this movie before, and know exactly how it ends.

Heavy state intervention in the economy, massive subsidies, and the redistribution of income -- the hallmarks of economic populism -- have a way of playing themselves out, proving time and time again that lasting prosperity can never be built on acquiring unlimited debt or just printing more money.

As UCLA economist Sebastian Edwards, a Chilean, writes in his brilliant takedown of Latin American populism, Left Behind: Latin America and the False Promise of Populism, all populist experiments begin with great euphoria and surges in economic growth, but invariably lead to rapid inflation, higher unemployment, and lower wages -- and soon thereafter, stagnation and crisis.

There is no question that right now times are good in Argentina. Since the country hit rock bottom in 2002, when it defaulted on $100 billion in debt, the largest sovereign debt default in history, the country has undergone a seemingly remarkable turnaround under the stewardship of the late Nestor Kirchner and now his widow, Cristina. The economy is expected to grow by 8 percent this year and unemployment is at a 20-year low.

But the problem is that Argentina's economic success has been built not on strong fundamentals, but on a tenuous foundation of heavy government spending, high commodity prices, and strong demand from China and Brazil for soy and other agricultural products. And what goes up in economics can always come down.

Other troubling signs are double-digit inflation, which private economists put at 25 to 30 percent; capital flight ($9.8 billion was pulled out of the economy in the first half of this year, compared with $11.4 billion in all of 2010); and plummeting foreign investment (down 30 percent in the first half of 2011).

The other elephant in the living room is the fact that Argentina has been shut out of credit markets since it left bondholders holding the bag in billions of dollars of unpaid debt from its 2002 default. Not only has there been no reconciliation, but the Kirchner government has gone out of its way to reject lawsuits and other claims from creditors. As a result, the Obama administration and multilateral lenders have refused further loans until Argentina begins to repay what it owes investors and settle with holders of defaulted debt, as well as adhere to its obligations with institutions such as the International Monetary Fund.

Yet despite warnings by economists that the government's profligate spending, coupled with a global economic slump, could spell disaster, the Kirchner administration soldiers on. Indeed, why wouldn't it see her overwhelming reelection victory as anything but a mandate to continue its unorthodox ways? "After a lifetime of pushing those ideas," she said after her victory, "We now see that they were not a mistake and that we are on the right path."

On the other side, former President Eduardo Duhalde, who unsuccessfully challenged Kirchner, said, "We're happily dancing on the Titanic."

Given the prevailing capital flight and declining investment in Argentina, the smart money is obviously on Duhalde. Fortunately, those players are in a position to avoid the risk; what's unfortunate are the millions of poor and middle-class Argentineans who will once again pay the price for Argentina's populist folly when the inevitable day of reckoning returns.

In recent weeks, civil unrest in much of the Middle East has reminded many Americans of the very uncertain world in which we live. Repressive regimes that appear stable one day can just as quickly be overthrown the next, altering the strategic landscape and impacting U.S. interests.

This is an important lesson for the members of the 112th Congress as they debate ways to reduce the United States' spiraling deficit. As the search for savings has begun, some members have gone after areas of the federal budget that have nothing to do with our fiscal woes to pay down the debt.

In recent months, Secretary of Defense Robert Gates faced pressure from the White House to find more savings in the defense budget despite being the one cabinet secretary who has already carried out multiple rounds of cost cutting. Republicans in Congress weren't much kinder. The House approved an FY11 continuing resolution late last week providing $15.9 billion less for the core defense budget than President Obama requested. The House's FY11 continuing resolution would also cut the FY11 international affairs budget by nearly 20 percent from FY10 levels. The debate shifts to the Senate when Congress returns from recess next week.

This pressure to cut international affairs and defense is coming not just from Congress, but also from several blue-ribbon commissions that recently produced deficit reduction recommendations.

As Secretary Gates observed after deficit commission co-chairs Erskine Bowles and Alan Simpson proposed $100 billion of cuts to the defense budget, these recommendations represent "math not strategy." Several task forces have combined a dire assessment of the impact of the financial crisis with questionable proposals about bringing troops home from overseas, closing embassies and consulates, and canceling weapons programs. The long-term implications of these proposals represent nothing less than a rethinking of the U.S. role in the world even though the commissions were ill-equipped to analyze the implications of their proposed cuts.

