Our sprawling, unilateralist, protectionist mess of a stimulus plan

By Phil Levy

The fiscal stimulus bill racing through the House has prompted a lot of discussion about bipartisan coordination. President Obama’s efforts to engage Congressional Republicans were admirable. The exclusion of House Republicans from any role in crafting the bill was not.

Hill Republicans are not the only ones being presented with a fait accompli. So is the rest of the world. Last November, as the global crisis deepened, the G-20 leaders gathered in Washington. They vowed to work together and avoid the temptation of protectionism. These pledges started to crumble almost as soon as the leaders had unpacked their bags from the trip. A number of countries have raised tariffs and the Doha trade talks have fallen by the wayside, as Dan Drezner described.  

The current U.S. stimulus package marks a new blow to international coordination. It contains explicitly protectionist language in its call to use only U.S.-made steel in infrastructure projects. This likely violates U.S. commitments under global trade agreements and will certainly be taken as a bad sign by the rest of the world. The world can deal with a protectionist India or Indonesia. The trading system will have much more trouble if the United States starts to reneg on its traditional leadership role.

One might argue that this bit of protectionism is just an unfortunate byproduct of the stimulus bill. But the central thrust of the package — an attempt to revive U.S. economic activity through massive government borrowing and spending — also raises global coordination concerns. 

This decade has seen serious imbalances in the global economy. The United States has saved too little and consumed too much. China has saved too much and consumed too little. The United States has urged China to undertake painful adjustment, revalue its exchange rate, and shift away from its export-led growth. Treasury Secretary Geithner repeated those calls last week.

When the United States had to grapple with the pain of reduced consumption and greater savings, we balked. Or rather, we are about to balk. That’s what the big fiscal stimulus bill will do. On top of trillions of dollars in deficits already planned, the stimulus bill will add almost a trillion more in the coming years. Don’t think the Chinese haven’t noticed.

One might ask: why coordinate a crisis response? If the whole world is slowing down, shouldn’t everybody be happy whenever anyone makes a move to pep up their economy? It doesn’t work quite like that. With uncoordinated fiscal stimulus, countries begin to worry that their shiny new spending will ‘leak’ overseas through imports (a concern that Harvard’s Dani Rodrik shares). This is a spur to protectionist impulses. Not only that, there are concerns about the entire world trying to borrow large sums at the same time. It works at the moment, when the private sector is moribund. It won’t work so well when the private sector revives.

The Congressional leadership might well pause to consider some of these global ramifications, if they were not so determined to lock in spending plans for 2011 and beyond before we reach the President’s Day Weekend.