Time for a Global Stimulus

Back during the dread Clinton years of peace and prosperity, it was taken for granted that in a world of globalized economies, international economics was bound to be an important part of the foreign-policy portfolio. During the Bush years, that kind of thing took a back seat to the "hard" security issues of terrorism and the proliferation of weapons of mass destruction. Such concerns are still with us, of course, along with the two problematic and mismanaged wars that Bush has handed off to his successor. But even though economic problems tend to make public attention turn inward, the reality is that it's bad economic times more than good ones that call for sustained attention to the economics of international relations.

Looming behind the sharp downturn in demand the Obama administration's stimulus package is supposed to address is the ominous shadow of global trade imbalances. In other words, not only have individual Americans been spending more money than they've been earning, the country as a whole has been consuming more goods and services than it has been producing. In theory, this could have all worked out OK. A slow but steady decrease in consumer consumption (and debt levels) could have been paired with a slow but steady decline in the dollar relative to major foreign currencies, and a slow but steady decline in the inflows of foreign investment money to the United States. That would have meant a drop in housing-related employment but an increase in domestic manufacturing as more U.S. consumers chose to buy domestically produced goods rather than foreign alternatives and increased exports to Europe and Asia.

Pain would still have been felt with a move like that. It's one thing to say that jobs would shift out of construction and manufacturing and another thing entirely to deal with the real-world stresses and dislocations caused by such a switch. Americans as a whole would perceive the decreased consumption share of income and higher prices of imports as a decline in well-being.

It would have been painful, but it would have been manageable. But it's not what happened.

Instead, we're looking at a global economic catastrophe. Unemployment is rising fast in the United States, and consumption is declining so quickly that no other sector can expand fast enough to pick up the slack from the declining building trades. The financial sector is experiencing vast layoffs. And for the large number of Chinese, Japanese, and German citizens who depend on exporting goods to the United States for a living, our hard landing is becoming their nightmare.

Japan's economy shrank at a 12.7 percent annualized rate in the fourth quarter. The Germany economy contracted 0.5 percent in the second quarter of 2008, then another 0.5 percent in the third quarter, then 2.1 percent in the fourth quarter. All signs, meanwhile, indicate that U.S. consumers will definitely be buying less in the first quarter of this year than they did in the first quarter of 2008, spelling even more gloom and doom for our trade partners. The Chinese, meanwhile, are putting a brave face on things and claiming that they'll be able to avoid a recession, but nobody believes them as their exports and imports alike are tanking. And with the world's four major economies in simultaneous contraction, the pain is going everywhere. Commodity prices are tumbling, devastating both the rich oil exporters and the bulk of the poor world, while tourism crashes globally and countries on the European periphery such as Greece and the Baltics are torn by riots.

In this context, we need not just American stimulus but global stimulus, and that's going to require political coordination.

Already in the United States we've seen political controversy over the concept of "buy American," the commonsense idea that American tax dollars should go to fund American jobs. But with or without such a provision, there's ultimately no changing the fact that in an interconnected global economy, some of the benefits of growth in any country "leak" out to that country's trade partners. For example, even if we commit to use only American steel in building projects, that doesn't change the fact that the steel-company executives may use their enhanced earning power to buy French cheese or Belgian beer or Japanese cars or, indeed, American cars containing Canadian parts. Since the United States is enormous, trade is a small share of our economy compared to other countries. But all other economies are smaller than America's, and quite a lot of productive capacity is tied up in countries that are much smaller and more trade-dependent. The government of Canada, for example, will obviously try to do what it can for the Canadian economy but ultimately can't help but be dragged along by U.S. events. Similarly, it's simply inevitable that any substantial Canadian stimulus activity will see a lot of funds leak south of the border, just as economic activity in the United States tends to leak north.

This trend is especially pronounced in Europe. The EU is collectively a gigantic economy -- bigger even than the United States -- but in political terms it's an agglomeration of medium- and small-sized economies, all of which are tightly integrated. Under the circumstances, it's easy for, say, Belgium to free-ride on German undertakings. And also easy for Germany to worry that any stimulus it might undertake will be ruined by free-riding. But if everyone is paralyzed by this fear, nobody will do anything, and everyone will suffer.

The world needs a coordinated response in which each country commits to undertake stimulus that's appropriate to the size of its economy and to its position in the global balance of trade. Further, we need a serious international commitment toward rebalancing in the medium-term -- to a weaker dollar, less U.S. consumption, more American exports, and less foreign economic dependence on the U.S. consumer market as an employment strategy.

Global coordination of this sort would be difficult to undertake. Indeed, it would largely be unprecedented. But the economic crisis is also without precedent. Or, rather, it carries with it the scary precedent of the Great Depression. In the 1930s and 1940s, the international dimension of the situation eventually did come to the rescue of the global economy. But it came in the form of a horrifically violent war, which first served as a jobs program for the belligerent countries and then managed to destroy so much of Europe and Asia that the world was left with ample "shovel ready" projects simply rebuilding. That, however, is not a model we want to emulate. The only alternative is a serious effort at a global coordination of recovery programs.

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