Does the G20 matter?
G20 finance ministers are gathering in Mexico City this weekend to prepare for the fourth G20 Leaders’ Summit since the Group of 20 declared itself the premier forum for international economic cooperation at its 2009 Pittsburgh summit. Birthed to coordinate a response to the global financial crisis, the informal body of the world’s richest countries has seen its agenda balloon over the past four years to encompass everything from green growth (Mexico’s pet initiative) to commodity price volatility (the agenda of the French, who hosted last year) to anti-corruption.
As workstreams proliferate, consuming an ever-increasing amount of communiqué paper and government staffers’ time, the question must be asked: Does the G20 matter? Or, more precisely, what should the G20’s role be on the global stage, and what reforms (if any) are required to allow the body to fulfill this role effectively?
The informal group was elevated from finance ministers to heads of state to quickly coordinate a decisive response in the face of the global economic crisis in 2008; and effective action required a forum that included China and other important emerging economies, as the former G7/8 club could no longer really call the shots. In its important initial mission the G20 mostly succeeded, forming the Financial Stability Board and taking other critical measures to stabilize the economy. Now the G20, at a leaders’ level, is de facto the premier forum for international dialogue and cooperation on a whole range of critical global issues that have been unable to find resolution in other contexts.
Yet the G20 excludes more than four-fifths of the world’s countries, causing some critics (and excluded countries) to denounce it as unrepresentative and therefore insufficiently legitimate. And because having enough of the right actors at the table is a prerequisite for effective global coordination, these same critics contend that this lack of representative legitimacy also undermines the G20’s effectiveness. At the same time, the informal structure of the G20, with a rotating chair and no permanent secretariat, means that agendas are determined each year by the chair and so can swing widely, and formal mechanisms to monitor follow-through on countries’ public commitments are weak.
To address these perceived governance challenges, some G20 members (Korea, France, and Brazil, among others) are pushing for a permanent secretariat and formal criteria for membership selection. In this view the G20 should be institutionalized to ensure continuity and follow-through on the implementation of global commitments, and to cement the group’s legitimacy and prominence as a global forum. Likewise, some members and non-members are eager to expand the group to include more countries. On the other hand, some G20 members (including the U.S.) argue that the body should remain nimble, with no heavy bureaucratic secretariat and with a narrowly defined and focused agenda, to reduce coordination challenges and make quick responses in times of crisis possible. As the UN amply illustrates, there is a significant trade-off between inclusive membership and the ability of an international body to come to quick, decisive and meaningful consensus.
Yet fundamentally both camps miss the boat. The main constraint on the G20’s effectiveness is not whether other countries are included — the existent group already represents 90 percent of global GDP, 80 percent of world trade and 65 percent of the global population, including key emerging economies like China and Brazil. This is far more inclusive and representative than the G8, which the G20 has largely displaced, and more than adequate to make agreements to act collectively credible and effective. Nor does the group’s efficacy depend on whether the G20 sticks to financial issues narrowly conceived or expands its remit to address other fundamental global challenges that have failed to see cooperative solutions emerge in other forums. The issues on the G20’s burgeoning agenda are critical global problems, and solutions may indeed be fundamental to sustainable, balanced and inclusive growth in the long term.
The main threat to the G20’s effectiveness is its lack of domestic legitimacy within member countries. The group is widely perceived by the public as transnational elites hatching plans behind closed doors in insulated centers of power. Without genuine ex ante engagement to build trust and support with diverse domestic constituencies — labor, business, civil society, and the members of parliaments and congresses that purportedly represent these different interests — leaders will never have the space within the G20 to negotiate meaningful agreements. Finance ministers and heads of state now come to the table with their hands tied, their positions determined in advance by their governments and a formal script that precludes meaningful and creative compromises. And the problem only increases once leaders leave summits to return home. Bound internationally by public commitments, but without the ability to get those agendas enacted at home, the effective implementation of commitments is even weaker than the ability of leaders to forge meaningful agreements in the first place.
