By Philip Zelikow
Entering 2009, the health and
prospects of the United States
and world economy are the most important national security issues facing the
country. The health of America's political and economic institutions is
the foundation for everything else the United States tries to do in the world.
I am uneasy about the current
proposals for a massive "stimulus" for both the United States
and world economy. In December 2006
Larry Summers wrote a prescient column. Sensing that the economic situation was deeply unsound, Summers
acknowledged that the usual indicators made it seem as if all was well. Yet, trusting his convictions, he urged
readers not to be lulled: "the main thing we have to fear is
lack of fear itself."
In December 2008 Larry
Summers, having offered excellent advice in the intervening years about how to
dampen the growing crisis, much of it unheeded, is now the President-elect's
chief White House economic adviser. He
writes that a stimulus and investment package of $700-800 billion over the next
two years is necessary and that, now:
"In this crisis, doing too little poses a greater threat than doing
too much."
There are some serious risks
either way, as I assume Summers knows better than he can now say. So, as economists on left and right join in
supporting calls for massive spending and tax cuts, I like his counsel of two
years ago: "the main thing we have to
fear is lack of fear itself."
Unconsciously, we seem to be
sliding into a totally domestic-focused approach on this problem, just as the U.S. did in 1933-34. Thus, even though we were doing some good
(and bad) things domestically, the U.S.
helped seal an unmistakable global assessment: Global coordination to save capitalism was dead. It was every state for itself. And to offer just one example of unforeseen
consequences on little boats swamped in our wake: the United States
de facto devaluation of silver in 1934 wrecked the struggling economy of the
new Chinese republic, a blow from which it never really recovered.
As the United States plans, in the best case, to borrow
trillions of dollars from the rest of the world in order to fuel our own
recovery, a global perspective is vital. A smart response, of course, is that recovery of aggregate demand here
is the best way to lift all boats. Also,
more technically, one could argue that our advanced economy will provide
stronger multipliers from fiscal stimulus than would comparable investments in
other economies. But it's worth
analyzing those premises for a minute, as the following posts will suggest.
Also, just as a matter of
agenda setting, we cannot do enough to just urge folks again and again to keep
our eyes on the bigger global picture. Especially as all the "buy/hire America"
riders start coming into political play. And, frankly my guess is our boat will best be lifted by a global
recovery, and especially by strong aggregate demand out of Asia, since our income/savings ratios weren't
and aren't sustainable anyway.
Even in his most recent, good,
foreboding counsel, Nouriel Roubini does not analyze the global
perspective and impact on other possible investments of such massive U.S. claims on the international capital
market. What will happen to the most
vulnerable billions of people? And what
are the knock-on political consequences of that?
The best commentary on these
issues will not be found in any of the major U.S.
papers, which have practically ignored these wider issues in their otherwise
extensive coverage. The Financial Times,
fortunately, has done much better -- led by the commentary of the pre-election
Larry Summers and the work of Martin Wolf, of which one can start with his
recent essays here and here. Wolf supports a major stimulus while also
giving the reasons why it could be so unsound; even he is not clear about how
he is working through his ambivalence and appraising the risks.
As the policy juggernaut
gathers size and speed, I'll have more to say later about the emerging plan,
seen from a global perspective, as well as some constructive suggestions about
the fiscal moves that make the most sense.
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