Defense and international affairs have ended up on the chopping block despite the fact that the 2010 midterms were not a referendum on U.S. foreign policy. In fact, even in the midst of two wars and continuing terrorist threats to the homeland, congressional campaigns were marked by very little discussion of national security. In a late October 2010 poll done by the Pew Research Center, only 12 percent of respondents said that the war in Afghanistan was the first or second issue most important to their vote, and only 9 percent cited terrorism.

As recent events in Egypt and elsewhere in the Middle East have shown, the United States will continue to face strategic challenges in the coming decades that will require significant diplomatic and military expenditures. For most Americans, the need to adequately fund the military, the country's most-respected institution, is clear. For conservatives looking to downsize government, the case for a robust international affairs budget may be less apparent.

In the post-9/11 era, funding via the U.S. State Department and affiliated agencies increasingly goes toward civilian missions in war zones. These programs are essential to our long-term success in front-line states such as Afghanistan, Iraq, and Pakistan. These targeted funds go toward U.S. efforts to support democracy and human rights abroad and help train and equip allied militaries around the world. Such security assistance is pivotal amid the increased threats of rogue states and terrorist organizations and allows an already overstretched U.S. military to focus on more immediate threats.

U.S. aid programs provide the United States with tools to counter emerging threats from weak and failing states. Often thought of solely as evidence of American goodwill and values, these programs are in fact key components in the battle against extremism, battling the conditions that often fuel anti-U.S. sentiment.

As President George W. Bush recently wrote in his memoirs, "After the attacks [of 9/11], it became clear to me that this was more than a mission of conscience. Our national security was tied directly to human suffering. Societies mired in poverty and disease foster hopelessness. And hopelessness leaves people ripe for recruitment by terrorists and extremists."

It is also important to remember that America only spends roughly 1.4 percent of the federal budget on international affairs. In polls, Americans routinely overestimate the amount spent on such programs, perhaps contributing to the temptation of lawmakers to look to such programs first when drawing up constrained budgets.

Like any part of the government, there are certainly wasteful programs and inefficiencies that should be targeted and eliminated, but the deficit is not going to be paid off by savings generated from gutting the international affairs budget.

Although the amount spent on defense is significantly larger, it too is not the source of our current fiscal predicament. Oddly, given the now frequent proposals in Washington to cut international affairs and defense, it is not apparent that the American public supports this agenda.

It was, in fact, outrage over the Obama administration's runaway domestic and entitlement spending that drove many voters to the polls last November. It is thus these areas of the federal budget that lawmakers should focus their attention on first. Targeting our military and diplomatic capabilities will only serve to put the country at greater risk.

The 112th Congress faces some tough choices about how to improve America's fiscal situation without sacrificing our standing in the world. Unfortunately, thus far, many have skirted over the strategic debate and jumped directly to the budget cutting. The United States' current economic woes are concerning, but abdicating the global responsibilities of the United States is not the solution.

Well, that was awkward. The world's leading economic authorities just gathered in Washington for a weekend session of policy glowering. Heading into the regular fall meeting of the World Bank and International Monetary Fund, there was some hope that some constructive, multilateral dialogue could defuse tensions and calm talk of currency wars. It was not to be.

What happened? The United States went into the meetings pushing for multilateral solutions, in particular an enhanced role for the IMF. In a speech at the Brookings Institution last week, Treasury Secretary Tim Geithner addressed the issue of global misalignments:

This problem exposes once again the need for an effective multilateral mechanism to encourage economies running current account surpluses to abandon export-oriented policies, let their currencies appreciate, and strengthen domestic demand.

He noted that this was part of the long-standing mission of the IMF, then went on to argue that the world's powers had already agreed to address these issues:

Read on

Advocates of a strong national defense ought to be thinking seriously about entitlement reform. Whatever one thinks of our current policies, recent reports by the Congressional Budget Office and testimony by Federal Reserve Chairman Ben Bernanke make clear our current course is unsustainable. The most frightening description to date of our problem is that if we continue as we are, "by 2058, the economy enters a free-fall, beyond which the catastrophe cannot be measured: CBO cannot model the impact because debt rises to levels the economy cannot support."

This has important effects not just for our national solvency, but also for our national security. Our current national indebtedness and its projections based on the president's budget will increase spending to $5.1 trillion by 2019, nearly a full quarter of the nation's economic resources. As CBO points out, "deficits never fall below $633 billion in the next 10 years, and exceed $1 trillion by the end of the decade." With non-discretionary spending constituting an increasing proportion of federal outlays, defense, diplomacy, and foreign assistance will inevitably be squeezed.