The G20 needs to embrace growth
This week’s Group of 20 meeting of finance ministers and central bankers in Mexico City needs to take concrete actions to support global growth and job creation, revive credit growth by the private financial sector, guard against a rise in trade protectionism and reduce financial market uncertainties.
The scope for long-overdue G20 actions on budget deficits and payments imbalances, including currency misalignments, is limited this year given presidential and legislative elections in France, South Korea, the U.S., and Mexico, and given the emergence of a new leadership team in China, a once-in-a-decade event. Politicians may well want to avoid taking unpopular measures right now, even if they’re necessary. However, there is still significant scope now for concrete G20 measures that strengthen the forces for growth and confidence-building in the short term.
Over the last two years, a euro sovereign crisis has been building in which many of the lessons that should have been learned from past debt crises in Latin America and Asia have been ignored. These include the risks of contagion, the dangers of delaying tough decisions, and the excessive focus on imposing austerity on debtor countries. The latter undermines debtor nations’ political leaders and their crucial task of building public support for tough reforms, ultimately creating the opportunity to grow their way out of their difficulties.
We need better balance. It is crucial for the G20 ministers’ meeting to emphasize concrete measures to strengthen competitiveness for countries now facing acute difficulties. For example, officials from the IMF and the euro zone governments should encourage Spain, Italy and Portugal, in particular, to introduce short-term actions that explicitly create jobs and stimulate investment. At the same time these countries should underscore their medium-term commitment to fix their underlying problems by mapping detailed budget and structural reform programs.
For its part, the U.S. Congress has taken action, finalizing an extension to the payroll tax deduction and securing unemployment benefits, that provides essential momentum to the economy. But more needs to be done. The U.S. should signal at the Mexico City meeting that it recognizes the risks of deleveraging right now by financial services firms, which in part is a product of enormous uncertainty about future rules and regulations. At an absolute minimum, there should be a freeze on any new regulation or additional capital requirements beyond what has already been approved by Congress and the regulators; bank capital requirements today are high enough.
Indeed, the G20 should declare its opposition to any new macroeconomic or financial regulatory actions that may dampen 2012 growth. This means, for example, that euro zone leaders should come to their senses and end the dangerous talk of introducing a financial transactions tax. European governments should also avoid imposing any new capital requirements on banks, over and above Basel III standards, at a time when banks’ balance sheets are being hit hard by sovereign debt losses, forcing them to reduce credit extension and therefore prospects for economic growth.
In addition, at a time when global economic conditions are so fragile, it is prudent to bolster the resources available to the International Monetary Fund. The G20 should encourage the IMF to create a special financial vehicle with resources from the countries with large foreign exchange reserves, such as Brazil, China, India, Japan, Saudi Arabia and South Korea. These resources could then be deployed swiftly to provide support to countries around the globe should they confront acute difficulties.
Mr. Rhodes, at first I wanted to point lack of internal cohesion of the major thoughts presented in your short aricle (In one sentence I could comment your major thoughts as: “Please make insanity of US financial market deregulation the world- wide custom.”). But luckily I noticed you are Citibank worker and this is just PR article/advertisement for Citibank (and “Citibank act”)
I think it was just ommission by Reuters staff that the article was not tagged PAID COMMERCIAL PRESENTATION.
The perils of protectionism
By Gordon Brown The views expressed are his own.
Next week’s 2011 G20 meeting has the power to write a new chapter in the response to the economic downturn. But every day, as nations announce currency controls, capital controls, new tariffs and other protectionist measures, the G2O’s room for maneuver is being significantly narrowed. Already the cumulative impact of a wave of mercantilist measures is threatening to turn decades of globalization into reverse, returning us to the economic history of the 1930s, and condemning at least the western parts of the world to a decade of low growth and high unemployment.
