There is some irony in the fact that the Economic summit this weekend is being held in Williamsburg. In 1776 the Virginia patriots there were rebelling against the impact on their lives of authority and forces beyond their control. Their demand was for independence to run their own affairs. Two centuries have radically changed the context and import of that aspiration.
These meetings of the Seven (Canada, France, Germany, Italy, Japan, the U.K., and US) are a recognition that the advanced nations cannot manage their economic affairs separately. The intimate meshing of their economies by trade, investment , technology and communications requires joint or coordinated actions for any hope of achieving prosperity or growth. Independence or isolation is not a real option. Of course, this has been true since World War II, but the linkages have steadily grown more dense, and more involved in domestic politics.
The lesser developing countries (LDCs), though not at the meetings, are in much the same boat. Their own efforts are indispensable for development, but their success also depends on favorable external conditions. The advanced nations must provide markets, capital, assistance and technology, and benefit in turn from trade.
In the last decade, however, the Organization for Economic Cooperation and Development (OECD) countries have not shown great skill in managing their own economic affairs. In the 1970s, they failed to adjust adequately to the massive oil price raises, resulting in dislocations and mounting inflation. That has been curtailed (in most countries) by the bludgeon of the worst post-war recession, at a cost of 30 million jobless and $600 billion or more in lost output. Will the advanced nations now be able to foster sustained recovery and absorb the unemployed without reigniting inflation? Can the enormous LDC debt be handled without a financial breakdown?
The impending summit could contribute to affirmative answers by facilitating coordinated action. Its value may suffer, however, from an undue effort to minimize controversy (mindful of Versailles), and from Reagan's insistance on unstructured discussion.
Yet, while concerted action is essential, the US has a special role to play in bringing about both its own and global recovery on a healthy basis. A recovery is already underway here and in a limited degree elsewhere. But almost all agree that it will not be sustained or vigorous unless real interest rates, especially long-term, can be brought down from their present high levels and kept down.
Such excessive interest rates not only threaten healthy US recovery but will be damaging to revival worldwide. They will keep interest rates up in the OECD countries and impede their recovery, as well as that of the LDCs. They distort exchange rates by overvaluing the dollar, which hampers US imports and fans protectionist pressures. And they keep the burden of service charges high on LDC debt.
What is keeping real US interest rates high? Most agree that it is the prospect of huge US budget deficits of $200 to $300 annually for the indefinite future. Such prolonged deficits are the result of the large tax cuts under Reagan, the tremendous expansion of the defense budget, and the refusal by Congress of further major spending cuts. Yet in order to reduce real interest rates sufficiently to support steady recovery and growth, it will be essential to put in place promptly a program for cutting these budget deficits, not for this year, but for the so-called out-years (1985 and beyond).
The President and the Congress are, however, deadlocked over the issue. The Congress, including moderate Republicans, reject the President's proposals, and insist on slower defense increases (though still 5-6 percent per year) and expanded tax revenues. The President is adamantly opposed to tax increases and threatens to veto any that Congress may approve.
This impasse, if not resolved, could have disastrous economic consequences, as already indicated. But it has wider implications. Many allied leaders have been troubled for some years about whether our political system and institutions are adequate for the role of leadership which the US must play both for security and economic well-being. They have been dismayed by a succession of presidents suffering from various inadequacies, by the assertive but undisciplined operation of Congress, and by the hassling between them. As they see it, the result has often been inconsistent or erratic policy and action, which has eroded their confidence in US leadership.
It is, of course, easy to fault many of these same allied leaders for their own inconstancy and other shortcomings. But that is merely scoring points. The fact is that the US, by reason of its size and power, must take the lead. Thus failure to deal effectively with the prospective budget deficits will not only imperil economic recovery, domestic and global, but will feed these deeper concerns about our capacity to manage our own affairs and to provide leadership.