Last year we worried about homes below water; now it is the economy itself that is sinking.
Warren Buffett says the U.S. economy has “fallen off a cliff.” And, as bad as the U.S. is, the rest of the world is worse. Germany’s exports have collapsed; Japan is in free fall; much of Eastern Europe may join Iceland in bankruptcy. The Asian Development Bank estimates the loss to financial assets worldwide at $50 trillion dollars —the equivalent of a full year of annual global output. It’s not for nothing that National Intelligence Director Dennis Blair announced that the economic collapse trumps terrorism and catastrophic climate change as the greatest threat to U.S. security.
After slogging through the stimulus, the banking mess and the foreclosure crisis, our besieged president now must turn his attention to organizing global cooperation to lift the world economy. Finance ministers of the group of 20 countries (G-20) meet near London this week; the heads of state gather on April 2. The agenda: whether to expand national stimulus plans, how to forestall a banking collapse and how to help the weaker countries that can’t help themselves. Rhetoric won’t cut it; real commitments have to be made. As the anti-Bush, Obama has been celebrated by much of the world as if he walks on water. Now, we’ll see if they will follow the savior rather than crucify him.
We need every major economy—particularly those like Germany, Japan and China in the best position to do so—to help boost the global economy with bold national, deficit-financed, recovery plans. We can’t do this alone. Our own stimulus—about 2 percent of GDP in 2009—is too small even to lift this economy. Everyone has to grab a bucket and start bailing.
Moreover, gaining this consensus will help put the world on notice that the old ways are gone. We’re not going back to an economy in which the U.S. borrows $2 billion a day from abroad, while serving as the world’s consumer of last resort. The Chinese, Japanese, Germans and other nations have to move away from export-led growth. The unsustainable trade imbalances—with the U.S. absorbing 70 percent of the world’s savings—provided the flood of cheap capital that eventually capsized the global economy.
That world is over. U.S. consumers are already tightening their belts. Exports have collapsed. If we ever begin a recovery, the U.S. should seek more balanced trade. That means we will have to sell stuff beyond toxic financial paper to the rest of the world. Obama anticipates this with his drive for new energy, an industrial policy that may allow the U.S. to gain an edge in the green markets of the future.
At the same time, China, Germany, Japan and the mercantilist nations will have to stop relying on exports for their growth. For Germany, the world’s largest exporter, exports made up an estimated 41 percent of GDP last year. That can’t go on. The first step is for the countries to stimulate internal demand to help get the global economy going once more, and thereby begin the wrenching journey they will have to make to more balanced growth.
Here as elsewhere in this economic debacle, the leaders remain behind the curve. On Monday, the European finance ministers announced that they had no plans to add to recent stimulus plans, dismissing U.S. pleas for expansion as, in the words of the European Chair, “not to our liking.”
The Chinese initially trumpeted a large internal public works stimulus, much of which turned out to already be in the five-year plan. Now Chen Deming, the commerce minister, declares China plans to subsidize exporters and lower export taxes, saying that we “should increase our share of the global market. We must transform ourselves from a big export nation to a strong export nation.” Nightmare.
G-20 conferences have generally been for show. The stakes are real this time—and the odds going in are against the president in gaining the bold action needed. And once more he’ll be out there virtually on his own, taking on the real deal in stark contrast with his opposition here at home. The conservative claque is ranting about socialism. Blue Dog Democrats like Sen. Kent Conrad of North Dakota are mobilizing to defend agribusiness subsidies, while the Republican leaders simply don’t get it. Rep. John Boehner, the perpetually tanned House minority leader, last week called for a freeze on all spending over the next year, something like putting a pillow over the mouth of someone suffocating to death. And Sen. John McCain, the Republican Party’s nominee, woke to deliver one of his dyspeptic lectures against earmarks; the patient is hemorrhaging blood, but the senator is worried about the pimples on his face.
The Europeans want to wait and see. The Chinese are subsidizing exporters. The Republicans are railing about earmarks and socialism. Obama’s call for a new responsibility hasn’t exactly taken hold.