Three years ago when the financial crisis first hit, the G2O communiqués were explicit in warning of the dangers of a new protectionism. Led by the head of the World Trade Organization (WTO), Pascal Lamy, we embarked on a forlorn attempt to use the crisis to deliver a world trade deal — and were frustrated by an irresoluble dispute on agricultural imports between two countries, India and the USA. But now, in the absence of any co-ordinated global action, member countries have been retreating into their national silos — and the trickle of protectionist announcements threatens to become a flood. Switzerland led costly action to protect its overvalued currency and has been followed by currency interventions in Japan (with perhaps more to come), India, Indonesia, and South Korea. Brazil, which had itself warned of currency wars, then imposed direct tariffs on manufactured imports — a hefty car tax designed to protect its own native auto industry against emerging market imports. Other countries are now considering mimicking them. Capital controls are also now in vogue, and of course the U.S. Senate has just voted to label China a “currency manipulator.”
The 2011 WTO report, just published, warns of divergences in regulatory frameworks in preferential trade agreements. And in the next few days the WTO will release its submission to the G20. It will note a rise in trade-restrictive measures and describe the outlook ahead as “less restraint in the adoption of new trade-restrictive measures and less determination to dismantle existing ones.” Perhaps as worrying is the growing resort to what I call “home country bias.” Today French banks are selling off their foreign assets and focusing their large portfolios on France itself. French banks have 8 trillion euros in total assets and if the plan is to run them down at 5 percent a year, then by 2014 we will see a 1.2 trillion-euro reduction in investments outside France. European bank liabilities are on the order of 32 trillion euros and when, as we can expect, the same mercantilist approaches to liquidating assets spreads to Germany, the Netherlands, and beyond, growth will be put at risk.
When in 2008 the financial crisis first hit us, money started to flow out of Eastern Europe, whose banking system is dominated by French, German, Italian, and Austrian banks. To soften the impact, we put in place a European Union/IMF guarantee that was sufficiently robust to prevent a massive outflow of bank funds. No similar guarantee is now available and, faced with capital flight, growth forecasts for Eastern Europe in 2012 are now half what they were.
The process of deleveraging with a home country bias is not restricted to European banks. Many American banks are now deserting Europe and, as the home bias becomes more pronounced, we risk a further round of tit-for-tat actions. This protectionism is the undesirable but inevitable result of a failure of countries to co-ordinate economic policies out of the crisis. Since a high point of cooperation in 2009, we have failed to secure not only a trade agreement but both a climate change agreement and the implementation of G20 decisions to create global financial standards, including a much needed global early warning system.
The new protectionism will make people question whether an era marked by open global flows of capital and the global sourcing of goods is sustainable and whether the very idea of a “global village” of irreversible economic interdependence and integration is now at risk. The biographer of Keynes, Robert Skidelsky, has written in apocryphal terms of “a disorderly, acrimonious retreat from globalization [that] is bound to overshoot its mark, reviving the economics and the politics of the 1930s; but leading in an era of nuclear proliferation, to consequences even more terrifying.”
How Europe can stave off a crisis
By Gordon Brown The views expressed are his own.
It was said of European monarchs of a century ago that they learned nothing and forgot nothing. For three years, as a Greek debt problem has morphed into a full blown euro area crisis, European leaders have been behind the curve, consistently repeating the same mistake of doing too little too late. But when they meet on Sunday, the time for small measures is over. As the G20 found when it met in London at the height of the 2009 crisis, only a demonstration of policy intent that shows irresistible force will persuade the markets that leaders will do what it takes. An announcement on a new Greek package will not be enough. Nor will it be sufficient to recapitalize the banks. European leaders will have to announce a comprehensive — around 2 trillion euro — finance facility; set out a plan to fundamentally reform the euro; and work with the G20 to agree on a coordinated plan for growth.
