Where is Obama’s global response?

By Philip Zelikow

I’m uneasy about the way President-elect Obama is framing his case on the stimulus.  Instead of a rhetoric of hope, it is a rhetoric of desperate trouble and borrowing our way out of it. This is not very FDR. President-elect Obama’s speech yesterday said nothing –nothing! — about how U.S. efforts would or should relate to what other countries should do. There was no discussion of the global economy or global coordination at all. 

I get the domestic politics. And, true, a big move is important just to get a psychological turnaround. Still, rather than promising gigantic borrowing to solve all our problems, it might be more heartening to Americans — and certainly more heartening to the international audience — if the United States would arrange a collective effort or statement along with the European Union, China, Japan, and a leading oil exporter (and surplus country) like Saudi Arabia that would describe a global agenda. That agenda should include fiscal stimulus, but with the U.S. role clearly proportionate and sustainable. That might seem more promising, and durable. The agenda would lead with joint efforts to complete the restoration of confidence in the banking system. 

The IMF has argued that effective fiscal action should be collective and coordinated, with some allocation of responsibilities that takes different capacities and impacts into account. That kind of spirit is not yet evident in the president-elect’s words or deeds.

Starting with the president-elect, prospective officials of the incoming administration always contrast themselves with the outgoing Bush administration by stressing their commitment to diplomacy, to the hard work of acting — whenever possible — with others. OK, well a crucial test is at hand. This is an issue of prime importance, especially for billions of the world’s poorest, most vulnerable people. 

This is not just altruism. Sure, there are the dangers of rising political instability and despair that globalization can ever become inclusive. For the United States, aggravating the global imbalances too sharply may not be a durable way out of the crisis, as we take too much capital from places and opportunities where it could do more good in lifting all boats, including ours.

It helps to remember where the U.S. government got the money for the classic (though disputed) story of fiscal stimulus success: mobilization for World War II ending the Great Depression. It borrowed the money from American firms and the American people.  That was what all those war bonds drives were about, reinforced by the constrained choices for consumption and investment in light of wartime controls.

In the current stimulus plans, the United States would borrow at least an extra trillion dollars from the world, as well as U.S. investors. Right now this looks highly doable, without jacking up interest rates, since there is a huge appetite for the safety of U.S. treasuries. But, as the IMF warned last week, the current low rates should offer "limited comfort, as markets often react late and abruptly" to changing perceptions about fiscal sustainability and alternative investments. This would especially be true as investors roll over short-term Treasury paper and contemplate buying longer-term T-bills.

It is worth examining the global consequences of U.S. success. If U.S. securities can soak up nearly a trillion more dollars of the world’s investment capital in 2009 and 2010, is this a good thing for the United States and world economy? The U.S. government might well prevail in a global competition for capital. But then, would there be losers? Would they be European and Asian economies? Emerging markets with more vulnerable people and large opportunities for growth? The equity market? 

If the underlying financial crisis is effectively addressed and banks feel they can now exploit the encouraging monetary environment to offer credit, and some significant recovery begins in 2009-10, this opening could come at the time the United States would be making maximal claims for capital. From a global perspective, would U.S. government fiscal stimulus then be the most productive use of the marginally available extra capital to fuel an incipient recovery? 

A "yes" argument could be that U.S. government spending might have a better multiplier effect on demand than would spending in many other advanced or emerging economies. The "yes" argument could then say that U.S. demand is still the best, the indispensable, way to lift all boats. 

But a "no" argument might emphasize the greater fiscal space for government investment elsewhere and the superior multiplier effects of private investment over public spending. The United States should play some role in stimulating recovery, but if it plays a dominant role, the country might inadvertently inflict severe damage on others as it helps itself. This would be a new version of the 1933-1934 "beggar-thy-neighbor" problem. And, arguably, overreliance on U.S. demand was a root cause of the global imbalance that helped produce this crisis.

I’m not arguing for a fiscal austerity program. But we do have to recognize that our domestic choices and actions have huge international ramifications — ones that will definitely affect in one way or another.