IMF shows U.S. how to restrict foreign capital

The U.S. isn’t expected to return to full employment for at least six more years, and the consensus in Washington seems to be that President Barack Obama’s administration has no options to improve that dreary outlook.
The debate over tax increases and spending cuts, as well as the latest statement from the Federal Reserve, proves that additional fiscal and monetary stimulus won’t be coming unless the economy turns even worse. But there’s one weapon the Obama administration can fire to get a more satisfactory recovery in employment: taking action to narrow the longstanding deficit in international trade. Millions of jobs are at stake.
As it happens, the International Monetary Fund recently gave a green light to measures the administration could use to reduce the trade deficit in a formal statement of its “institutional view” on the management of capital flows.
Capital flows directed by a number of foreign governments into the U.S. have grown to unprecedented levels in recent years. These flows keep foreign exports artificially cheap and make U.S. exports artificially expensive to foreign buyers; they are the main reason the U.S. has a large trade deficit right now. The country should take heed of the IMF’s recommendations and act forcefully to damp these distortionary capital inflows and to restore balance in international trade.
For countries in the position of the U.S., the IMF doctrine recommends policy measures be taken in the following order. Each successive step should be taken only if the previous ones have been pursued aggressively and proved insufficient. First, ease monetary policy if inflation isn’t a problem.
Second, use expansionary fiscal policy to sustain growth if government debt isn’t excessive.
Third, accumulate more foreign-exchange reserves to weaken the currency.
Fourth, impose controls on capital inflows.
The U.S. has pursued the first two steps aggressively but growth has remained too weak.
The U.S. should purchase reserves in a range of currencies from countries that manipulate their exchange rates, namely Denmark, Hong Kong, Malaysia, Singapore, South Korea, Switzerland and Taiwan. And the U.S. should communicate clearly to Japan that any future intervention by the Japanese to weaken the yen would be fully offset by U.S. purchases of yen.
The IMF should examine whether the large purchases of foreign assets by governments in oil-exporting countries exceed a reasonable level, especially in light of the negative effects of such purchases on global economic activity during a time of widespread underemployment.
These policies would add millions of jobs in the U.S. As the leaders of the Group of 20 have urged, governments in countries with trade surpluses should be encouraged to boost consumption and investment at home. Returning international trade to balance would strengthen global growth and make it more sustainable, a good outcome for the whole world. •


Joseph E. Gagnon is a senior fellow at the Peterson Institute for International Economics. Distributed by Bloomberg View.

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