For three years it has suited leaders across Europe to disguise Europe’s banking problems and, citing the blatant profligacy of Greece, they have defined the European problem as simply a public sector debt problem. And it has suited Europe’s leaders to call for austerity (and if that fails, more austerity) and forget how the inflexibility of the euro is itself dampening prospects for growth, keeping unemployment unacceptably high and weakening Europe’s competitive position in the world today. Indeed, Europe’s share of world output has now fallen to just 18 percent. And it is a measure of how it is losing out in the growth markets of the future that just 7.5 percent of Europe’s exports go to the emerging markets that are responsible for 70 percent of the world’s growth.
When I attended the first ever meeting of the euro group of leaders in October 2008 there was astonishment when I reported that Europe’s banks had bought half America’s subprime mortgages and there was incredulity when I said that European banks were far more at risk than U.S. banks because they were far more highly leveraged. Since 2008, as American banks have tackled their toxic assets, they have written off 4 percent of their loans and raised the equivalent of another 4 percent in new equity. But euro area banks have written off just 1 percent of their loans, and have raised their capital base by only 0.7 percent, leaving them highly vulnerable even before their exposure to sovereign debt has become a central issue. Their vulnerability is increased because they have always been far more dependent for their funding on the short term and confidence-dependent wholesale markets, and countries within the euro zone are able to do far less in the face of capital flight than, say, Britain.
Of course in 2008, governments could fund the rescue of indebted banks; in 2011, indebted governments are finding that more difficult. For they know that even after they recapitalize the banks, they have still to deal with the even bigger financial problem of funding the borrowing needs of the most at-risk countries: Greece, Ireland, Spain Portugal and Italy, which could cost as much as $2 trillion in the years to 2014.
It is thus clear that the 400 billion euro rescue fund, the European stability fund, is wholly inadequate to address this profound failure across the European financial system, and that without a mechanism for fiscal coordination the euro cannot easily survive. A few days ago, U.S. Treasury Secretary Tim Geithner said that “the critical imperative is to ensure that the governments and the financial systems under pressure have access to a more powerful financial backstop.”
I believe that only an impenetrable firewall will show the determination of European leaders to head off the crisis and save Europe from a new recession. I know of all the doubts about a new but temporary role for the ECB, but it is unlikely that any other organization has the resources for quick action. But the IMF should back them up, funding their contribution through loans from the oil states and China. It may now be impossible to avoid hundreds of billions in bank de-leveraging and liquidations, but a coordinated approach with the support of the international community could provide the breathing space for what matters — the reform of the euro.
at last some clear analysis…bvious, but yet clear and sophisticated…nevertheless problems of trust and adjustment work against co-ordination…we need a psycologival recognition in the west that the balance of power is rapidly shifting. such a recognition needs to be on all sides to develop the trust necessary….and there is the problem. If I was China, I would not trust.
The great global rebalancing and its implications
Manoj Pradhan, left, a global EM economist, is an executive director at Morgan Stanley. Alan M. Taylor, right, a senior advisor at Morgan Stanley, is a professor of economics at the University of California, Davis. The opinions expressed are their own.
Policymakers have fretted about global imbalances for nearly a decade, but little consensus or clarity has emerged. Some saw problems created by surplus countries, others deficit countries. Many feared a fiscal-cum-balance of payments crisis in the U.S., but the crisis we got reflected private/financial failures. G20 proposals for collective action remain a work in progress. Uncoordinated policy actions triggered talk of currency wars.
As these debates drone on, there may be less cause for concern about global imbalances. Emerging market-developed market (EM-DM) relationships may revert to a more typical historical pattern. We highlight key areas of global adjustment in this scenario: shifts in capital flows, exchange rates and real interest rates.
The peculiar global macro configuration of the last 15 years was unprecedented. Capital flowed “uphill” from poor to rich countries — EMs saved more than they invested, the excess showing up as current account surpluses (net exports of EM goods) and financial outflows (net acquisition of DM assets). But digging deeper exposed a crucial fact: private capital still flowed “downhill” to EM economies in line with intuition, but offset by even larger “uphill” official flows, the reserves bought by EM central banks and sovereign wealth funds.