The United States' Joint Forces Command (JFCOM) sounded the alarm earlier this year by naming federal debt and deficits as a major threat to the continued strength of our American military. JFCOM's Joint Operating Environment 2010 states that "interest payments, when combined with the growth of Social Security and health care, will crowd out spending for everything else the government does, including National Defense."

As Representative Paul D. Ryan of Wisconsin stresses in his "Roadmap for America," the threat to adequate defense spending is entirely from the price tag for domestic programs. Defense spending isn't even addressed in the roadmap, because it is not material to the debt picture. That is, before we fight about what defense spending should be (and I've argued here it should be reduced), we ought to be arguing about a long-term program for bringing our national spending into alignment with our revenue.

The "Roadmap for America" is a terrific place to start. It proposes sweeping changes to our tax code, provision of medical insurance, retirement programs, and process of budgeting for entitlements. It would raise the age of retirement and reduce benefits for those under 55. But it would also expand our choices -- and not simply by keeping entitlement programs solvent. The roadmap would allow individuals to determine for themselves what they value and want in their medical plans, retirement programs, and would even allow a choice in type of taxation.

It is often work to read, with sections on the investment and labor force participation effects of taxes, calculation of the fiscal gap, unfunded liabilities and third-party payer health care.  But it is a genuine delight to see a major public policy proposal argued passionately for, with assists from Thomas Jefferson, John Locke, and Alexander Hamilton's "Federalist No. 12." The driving philosophy of Ryan's approach is empowerment of the individual. And on the whole it explains in plain language the current state of our public finances, and the choices available to us to remedy our problems.

Importantly for conservatives, Ryan's plan recaptures our proud legacy of fiscal prudence without sounding reckless about what government should and does contribute to our lives.  

He makes a sound fiscal argument for acting now by demonstrating the cost of delay: "waiting just 11 years to take action increases by nearly 20 percent the amount of spending reductions or tax increases (as a percentage of GDP) needed to close the fiscal gap. Waiting until 2030 increases the amount by about 50 percent; and waiting until 2040 nearly doubles the spending cuts or tax hikes needed to close the gap."

There will be many who denounce Ryan's plan as radical. They should be rebutted by CBO data showing that under his proposals, "the standard of living for a child born today would double (i.e. per-capita output would rise from $45,000 to more than $90,000) by the time he or she reached middle age, just after the middle of the century." What a fantastic legacy for us to leave our children and with which to strengthen our nation. Unless we get our spending in line with our revenues, we will not only leave our children worse off than we have been, but we will be unable to afford a strong military.

Watching Greeks fire-bomb their banks, shut down their airports and ruin the tourist trade that is their economy's main prospect, I can't help but hear Virgil reprised. In that Roman poet's great narrative The Aeneid, survivors of the Trojan War seek a place to start anew, after much difficulty founding what will become the Roman Empire. It's rough going, and after much hard luck and stormy seas, the Trojan women burn the ships in order to prevent the men returning them all to sea.

They knew the Sybil (a rough approximation to an oracle for the Greeks) had prophesied that when they "quit at last of the sea's dangers / for whom still greater are in store on land... wars, vicious wars / I see ahead, and Tiber foaming in blood." Seeing the fleet in flames, Ascanius' reaction is "but your own hopes are what you burn!" And so it is with the Greeks -- they burn their own hopes by such unwillingness to do the unpleasant but necessary belt tightening.

Tourism provides one in five jobs in the Greek economy and a full sixteen percent of its gross domestic product. Being tied to location, it cannot be manufactured elsewhere. Being tied to history and culture, it is inherently Greek. And the best way to attenuate the effects of the austere cutbacks in government spending necessitated by Greece's financial crisis is to grow their economy as fast as possible. The debt to GDP ratio goes down both by reducing the numerator and increasing the denominator. Yet the Greek riots against the austerity program are sure to diminish tourism.

It is difficult not to sympathize with German hesitation to bail Greece out. Germany has labored for nearly 20 years to bring the former East Germany up to par with the West. Greece leapt into the euro on questionable accounting and proceeded to splash around the cheap credit that German stolidity in finances extended to the rest of the eurozone. One in three Greeks is a government employee. Hairdressers can retire at age 50 with full pensions because their jobs are categorized as hazardous.

But now much more outrageous is that than our Foreign Service Officer's Union refusing rewarding diplomats that serve in war zones? When Secretary Rice tried to give preferential promotion to diplomats that volunteered for service in Iraq or Afghanistan, the union representatives argued that every posting is dangerous -- as though volunteering to serve in Iraq took no more courage than volunteering to serve in Costa Rica. Currently two-thirds of foreign postings are designated as hazardous duty posts.

