Pasta With Platitudes in Venice: World Needs an Economic New Deal

The outlook for the Venice economic summit is bleak; seven heads of government will exchange the usual platitudes and recriminations.

The Americans will talk about terrorism, the Persian Gulf, nuclear disarmament, AIDS and other critical economic issues; we will tell the Germans and Japanese to save less and spend more. The Germans and Japanese will tell the Americans to save more and spend less. The Germans and the Americans and the Japanese will all say they are making progress and promise to do even more in the future. The foods and wines of Italy will be studied in detail.

This is too bad; 1987 is emerging as a critical year for the world economy--markets are jittery while Alan Greenspan succeeds Paul A. Volcker as chairman of the U.S. Federal Reserve Board, as Treasury Secretary James A. Baker III’s plan for Third World debt is in trouble, as protectionism is spreading and economists are scaling down their growth forecasts. Not since the late 1920s have so many signals been flashing. The leaders of the world’s great industrial democracies should be talking about these problems and working toward common action for overcoming what could be the most severe international downturn since the Great Depression.

They should start with diagnosis. As in the 1920s, the world suffers from a serious but curable economic disease: underconsumption. Farmers, steelmakers, automobile companies and miners all know the truth--markets are glutted. In the fifth year of an economic expansion the United States is operating at less than 80% of its industrial capacity; European economies have similar problems, with unemployment rates tripling in the last decade.

During the 1980s, the United States was the world’s “consumer of last resort.” Our budget and trade deficits eroded the national economy but also prevented a world-wide depression. Now America is telling the Germans and the Japanese in effect to do what we did: Go into debt to stimulate consumption to keep the world economy on the move. They look at our experience and have their doubts.

The industrialized nations at Venice ought to be talking about ways to increase consumption in the Third World, where the greatest possibilities exist for expansion. All our interests would be best served by a global New Deal, one that would stimulate consumption just as Franklin D. Roosevelt’s New Deal aided U.S. recovery in 1933. Together, the summit allies could foster such a program but no country--not even the United States--could do it alone.

Third World debt is the first obstacle to Third World consumption. To pay interest on the debt, Third World countries have slashed development projects, cut social spending and reduced imports from industrialized nations. They have kept wages down and done their best to run huge trade surpluses with the advanced countries, thereby earning the foreign exchange to service the debt.

As with Allied war debts of the 1920s, the question is not whether the debt will be cancelled, but how. Bankers, presidents and prime ministers should be discussing ways of ensuring that the solution does not threaten the world’s financial system. Greater Third World spending will benefit everyone. As more U.S. banks set aside reserves against uncollectable loans, a new sense of realism may enter the debate; world economic leaders should be talking about how to capitalize on this development to settle the issue once and for all.

The next topic should be a shift in strategy for the World Bank and other agencies. When the debt problem first hit, the aid agencies called for austerity. The limits of that strategy were quickly reached and governments and agencies of industrialized nations then began to encourage economic growth in the Third World, a lopsided growth based on exports. The next strategy needs to encourage growth of Third World domestic markets--for exports from industrialized nations as well as for goods the Third World produces itself.

This does not involve massive commitments of new money or even of inordinate government intervention in Third World economies. Repressive labor policies have kept wages artificially low in some countries in order to keep export prices down. Simply adopting a more permissive stance toward unions in the Third World will raise wages and therefore consumer spending. Restoring cutbacks in social services imposed by the austerity strategy will also raise domestic consumption. Other programs to stimulate consumption and help bring the world economy back into balance would include the kind of measures that have worked so successfully for the last 50 years in advanced industrial countries: minimum-wage laws, government-backed loans for students and home-builders, social-insurance programs and so on. These programs have demonstrated an economic impact that far outweighs their cost.

The role of the industrialized countries would be to provide the kind of credits that assist Third World transitions from low-wage to medium-wage economies. Industrialized countries, acting with Third World governments, should establish international minimums for wages and working conditions, including health, safety and anti-pollution standards. Goods manufactured in accordance with these standards should have free entry into all markets; violators should be penalized by appropriate tariffs.

Not all Third World countries are ready for this approach, but the “newly industrializing countries” of East Asia and the major Latin American countries are past due for it. Many have reached or surpassed the levels that the United States, Britain, France and Germany had reached at the time these countries began their own social-welfare improvements.

A global New Deal deserves a high place on the Venice agenda. Such a reorientation of world economic policy will be complicated and take time, requiring coordination and cooperation among countries. It will also be worth doing, holding out the promise of escape from an international economic deadlock that becomes increasingly dangerous.