Despite allegations of strategic undervaluation, mercantilism, and the like, EMs had good reason to accumulate reserves as a precautionary measure. They had learned painful lessons from past crises. A loss of capital market access or sudden stop, or a bank/currency run or sudden flight, could trigger a vicious risk spiral linking currency crashes, banking panics and default.
In the 1997 Asian crisis, IMF help was seen as slow, limited, expensive and laden with unpleasant policy conditionality; economies, and their political leaders, suffered heavy damage. Reserve war chests were a “self insurance” response, obviating the need to rely on the kindness of strangers.
G20 recipe for deflation, protectionism
It may be folly or it may be prudence, but the move to fiscal austerity and restraint will be deflationary, will be bad for risky asset prices and will raise further the threat of protectionism.
The weekend’s meeting of the Group of 20 wealthy nations in Korea ended in a muddle of policies, with the final communique appearing to praise fiscal retrenching, expansionary policy, tighter regulation and slower implementation of that tighter regulation all at the same time, and all in the same impenetrable thicket of euphemism, buzzwords and consultant-speak.
To wit:
“The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability, differentiated for and tailored to national circumstances. Those countries with serious fiscal challenges need to accelerate the pace of consolidation. We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions. Within their capacity, countries will expand domestic sources of growth, while maintaining macroeconomic stability,” the communique issued at the conclusion of the meeting read.
For the perplexed, a gloss would be: “Europe having hit the fan, we can no longer agree on common policies to stimulate the wretched economy. Every man for himself! Well, except for the U.S., which should carry on buying all of the rest of our stuff.”
China is not taking serious steps to revalue its currency, deciding instead to fight inflation and an overheating property market at home. And over in Europe, if it isn’t French Prime Minister Francois Fillon praising the “good news” of a newly cheap euro it is German Chancellor Angela Merkel unveiling a package of budget cuts. Just as fiscal stimulus must be done in concert internationally, as some of the benefit of the money spent will “leak” through borders, so is austerity a bit of a communicable disease; you may be punished by markets if you are the one still expanding borrowing while others cut.
And if you are lucky enough to have a reserve currency, you end up with the unenviable job of U.S. Treasury Secretary Geithner, who will need to explain back home why the U.S. should be the world’s export-eating foie gras goose. He is likely to say brave words about how the strong dollar reflects U.S. robustness, but as mid-term elections near and a jobless recovery stays jobless that will sound increasingly hollow.
Macroeconomic models rely for their validity on some measure of equilibrium and substantiality being present in the money system, which is sadly far from the case today.
If the world were relying solely on the munificence of US consumers of whom significantly fewer remain afloat than US statistical conjuring acts imply, the world would be on the road to perdition. How much further down the same old road the world is inclined to travel based on faulty American navigation remains to be seen.
Should it finally dawn on the other 19 of the Gs that Good Ol’ Number 1 has been deliberately leading them around by the nose into all kinds of trouble to be borne on the backs of their citizens a certain amount of whiplash is to be anticipated, not so much inflation or deflation as economic annihilation.
Taxing spoils of the financial sector
If you want less of something, tax it.
That truism is often used as an argument against a tax on profits, or health benefits, or employment, but in the case of the rents extracted from the economy by the financial services industry here’s hoping it proves more of a promise than a threat.
The International Monetary Fund has put forward two new taxes on banks to pay the costs of future rescues, one of which is a fairly conventional “Financial Stability Contribution,” with an initial flat levy on all banks, to be refined later into something with more precise institutional and systemic risk adjustments.
More interestingly, the IMF is also proposing a “Financial Activities Tax,” (FAT) a tax on bank pay and profits which, if correctly designed, could serve as a tax on rents — the unwarranted spoils — of the financial sector.