The state of our public finances is not as bad as Greece's, but we'll get there fast. Current and future obligations already incurred by our government amount to 500% of our GDP. And President Obama's budget will triple our already staggering national debt by 2020.

What may -- may -- save America from Greece's fate is that public outrage is building at our government spending money we don't have. When California governor Arnold Schwarzenegger tried to move against public sector unions in 2005, voters rejected his ballot initiatives. Californians cannot yet bring themselves to make the hard choices Greece is now having imposed on it by the IMF and its EU allies. New Jersey governor Chris Christie seems more successful, perhaps aided by greater public awareness of the parlous state of government finances. The hold of "entitlements" and public sector unions over government finances needs to be broken -- otherwise we really will be Greece.

Markets will not bankroll U.S. profligacy forever. No one can say when the chill will start, but once it does -- as Greece's example demonstrates -- the effects are dramatic. The longer we stall before facing up to the unpleasant reductions we must make, the more draconian will be the demands. As the spiraling cost of reassuring markets of the EU's commitment to support Greece demonstrates, it's much better to beat markets to the reckoning.

Here again Virgil offers sound advice. As the Sybil gives Aeneas instructions to Hades, she cautions:

The way downward is easy from Averinus.
Black Dis' door stands open night and day.
But to retrace your steps to heaven's air,
There is the trouble, there is the toil.

It's easy to become Greece. But it's very hard to get out of their predicament.

Europe's financial difficulties were predictable, but they have been unfolding at a startling clip. This has brought out different reactions in different commentators. Paul Krugman, for example, is preparing to hide under a table. I am no less impressed by the potential for disaster, but I am also struck by the undemocratic nature of major deliberations in Europe and by parallels here in the United States.

The pace of Europe's response to Greece's mounting woes has been rather stately. This is in spite of some fairly blunt calls for urgent action. From the Financial Times:

"Far too much time has been wasted on inaction," said Angel Gurría, secretary-general of the Paris-based Organisation for Economic Co-operation and Development. "We should have intervened two or three months ago. The markets have developed negatively since then, unnecessarily. That's why we have to act now, quickly and decisively."

And yet Europe's summit meeting appears set for May 10. Why the delay? There is an important German election on May 9. From the New York Times:

The North Rhine-Westphalia election has the potential to upset the existing balance of power. At stake is not only the state legislature, but also control for Mrs. Merkel's coalition over the little-watched upper house of Parliament, the Bundesrat, which has to sign off on legislation. Billions of dollars in assistance for Greece may not play well with voters in a state with its own financial problems.

"May not play well" is an understatement. A German poll found that only 16 percent of Germans support a Greek bailout while 65 percent are opposed. I am not an advocate of governing by referendum (a number of years living in California clarified the problems with that approach). Yet the avoidance of the electorate on such matters is deeply problematic.

Read on

By Daniel Twining

It is a quality of human nature to extrapolate the present into the future. What else explains the pervasive gloom about America's future in the international system? Headlines around the turn of the new year were full of learned and normally astute commentators bemoaning the inexorable diminution of the West by the ever-growing economies of Asia in the wake of the global financial crisis and what many perceived to be a lost decade from 2001- 2009.  Surveys show that three in five Americans believe their country is in decline. A little more New Year's cheer is in order.

The United States today enjoys a share of global GDP no different than it did in the 1970s. The spread of democratic capitalism to large parts of the world that, during the Cold War, suffered from closed economies of scarcity is an enormous victory for American power and principles, and has made this country -- not to mention billions of people across Asia, Latin America, Central and Eastern Europe, and at least parts of Africa and the Middle East -- decisively better off.

This outcome, no less than the end of the U.S.-Soviet balance of nuclear terror, is the ultimate victory of the Cold War, and its final chapters have yet to be written -- as China's leaders, consumed by domestic insecurities even as the world lauds their unprecedented ascent to world power, seem to understand.

The United States remains the world's indispensable nation, even if President Obama has cast off the bracing language of American primacy in favor of a more subtle and understated poetry about American purpose. Washington's security commitments continue to order Asia, deter aggression in the Middle East, and make possible Europe's historic experiment in regionalism. The United States remains the international system's core convening power -- as seen most recently at Copenhagen-- and no solution to any pressing international problem is possible without American leadership. 

