“The main thing we have to fear is lack of fear itself”

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.