In economics the concept of “rents”, essentially the extra money a given individual or industry is able to extract from its clients above what it would if there were perfect competition, is central. If there is only one cable television provider in your neighborhood you will know what I am talking about.
In financial services, the evidence is that rents are huge, in part because of impaired competition and in part because increasingly complex financial services allow banks to sell clients products that they don’t understand, may not need and will almost always be over-charged for. Bank employees in turn charge hefty rents to their bosses, boards and shareholders, each of whom, as you journey up the organizational chart, understand less about the complex services, and like clients, are then less able to defend their own interests.
Some of the best evidence forming the intellectual underpinning of this is provided by economists Thomas Philippon of New York University and Ariell Reshef of the University of Virginia, whose work found that about 30 to 50 percent of the extra pay bankers get as compared to similar professionals is attributable to rents. <http://people.virginia.edu/~ar7kf/paper s/pr_rev15_submitted.pdf>
As a long in the tooth former consultant to Central Banks & Commercial Banks, here is my “old fashioned” view.
Banks are the primary engine driving the world’s economy.
Tax the Banks and they will pass it on their customers.
More expensive money means Less economic dynamism & incidentally more unproductive public service costs to regulate.
Obama must have fools for advisers.
But what do I know, it is 20 years since I was advising governments of the world.
A rally that is both rational and crazy
(James Saft is a Reuters columnist. The opinions expressed are his own)
Stocks and other risky assets are rallying around the world this week because the Group of 20 nations said on the weekend they would keep the economic stimulus flowing, a state of events which illustrates where we are and what a very strange place it is.
The G20, the only group of big hitters that matters because it is the only group which includes the Chinese, met in Scotland over the weekend and, as is the way of these things, did very little with immediate consequences for anybody.
In the communique they issued, the Group of 20 finance ministers, after congratulating themselves on the recovery, more or less admitted that the measures we once thought of as heroic are in the process of becoming commonplace.
“However, the recovery is uneven and remains dependent on policy support, and high unemployment is a major concern,” the statement said. “To restore the global economy and financial system to health, we agreed to maintain support for the recovery until it is assured.”
Let me put that in human terms for you:
“We’ve spent untold trillions saving the economy, but, er, we’ve really only saved the financial system and that only to the extent that we keep on saving it. Jobs, well, not so much. We therefore pledge to continue doing this thing that may or may not be working until we are sure that it is.”
Property taxes, utility bills (you call them rates I think) haven’t changed and the towns and cities haven’t noticed that the bubble burst. In fact the property taxes and utility bills still creep upward due to their own COLA logic. This does not help the consumer who is supposed to be stimulating the economy through big consumer spending. None of this local taxation does anything to stimulate economic activity. It just sucks up income on more or less unproductive efforts. All town projects are really on hold. But it must be nice to work for the local schools or town hall. Talks with my dear old Dad remind me that this is what the Depression was like. You were well off if you worked for the Town or State government – but those days almost sound humane because town or state employees didn’t have contractual cost of living adjustments.
All the towns and cities may be doing is waiting until the dollar has inflated to levels where the assessments seem like they match and make sense again. Our houses won’t be more valuable, they will only sound like they are. But nothing much is selling so I can’t understand how that will ever work. Since the property in towns and cities has dropped appreciably in price and still aren’t selling, how can it ever get back, even with inflation, to the levels before the prices collapsed? There is some increase in the employment here but the wages haven’t risen. A very few more people can now pay their bills but those bills are getting larger. They have invisibly risen dramatically actually, because they are being based on assessments made at the peak of the bubble. But in visible terms they are still also rising.
It’s a little like living in an expanding universe and actually feeling the phenomenon.
Fortress balance sheets at financial institutions
– Robert Bench, a former Deputy Comptroller of the Currency in the Reagan administration, is a senior fellow at the Boston University School of Law Morin Center for Banking and Financial Law. The views expressed are his own. –
Financial Institutions inherently are fragile, simply because they are intermediaries exposed to both exogenous and endogenous forces.