The same cannot be said of China, so often conflated to be America's global equal despite possessing an economy one-quarter of America's size and political, demographic, and economic challenges that dwarf those of any other great power (with the possible exception of Russia, whose future appears bleak). China's passive acquiescence may be necessary on a host of international challenges, from stemming Iranian proliferation to (not) agreeing to climate change targets. But where is Beijing forging international solutions on the hard issues of the day? More often it is free-riding on the leadership of others, or belatedly consenting to decisions after being forced to take a position by the more active leadership of the West.

Uniquely within the developed world, America possesses a population that does not face a demographic crisis over the coming few decades, thanks in part to our historical tolerance for immigration. U.S. universities continue to educate the global elite -- and if they go back to India or China to start software companies rather than staying in the United States, that is in part an indictment of our tough controls on highly skilled immigration that deter the world's best talent from staying.  At the same time, while it would be better to import than to export talent, we shouldn't diminish the value of the latter in extending American influence into these important new centers of power and seeding economic growth there that benefits us, too. 

The United States is well-placed to compete in a globalized world -- we always have been, which is why generations of American presidents have pursued free trade and freedom of the seas as enduring national objectives. Half the S&P 500's earnings come from abroad, which means every American who owns a retirement fund in stocks, even if not invested internationally, benefits from the economic "rise of the rest" (as does every American who doesn't own a retirement fund but shops at Walmart and chooses to consume cheap imports).  And it's worth pointing out that economic growth in the BRICS relies in part on the soft infrastructure of trade and finance that is dependent on the security of the global commons, still policed overwhelmingly by the U.S. military and our allies.

The United States suffered calamitously from the financial crisis of 2007-2008, which started here at home from our own Schumpeterian excesses of capitalism. But the United States also appears poised to lead the developed world out of recession and into sustained, if moderate, growth. It is true that China, in contrast to the West, had a good financial crisis.  But its extraordinary stimulus spending combined with its artificially undervalued currency is creating a different set of financial and economic risks. The country's opaque and underdeveloped banking system, not to mention its rigid and non-transparent political regime, will be hard-pressed to manage these with ease. 

More broadly, as Thomas Friedman has said, the 21st century cannot belong to a country that doesn't let its citizens use Google. Americans (and our friends abroad) should have a little more confidence in the values and purpose that have inspired us to help make the new world we live in. We have plenty of problems at home, from inadequate infrastructure to an underperforming educational system and, perhaps most disturbingly, a growing burden of national debt that, if not corrected, will increasingly undermine our welfare at home and our leadership abroad.

That said, I wouldn't trade America's problems for those of any other country. For his part, President Obama certainly doesn't want to spend four or eight years presiding over American decline. It doesn't pay to bet against the United States. We should have faith in our political leadership -- and actively involve ourselves in the political process -- to shape a coming decade and century that prove the skeptics wrong.

Happy 2010.

By Phil Levy

The dollar has been drooping. This week, a broad measure of the dollar's value against other currencies fell to a 14-month low. Depending on the commentator, this is either a global vote of no-confidence in the United States; or it is good news, a return to normality as worldwide fears subside. Without exactly leaping between Paul Krugman and his latest sparring partners, there are a number of questions one might ask about the dollar's recent decline. This post kicks off a short series to consider four of them, beginning with: Is the drop in the dollar "natural" currency depreciation or the result of "manipulation?"

The dollar has fallen roughly 15 percent from its recent high this spring. When we see sharp movements in a price, it's natural to look for an active protagonists driving those movements. Every now and then in the past, we've found some. There have been attempts to corner markets in silver, wheat, and even salad oil. Each of these instances involved attempts to drive up a price and some were spectacular failures, but that's not what sets them apart from the case of the dollar. The market for currency absolutely dwarfs these other markets.

The last time statistics were gathered on this (late 2007), the average daily turnover in foreign exchange markets was $3.2 trillion and growing rapidly (up 69 percent since the 2004 survey). To put this in perspective, if we divide U.S. GDP over 240 business days in a year, it was about $0.06 trillion ($60 billion) in 2008. So every business day, the value of currency transactions averaged about 50 times the total value of U.S. output. 

The implication is that it's very hard to manipulate the value of the dollar. In fact, this enormity of the market for dollars is one of its great strengths as a reserve currency; no one wants to keep their wealth in a thinly-traded currency that can be easily manipulated. As a general rule, the U.S. government doesn't even try to move the dollar around, and it gets to print the stuff. Every Treasury secretary since Robert Rubin has chanted the mantra "a strong dollar is in the U.S. interest" to avoid making any news that might move the markets in unpredictable ways. 

