In the depths of the financial crisis, the world's 20 largest economies took an unprecedented step: At the April 2009 G-20 Summit in London, world leaders agreed to provide $5 trillion in spending in an effort to counteract the effects of the recession on jobs and growth. The U.S. had already complied via the Recovery and Reinvestment Act, passed two months prior. Other countries followed suit, helping bring about the stumbling global recovery we're now experiencing.
Last weekend, President Barack Obama traveled to Toronto, Canada, for another G-20 summit. He had a simple agenda, according to a recent op-ed by Treasury Secretary Tim Geithner and top White House economic hand Larry Summers: "ensure that global demand is both strong and balanced." The two note correctly that "we must demonstrate a commitment to reducing long-term deficits, but not at the price of short-term growth. Without growth now, deficits will rise further and undermine future growth."
All of that means that the U.S. wants more government spending and efforts to stimulate demand -- especially from those countries, like China and Germany, that export more than they buy. Unfortunately, Obama came away from the conference empty-handed. A bloc of European countries, led by German and British Prime Ministers Angela Merkel and David Cameron, rebuffed the president. The final G-20 declaration encourages governments to finish existing stimulus plans but mainly focuses on exhortations for "sustainability" and "consolidation" -- cutting budgets to limit risk to government debt.
Unfortunately, with the economic recovery slow and not all that steady, this is not the best policy prescription. Growth, as commentators from Paul Krugman to Matthew Yglesias have noted, is key to both future success and continued borrowing. Austerity during a recession, on the other hand, tends to kill growth. This has led sovereign debt markets to keep countries that have steeply cut public spending, like Greece and Ireland, at arm's length. They are unable to borrow cheaply and are facing enormous unemployment and political strife. Yet these are the policies being recommended by world leaders.
How did Obama fail to sell his fellow world leaders on a renewed stimulus effort? "He would be a lot more convincing if he did it himself," Mark Weisbrot, the co-director of the Center on Economic Policy Research, told me. "The U.S. is making a negative contribution to the economy right now -- we don't have a stimulus here," he said, explaining that state and local government cuts are undermining already limited federal efforts to push the economy toward growth. Even a pared-down bill to fight unemployment has been defeated several times in the Senate.
Moreover, Obama's domestic rhetoric has been attuned to political concerns. Much of the substance of Obama's second budget, unveiled last winter, was designed to counter the recession -- even if it did not go as far as many economists would have liked -- but the administration publicly emphasized a "spending freeze" and deficit reduction. These gestures disguise the fact that our deficit doesn't come from an increase in discretionary spending but from lost revenue due to the recession, tax cuts, and wars that were not paid for during the Bush administration, and long-term costs of health care. It seems world leaders took Obama's rhetoric at face value.
The financial woes of local and state governments have had a cancellation effect on the United States' stimulus, creating net negative government spending over the last two quarters and undermining its efficacy. This dynamic looks likely to be replicated on the world stage as governments continue to cut, which could lead to a decline in overall demand.
The International Monetary Fund (IMF) has been conducting studies on how to improve international coordination on global economic policy. In its most recent report, released at the G-20, it notes that fiscal consolidation, "while supportive of growth in the medium term," would limit growth in the short run for both G-20 countries and other nations around the globe.
The IMF argues that countries that don't have debt problems, like China, will alleviate these losses by increasing demand. But these rebalancing policies are both slow and imprecise, and as we saw with China's plan to readjust its currency, prone to hand-waving and promises that take time to deliver. And even under the IMF's rosiest projections, the U.S., the European Union, Japan, and emerging markets in Asia all face negative gross domestic product growth through 2012 with austerity policies.
Unfortunately, unemployed workers in the United States -- and around the globe -- don't have time to wait for jobs and economic growth. There is a difference between fiscal responsibility and austerity, but it's a distinction that has apparently been lost on world leaders.
Obama isn't out of time -- the jobs bill, while in limbo, is not dead, and another G-20 meeting is coming up in Seoul, South Korea, this November. By then, we'll have more data about whether bond markets react positively to austerity policies, whether growth is increasing or stagnating, and more important, if people are going back to work. Obama may have a second chance to steer global coordination to fight the recession. But leadership starts at home -- the president will have to make his case domestically before he can succeed abroad.
