What We Learned From Toronto -- It's Time to Dump the G20

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Last weekend’s G20 summit was advertised as a meeting of leaders to chart a path to economic recovery and solvency. But the gathering looks more like just another vehicle for various governments to peddle failed economic policies from the left. The G20 grouping itself is hopelessly ill-equipped to solve economic problems, and along with the G8, ought to be replaced.

Less than three years old, the G20 resembles a college administrator’s view of diversity: different faces and different backgrounds, but not different ideas — or at least not ones incompatible with liberal ideology. Press reports were dominated by disagreement between the U.S. and Europe. Europe wanted to follow the Anglo-German model of reducing deficits through cuts to government spending and tax hikes. The U.S. wanted more emphasis on economic growth.

Both descriptions were misleading, especially the one advanced by the Obama administration. “Economic growth” in Mr. Obama’s Washington means massive new government spending by borrowing more, taxing more and printing more dollars to fatten the ranks of those who receive government largesse.

It has little to do with promoting real private sector growth by getting out of the way of those who create new wealth and jobs. It represents the Keynesian school of economics, which calls for government spending during recessions to spur demand. Its outsized role for government makes it a favorite of left. The only problem is that it was demonstrated to be faulty during the 1970s when trying it failed, and during the 1980s, when ignoring it succeeded.

The European alternative to Mr. Obama’s spending spree involves cutting government somewhat and raising taxes to reduce the deficit. In reality, this is biased heavily toward new taxes. For example, the new British government is planning to hike the country’s valued-added tax, as well as imposing growth-killing levies on investment and banks.

Missing from this is the economic model that has now been demonstrated repeatedly to work best. Described at times as “classical,” “neoclassical,” “supply-side” or “monetarist,” the set of policies that calls for a sound currency and removing obstacles to those who create, invest, produce and save is tried and true.

It was best demonstrated during the economic boom that began after President Reagan’s monumental tax reductions took effect, sparking a two-decade boom that had but one minor interruption. Similar income and investment-tax reductions in the 1990s and early 2000s rewarded those who worked productively and took prudent risks, and in turn, led to more growth and higher government revenue.

By comparison, Richard Nixon declared in 1971 that “I am now a Keynesian in economics,” beginning a decade of inflation, high taxes and resulting economic malaise.

However, this is an inconvenient consideration for an American president rushing to smash the United States into the mold of European welfare state. It also lacks buy-in from European heads of government and other G20 participants, among them developing countries and petro-states. Many of these leaders continue to fantasize that a financial crisis and recession initiated by perverse government incentives is the justification for their wildest big government dreams.

However the problem with the G20 is not only its present agenda, but its very design. Its members are not inclined toward economic or fiscal policy that empowers individuals and wealth creators.

The G20 grew out of the G8, which still exists somewhat separately. The G8’s effectiveness atrophied as its membership grew and its participants became less consequential. When the number of an international grouping becomes too big, its workings come to resemble the highly ineffective UN General Assembly. So do its politics.

The G8 now meets alongside the G20, and its effectiveness is diluted by the conflation. The G8 traces its history to the collapse of the Bretton Woods economic system that reined from 1945 to 1972. The high inflation and economic turbulence that followed created the need for a venue for leaders of rich nations willing at times to coordinate policy or pull out their checkbooks. This began to decay with the admission of Russia in 1997 and the overall decline of Old Europe’s importance in the world. China’s communist government is now omnipresent in the G8 as an observer.

What was once useful has become much less so. The formation of the even more inclusive G20, which first met in 2008, has caused a further dilution of purpose and effectiveness.
What is needed is an international grouping based not on number, but on kind. A better alternative would be a tight grouping of countries that favor freedom and that will be consequential in the 21st century.

A “D6” of economically significant democracies would make the most sense, involving the U.S., Japan, Australia, Great Britain, Poland and India. These are the free countries that generally stand for political and economic freedom not only at home but throughout the world. They also have the means and inclination to back their will with real economic power.

More coordination and meeting among their leaders would also reinforce personal relationships that are crucial when crises arise. A democracy grouping like this could also best handle threats posed to free societies ranging from Islamist terrorists to rising authoritarian powers like China. It would make far more sense than a 20-member gathering that primarily promotes failed economic policies.

Christian Whiton was a State Department official during the George W. Bush administration. He is a principal at DC International Advisory and is president of Hamilton Foundation.

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