But how can it be "natural" for the dollar to drop as far as it has in the last six months? Ever since the dollar was de-linked from gold almost four decades ago, the value of the dollar is determined continually in those massive global markets. The markets are populated by investors and traders, some with business ideas, some with money to save, some with goods to buy and sell. Some of them want to turn their dollars into euros to buy some French wine, others wish to turn their yen into dollars to buy some oil, a Treasury bond, or an American office complex. Exchange rates balance dollar buyers against sellers.

That means, in part, that we can have many explanations for what happens in these markets. The dollar could go up because American vinophiles turned to Sonoma Valley, or because the U.S. commercial real estate market became more attractive. One popular explanation for the dollar's rise and fall in the recent crisis is offered by Paul Krugman: "the dollar rose at the height of the financial crisis as panicked investors sought safe haven in America, and it's falling again now that the fear is subsiding."

That certainly seems to be part of the explanation. But it gives the impression that all is well, that we have returned to normal and there's little to worry about on the currency front. In fact, there is no indication that we've reached a long-term equilibrium and there is a serious basis for worries about the dollar's fall. That, though, will be the subject of the next post in the series: Has the dollar stabilized or is there risk of a further plunge in its value?

PAUL J. RICHARDS/AFP/Getty Images

By Will Inboden

Here in London, as I write, the G-20 proceedings have recently ended, and local attention remains split essentially across three fixations:

• 1) The substance of the G-20 summit itself, and the question of whether the actions that came out of it will be at all meaningful (with many competing meanings of "meaningful");
• 2) The domestic political question of how the G-20 will affect Prime Minister Gordon Brown's standing and electoral prospects;
• 3) A somewhat morbid but nearly irresistible voyeurism around the mind-boggling array of protests, protestors, counter-protests, and riot police.

On #1, the emerging narrative of the inchoate Merkel-Sarkozy pro-regulation/anti-stimulus alliance against the Obama-Brown pro-stimulus camp was intriguing as political sideshow, but unsettling both in terms of economics and geopolitics, with one ironic by-product being the creation of even more maneuvering room for China and Russia to position themselves as global leaders on economic policy. Given the alternatives, perhaps the "best" outcome was the sort of anodyne statement that failed all of these tests, which is what we got, seriously sweetened with $1 trillion in pledges to the IMF.

On #2, April is a pivotal month for Brown, bracketed as it is by the G-20 at the beginning and the unveiling of his government's budget at the end of the month. Early returns seem to regard Brown's meeting and press conference with President Obama on Wednesday as a success and a much-needed boost, though given the painful optics from their first meeting last month, the bar of expectations was set very low. 

On #3, mindful of reports that some protestors might throw eggs or target spray paint at business attire-wearing capitalists, I wore an old suit just in case of any uncivil encounters with the agitators down the street - but thankfully it was a quiet walk to the office.

Meanwhile, many voices (including my Shadow colleagues Philip Zelikow and Phil Levy) have rightfully decried the global lurch towards protectionism, exemplified by the 17 leading nations that have adopted protectionist measures just months (sometimes even days) after pledging not to at the last G-20 summit in November. The pro-free trade and anti-protectionism rhetoric from yesterday's G-20 statements was to be expected, but trade policy embodies the wisdom of watching what nations do rather than what they say. It is doubtful that "naming and shaming" violators will be sufficient.

So Wednesday's release of a letter defending free trade and warning against protectionism, signed by over 2,000 economists (and a number of non-economists as well, including yours truly) will hopefully continue to speak to the G-20 leaders even - especially - as they return to their home countries and face fierce domestic pressures otherwise. Even allowing that group letters signed by economists don't automatically equate with wisdom (for example, the notorious example of the 364 economists who denounced Thatcher's economic policies in 1981), this letter's message deserves to be heeded. 

While Norman Angell remains the paragon of benighted optimism that economic integration will obviate military conflict, the 1930s offer the ominous counter-warning that protectionism can accelerate the risk of war. Or to take a lighter comparison, if 50 million Elvis Fans Can't Be Wrong, then surely 2,000 economists can't be wrong either?

By Philip Zelikow

The next step toward a better agenda for the G-20 summit is this:

On financial regulation, don't fall for the dumb dichotomy of global vs. national; adopt a smart synthesis, a global framework for coordinated national regulation.

