Embarrassment in Seoul

The world won't follow slow-growth, weak-dollar America.

Has there ever been a major economic summit where a U.S. President and his Treasury Secretary were as thoroughly rebuffed as they were at this week's G-20 meeting in Seoul? We can't think of one. President Obama failed to achieve any of his main goals while getting pounded by other world leaders for failing U.S. policies and lagging growth.

The root of this embarrassment is political and intellectual: Rather than leading the world from a position of strength, Mr. Obama and Treasury Secretary Timothy Geithner came to Seoul blaming the rest of the world for U.S. economic weakness. America's problem, in their view, is the export and exchange rate policies of the Germans, Chinese or Brazilians. And the U.S. solution is to have the Fed print enough money to devalue the dollar so America can grow by stealing demand from the rest of the world.

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Associated Press

President Barack Obama walks off the stage with Secretary of Treasury Timonthy Geithner

But why should anyone heed this U.S. refrain? The Germans are growing rapidly after having rejected Mr. Geithner's advice in 2009 to join the U.S. stimulus spending blowout. China is also growing smartly having rejected counsel from three U.S. Administrations to abandon its currency discipline. The U.K. and even France are pursuing more fiscal restraint. Only the Obama Administration is determined to keep both the fiscal and monetary spigots wide open, while blaming everyone else for the poor domestic results.

The American failure was most acute on trade, as the U.S. and South Korea couldn't agree on a bilateral pact that the two countries had signed three years ago. Mr. Obama had campaigned against that pact in 2008, let it languish for two years in office, and now suddenly wants the South Koreans to agree to new terms.

But the Koreans aren't pushovers, and they want new concessions from America in return. They also see a less urgent need for a trade pact with the U.S. because, while Mr. Obama has fiddled, the Koreans have been negotiating other trade deals with all and sundry—not least a pact with the European Union that carries nearly identical terms to what the Bush Administration negotiated in 2007. Mr. Obama's negotiators left Seoul empty-handed.

Meanwhile, China and other Asian economies see first-hand that rather than spurring more U.S. growth (on which Asian exporters still depend), U.S. monetary ease has flooded the developing world economies with dollars they're not able to absorb; produced exchange-rate turmoil to the detriment of the region's traders; and sent the world's dollar-denominated commodity prices climbing.

Far from distancing himself from this Federal Reserve policy, Mr. Obama defended it more than once. "From everything I can see, this decision was not one designed to have an impact on the currency, on the dollar," Mr. Obama said in Seoul. "It was designed to grow the economy."

But this defense will only confirm to most of the world that the goal of U.S. monetary easing is solely domestic and political. Isn't the U.S. central bank supposed to be independent? Mr. Obama may come to regret his political embrace of Fed Chairman Ben Bernanke if commodity price increases flow through to consumer prices and leave Americans feeling poorer than they already feel.

The Administration's dubious monetary theories also led it to waste valuable political energy pushing an unlikely deal with China to revalue the yuan (and devalue the dollar). Instead Mr. Obama could have argued for reforms to China's capital account that would do some genuine good. China's exchange rate by itself has not contributed to global imbalances, but China's capital-account regulations have.

In particular, the fact that Beijing sterilizes capital inflows and recycles them into U.S. government debt instead of allowing capital to enter and exit more freely contributes to a global misallocation of resources. Mr. Geithner is too busy focusing on the exchange rate to notice, let alone to respond to Beijing's complaints about U.S. monetary instability by challenging China to liberalize its own capital account.

The world also rejected Mr. Geithner's high-profile call for a 4% limit on a nation's trade surplus or deficit, which would amount to new political controls on trade and capital flows. This contradicts at least three decades of U.S. policy advice against national barriers to the flow of money and goods. We don't like to see U.S. Treasury Secretaries so completely shot down by the rest of the world, except when they are so clearly misguided.

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None of this should be cause for celebration, because a world without American leadership is a more dangerous place. The U.S. is still the world's largest economy, the issuer of its reserve currency, and its lone military superpower. No other nation has the will or capacity to lead the way the U.S. has for 70 years, so faltering American influence will produce a vacuum in which every nation can seek narrow advantage.

If Mr. Obama wants to restore his economic leadership, both at home and abroad, he needs an urgent shift in priorities. Strike a deal with Republicans to extend the current tax rates across the board, pursue the spending cuts proposed by his own deficit commission, end the regulatory binge that has constrained America's animal spirits, stop trying to direct capital toward political mirages like "green jobs," and press Congress to pass the Korean and other trade pacts.

The world will follow American leadership again only when it sees policies that restore robust U.S. economic growth.