Daniel W. Drezner
The foreign twist to complaints about the stimulus
As I’ve said before, in recent months there is a danger of creeping protectionism getting in the way of countries enacting expansionary fiscal policies (and the bill that passed the House only reinforces this danger, by the way) In the past few days at Davos, others have voiced this concern, but with a twist. Rather ...
As I’ve said before, in recent months there is a danger of creeping protectionism getting in the way of countries enacting expansionary fiscal policies (and the bill that passed the House only reinforces this danger, by the way)
In the past few days at Davos, others have voiced this concern, but with a twist. Rather than complaining about the underprovision of a fiscal boost, some are complaining that the Americans are hogging all the expansionary plans. First, there’s Russia:
A senior adviser to Dmitry Medvedev, Russia’s president, has sharply criticised the scale of the new US administration’s economic rescue package and projected budget deficit, saying it would suck up liquidity from other global markets.
“What is discouraging is [President Barack] Obama’s statement that he is going to run a $1 trillion deficit for years to come. For us, that means that all the free liquidity in the world will run into American Treasury bills,” said Igor Yurgens, who heads a think-tank advising Mr Medvedev. “That liquidity will not be available in other parts of the world. For us, it will be worse.”
Mr Yurgens said the policy was akin to the “beggar thy neighbour” protectionist policies of the 1930s. “Of course [Mr Obama] expects the Chinese or Russians to buy US Treasury bills. That is pretty selfish and philosophically it is protectionism.”
He’s not the only one making this complaint. The NYT’s Nelson Schwartz has a good chronicle of these concerns:
Few people attending the World Economic Forum question the need to kick-start America’s economy, the world’s largest, with a package that could reach $1 trillion over two years. But the long-term fallout from increased borrowing by the federal government, and its potential to drive up inflation and interest rates around the world, seems to getting more attention here than in Washington.
“The U.S. needs to show some proof they have a plan to get out of the fiscal problem,” said Ernesto Zedillo, the former Mexican president who helped steer his country through a financial crisis in 1994. “We, as developing countries, need to know we won’t be crowded out of the capital markets, which is already happening.”….
“Even before Obama walked through the White House door, there were plans for $1 trillion of new debt,” said Niall Ferguson, a Harvard historian who has studied borrowing and its impact on national power. He now estimates that some $2.2 trillion in new government debt will be issued this year, assuming the stimulus plan is approved.
“You either crowd out other borrowers or you print money,” Mr. Ferguson added. “There is no way you can have $2.2 trillion in borrowing without influencing interest rates or inflation in the long-term.”
Meh. To be generous, these complaints are not completely without foundation. They are a little odd, however. If the United States does not engage in greater stimulus, then other countries are going to have to pick up the slack, or this recession will last a long time. Indeed, count me in the Martin Wolf/Brad Setser camp of those who would love to see other countries — *cough* China, *cough* — starting to boost their own consumption as a means for igniting global growth, because that would also help to redress the macroeconomic imbalances that are at the heart of the current predicament.
To date, however, the efforts by most of these other countries have been underwhelming. [What about China?–ed. Their stimulus has targeted investment rather than personal consumption, so yes, them too.] If I were Obama, I wouldn’t trust other countries to provide the locomotive power necessary to get the global economy moving again. So I don’t see how they can blame the United States for doing what they are choosing not to do.