The papers are playing up an issue for the G-20 summit of Europeans emphasizing the need for new financial regulation vs. Americans talking up stimulus. This would be a truly terrible way for the debate to evolve. The Europeans would be all about attacking bad bankers (like the Wall Streeters they want to scapegoat) while the Americans would seem wedded to their preferred panacea. And the biggest issues get lost both ways.

Fortunately, the U.S. side has moved adroitly to develop an agenda for future regulation (important but not critical right now) that should help answer the European mail. Geithner laid out a set of ideas on this point in the statement he issued last week. They seemed plausible. But Bernanke did an even better job of discussing this issue in an address he delivered to the Council on Foreign Relations on March 10. Here is his four part outline:

First, we must address the problem of financial institutions that are deemed too big--or perhaps too interconnected--to fail. Second, we must strengthen what I will call the financial infrastructure--the systems, rules, and conventions that govern trading, payment, clearing, and settlement in financial markets--to ensure that it will perform well under stress. Third, we should review regulatory policies and accounting rules to ensure that they do not induce excessive procyclicality--that is, do not overly magnify the ups and downs in the financial system and the economy. Finally, we should consider whether the creation of an authority specifically charged with monitoring and addressing systemic risks would help protect the system from financial crises like the one we are currently experiencing.

Bernanke added, crucially, that it is "self-evident that, in light of the global nature of financial institutions and markets, the reform of financial regulation and supervision should be coordinated internationally to the greatest extent possible." In other words, the U.S. side is clearly developing a constructive approach toward the topic of regulation.

One red herring, though, is the "mark to market" issue. The SEC and others are being pressured by Congress (e.g. Barney Frank) to revise these accounting rules. Conservatives like Steve Forbes have jumped on this too, arguing that this is a relatively recent deviation from good old traditional accounting rules. Well, the problem is that in the good old days accountants weren't being asked to sign off on the asset value of hundreds of billions of dollars in collateralized debt obligation derivatives whose asserted value was based on statistical modeling rather than the ability to assess the quality of individual loan performance. These CDOs were also being traded in, shall we say, a rather murky marketplace. As the trading of these derivatives skyrocketed in the last decade, honest accountants tried to cope.

Here again the administration's instincts seem right to me. Geithner in particular has resisted devices to cheat on assessing the asset value of troubled banks, while everyone acknowledges being open to smaller adjustments in the ways the rules work. My only footnote is to observe that, here again, the United States would be well advised to coordinate its regulatory framework with the one being developed by other leading states, like the participants in the G-7's Financial Stability Forum.

By Philip Zelikow

The next step toward a better agenda for the G-20 summit:

The proposal to expand U.S. contributions to the IMF is good and important.

Not to be confused with Secretary Geithner's call for global stimulus spending (about which more below). Geithner's call for expanding IMF "New Arrangements to Borrow" is timely and important. The proposal is to add $500 billion of emergency credit facilities for countries trying to stay afloat, like Ukraine. The money is not for stimulus; it is for fiscal survival and sustaining international trade. Indirectly, the plan might also help mitigate the growing exposure of the European banking system which, incidentally, is one of the reasons that leading European countries are against the stimulus part of Geithner's proposals.

This move should get bipartisan support, showing the United States will do its part in fashioning an international approach to an international crisis. Japan has also stepped up with some large financial commitments to expand the IMF. Its new finance minister, Kaoru Yosano, looks like he is prepared to be a lively, constructive player.

Europeans are already uneasy about the corollary part of Geithner's proposal, the need to update, ahead of the usual schedule, the voting powers in the IMF based on current contributions. Such a review is bound to increase Asia's voice at the expense of Europe. This review is the right move, though, and would not happen -- in the U.S. proposal -- until 2011.

By Philip Zelikow

What is the agenda for G-20 action?

The issues for the G-20 summit next month are becoming clearer. But there are so many issues, it really is useful to map them out. I tried something like about six weeks ago, in the context of the arguments about the administration's stimulus package. So, looking ahead to the G-20 summit, I will lay in a series of posts a six part agenda from the peanut gallery ... complete with questions and suggestions for clarifying thought.

But first, a more fundamental point: I hope the Obama administration does a terrific job. From the outside, it is awfully easy to slide into a habit of thought that, every time the administration stumbles, sees opportunity. And if you work on the Hill or an opposition think-tank, you may be getting paid every day to come up with fresh talking points on the administration's latest outrage against the good people of America. That pattern does tend to build up certain muscle reflexes.

