Greider also quotes the Levy Institute analysis. This comment is
from The Nation.
Ann
The Crisis Is Global
The Nation
By
<http://www.thenation.com/directory/bios/william_greider>William Greider
January 15, 2009
Three large obstacles are blocking Obama's path. The first is one of
scale: his nearly $800 billion recovery package sounds huge, but it
is perhaps two or three times too small to produce a turnaround. The
second is that the financial system--still dysfunctional despite the
bailouts--requires much more than fiscal stimulus and bailout: the
government must nationalize and supervise the banks to ensure that
they carry out the lending and investing needed for recovery. This
means liquidating some famous nameplates--led by Citigroup--that are
spiraling toward insolvency. The third is that the crisis is global:
the US economy cannot return to normal unless the unbalanced world
trading system is simultaneously reformed. Globalization has vastly
undermined US productive strength, as trade deficits have led the
nation into deepening debtor dependence.
While Washington debates the terms of Obama's stimulus package,
others see disappointment ahead. The Levy Economics Institute of Bard
College, an outpost of Keynesian thinking, expresses its doubts in
emotional language that professional economists seldom use. "The
prospects for the US economy have become uniquely dreadful, if not
frightening," Levy analysts reported. The institute's updated
strategic analysis warns that the magnitude of negative forces--the
virtual collapse of bank lending, private spending, consumer incomes
and demand--"will make it impossible for US authorities to apply a
fiscal and monetary stimulus large enough to return output and
unemployment to tolerable levels within the next two years." Instead,
the unemployment rate is likely to rise to 10 percent by 2010.
Obama's package amounts only to around 3 percent, annually, of GDP in
a $13 trillion economy. Levy's analysis calculates that it would
require federal deficits of 8 to 10 percent of GDP--$2 trillion or
more--to reverse the economic contraction. And yet, the institute
observed, it is inconceivable that this level "could be tolerated for
purely political reasons" or that the United States could sustain the
rising indebtedness without terrifying our leading creditors, like China.
Stimulus alone by a single nation will not work, in other words,
given the distorted economic system that Obama has inherited. The
stern warning from the Levy analysts and other skeptical experts is
that the United States has no choice but to undertake deeper systemic
reforms right now, rather than wait for recovery. Will Obama have the
nerve to tackle these fundamentals? To do so he would have to abandon
some orthodox assumptions about free trade and private finance that
he shares with his economic advisers.
The most obvious and immediate obstacle to systemic change is the
dysfunctional financial system. It remains inert and hunkered down in
self-protection, despite the vast billions in public money
distributed so freely, no strings attached, in the last days of the
Bush administration. We will learn soon enough whether Obama intends
to start over with a more forceful approach. Obama and his advisers
are eager to get another $350 billion in bailout funds, but they have
remained silent on whether this will finance a government takeover of
the system. Without such a move, the taxpayers will essentially be
financing the slow death of failed institutions while getting nothing
in return.
The most complex barrier to recovery is globalization and its
negative impact on the economy. Given our grossly unbalanced trade,
we have kept the system going by playing buyer of last
resort--absorbing mountainous trade deficits and accumulating more
than $5 trillion in capital debt to pay for swollen imports, while
our domestic economy steadily loses jobs and production to other
nations. Renewed consumer demand at home will automatically "leak" to
rival economies and trading partners by boosting their exports to the
US market--which subtracts directly from our GDP. This is the trap
the lopsided trading system has created for recovery plans, and it
cannot be escaped without fundamental reform.
To put it crudely, Obama's stimulus program might restart factories
in China while leaving US unemployment painfully high. In fact, some
leakage may occur via the very banks or industrial corporations that
taxpayers have generously assisted. What prevents Citigroup and
General Motors from using their fresh capital to enhance overseas
operations rather than investing at home? The new administration will
therefore have to rethink the terms of globalization before its
domestic initiatives can succeed.
A global recovery compact would require extremely difficult diplomacy
but could be possible because it is in everyone's self-interest. The
United States could propose the outlines with one crucial condition:
if the trading partners are unwilling to act jointly, Washington will
have to proceed unilaterally. A grand bargain could start with US
agreement to serve once again as the main engine that pulls the
global economy out of the ditch. That is, the United States will have
to continue as the buyer of last resort for the next few years, and
China and other nations will have to bail us out with still more
lending. In the short run, this would dig us into a deeper hole, but
the United States could insist on a genuinely reformed system and
mutually agreed return to balanced trade, once global recovery is under way.
Congress can enact the terms now--a ceiling on US trade deficits that
will decline steadily to tolerable levels, as well as new rules for
US multinational enterprises that redefine their obligations to the
home economy. Unlike in other advanced nations, US companies get a
free ride from their home government when they relocate production
abroad. That has to change if the United States is to reverse its
weakening world position. Tax penalties plus national economic policy
can drive US multinationals to keep more of their value-added
production at home. These measures can be enforced through the tax
code and, if necessary, a general tariff that puts a cap on imports.
Formulating these provisions now for application later, once the
worst of the crisis is over, would give every player the time to
adjust investment strategies gradually.
President Obama and his team may at first scorn the notion of saving
the world while negotiating a bailout for the United States. They
will be reluctant to talk about reforming the global system by
threatening to invoke emergency tariffs. But we are in uncharted
waters. Impossible ideas abruptly begin to seem plausible. Six months
from now, if the Obama recovery does not materialize, the president
may discover he has to reinvent himself.
About William Greider
National affairs correspondent William Greider has been a political
journalist for more than thirty-five years. A former Rolling Stone
and Washington Post editor, he is the author of the national
bestsellers One World, Ready or Not, Secrets of the Temple, Who Will
Tell The People, The Soul of Capitalism (Simon & Schuster) and--due
out in February from Rodale--Come Home, America.
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