Externally, they are vulnerable to wars, weather, or worn-out economic conditions. Internally, they always are susceptible to excessive risk takings as well as inadequate controls over operations.
Therefore, financial institutions historically have projected strength two ways. First and most obvious have been their buildings, designed of granite, with strong doors and deep vaults, to show the institution was a “fortress” against troubled times. Less obvious, but more importantly, they maintained “fortress balance sheets” comprised of high levels of capital, high levels of liquidity, and massive “hidden” and “inner” reserves.
Accounting, tax, and regulatory policies accommodated salting away profits in good times, so they would be available to draw down during bad times, which were sure to occur. The policy bias in both the private and public sectors was to preserve stability within the “public utility” that is the financial system.
But the recent history of financial policy has been to abandon these historical building blocks in the financial fort. Tax policies no longer accommodate the build-up of loan loss reserves. The Securities and Exchange Commission set policy when they complained to a major institution that it had tucked away too much money in reserves. The SEC also permitted investment banks to operate with 50 percent less capital while the banking regulators allowed the banks themselves to decide how much capital and reserves they needed.
The mantra of “maximizing shareholder value” led to religious attempts to precisely measure risks and profits without any recognition of the history as to how financial institutions are absolutely unlike commercial firms.
gd, I am not particularly good with acronyms and I don’t know who ‘Ben’ is, but from what I have read, they will cock that imaginary bank up too.
Pittsburgh: A city transformed by R&D
– Phil Bond is President of TechAmerica, which represents 1,500 companies across the technology industry. The views expressed are his own. —
Will Pittsburgh, with its historical role in two American industrial revolutions, remain a leader in revitalization? Or will it be have to carry the extra burden of uncompetitive national policy?
The first revolution, perhaps a product of geographical chance, made the city and the nation a manufacturing powerhouse. The second, resulting from a tremendous act of will by the people, remade Pittsburgh into a great research and development (R&D) center that could help lead us out of the current recession. These hardworking Americans are going to need smart policy from Washington if their technology revolution, and efforts to emulate it across the country, are to continue.
For many years now, there has been too much talk inside the beltway about pro-innovation economic policies and too little action. Case in point: Congress has yet to take action to extend the R&D tax credit, due to expire at the end of 2009, that is so vital to the U.S. keeping its innovation edge and helping other cities do what Pittsburgh accomplished – achieve economic revitalization.
R&D creates new industries and products, new solutions to our toughest challenges and many new jobs. In Pittsburgh, R&D and testing labs account for the second highest category of high-tech employment, generating thousands of good, high-paying jobs, according to TechAmerica’s latest Cybercities research. Nationwide, at least 70 percent of R&D investments are spent directly on employment.
This tax credit applies only to R&D performed in the United States, and it stands as the only broad incentive offered by the federal government for private-sector investments in R&D. Without it, many companies based here might not chose to make potentially risky R&D investments because the return on those investments would be insufficient. Meanwhile, other countries around the world offer much more robust incentives to lure companies to their shores.
America’s tax credit, once a world-leading policy, is now comparatively modest – especially when you consider that in the long-term, nearly two dollars are generated for every dollar of tax benefit. To bolster the U.S. economy and create jobs, Congress should strengthen the credit and make it permanent.
I think my colleague Terra has it partly right and partly wrong. Right is to call on her former bosses at Treasury to involve other US government stakeholders, meaning important Congress members in developing policies. I infer from her piece that this is not being done. Maybe it is a telling comment on Congress today, which also means there is little point in attending the G20, as the President will not be able to deliver on any commitment he might make. Imagine a different model: imagine if the Leaders only met when they had some actual agreement to announce instead of every year. Finance Ministers meet anyway every six months at IMF. So, now they listen to each other make the same speeches at G20 and IMFC. Not very efficient. Equally, every other topic taken up by the G20 has another more legitimate forum. G20 could be closed down with little loss and some budgetary savings.