So I urge a conscious effort to extend plenty of benefits of plenty of doubts. First, of course, we all want our country to succeed. Senator McCain has already offered this reminder, so it requires no elaboration from me. Second, Republicans, in particular, should pause and ask themselves this question: Given the setting for this crisis, if conditions get dramatically worse and on a global scale, do you really believe most Americans will then say, "Gee, this is scary, let's cut back on government and trust the free market to fix this"? Maybe not. At least concede the large possibility that, if Obama fails dramatically on the economy and conditions become dire, Republicans -- or at least moderates like me -- will not like the political results of what will happen when people get frightened on a very large scale, worldwide.

History does not provide any answers, but it does offer a few reminders about the possibilities. Recall, for instance, that FDR won in 1936 by taking his party to the left and sharpening the anti-business rhetoric. (In doing so, he alienated the national planner technocrats like Raymond Moley and Rexford Tugwell, men who had been core New Dealers and thought the state should work in association with big business.) By moving left in 1936, FDR was actually finding the new political center. His most dangerous adversaries in 1935-36 were not those on the pro-business right. That faction had already been discredited for the majority of Americans. FDR's publicists loved the businessmen's "Liberty League" -- just as Obama's people love to make Rush Limbaugh the face of the Republican party.

What really worried FDR and his aides were the radical populists like Huey Long, Father Charles Coughlin, and Francis Townsend who, together, represented a very large, volatile force in American public life. It is probably fortunate for the United States that this force never unified around a potent catalyst. And this was at a time when the country was slowly pulling out of the Depression, before the 1937 relapse.

It is still too early to judge the Obama administration's policymaking on a great many matters. Even with the budget, I don't know how the administration plans to reconcile its various goals. Then again, I'm pretty sure they don't know yet either. My prevailing sense of the Obama team now is that of a handful of people frantically coping, laying down a few big markers and delegating to congressional barons, as they slowly try to get organized, get their people into office, and flesh out their own ideas.

That said, here is the first part of a better agenda for the G-20 summit:

The national and international agenda for the banking crisis needs to take shape.

According to the Financial Times, the head of the Banque de France, Christian Noyer, is "softly spoken and known for choosing his words carefully." So I paid attention when Noyer made three major points last week:

First, that European and French monetary policy was doing more easing than was generally realized, pumping money into the Eurozone. (Fed Chairman Ben Bernanke and his institution followed suit in a big way this week; more on that in a later post.)

Second, Noyer said that it was now more important to stabilize financial systems than to embark on fresh public spending programs.

Third, Noyer had some gentle chiding for the United States: "I have the impression that we are a little more advanced [on stabilizing financial systems] in Europe than in the US. It is clear that the US authorities are making every effort to reach that goal but that is probably as important as the size of the stimulus itself if we want to stabilize the economy."

There is a large argument about how to address the banking crisis between the "liquidity" and "insolvency" schools. The "insolvency" school has adherents across the political spectrum and calls for more radical government action now to take over and quickly restructure banks and their balance sheets.
I am attentive to the debate without feeling qualified to judge who is right, though it certainly is worthy of notice when a conservative Republican like James Baker (a former Reagan Treasury secretary) comes out on the side of "insolvency." This is an interesting situation, defying the usual ideological categories, in which both Republicans and Democrats feel the Obama administration is being too conservative.

So look carefully at what the IMF recommended to the G-20 finance ministers last week. Their lead recommendation was that the G-20 should tackle the financial sector problems "head-on." Look at the language: "Policymakers must resolve urgently balance sheet uncertainty by dealing aggressively with distressed assets and recapitalizing viable institutions." It appears the IMF has taken the more radical "insolvency" side of the argument.

Also clear is that the United States cannot and should not adopt a unilateral approach to salvaging "its" banks. I write "its" in quotation marks, because an entity like Citigroup is not really just a U.S. bank. It provides banking services to customers around the world. So does Deutsche Bank, for that matter. So do many others. These are transnational institutions.

The European-based banks may even have more risky exposure than the ones headquartered in the United States. In congressional testimony, former IMF chief economist Simon Johnson has observed that the European-based banks may not just be "too big to fail." They are "too big to be saved," because of the proportionate size in comparison to their governments' resources.

So it is reasonable for outsiders to look hard at how, if at all, the G-20 leaders display their recognition of their need to develop a harmonized approach toward the banking crisis, especially since this issue goes to the very heart of the current crisis. Right now the international policy cooperation does not look reassuring.