Global Fiscal Stimulus: Should It Be An Obama Administration Priority?

The US has the opportunity – and perhaps the responsibility – to immediately retake a leadership role in global economic policy thinking, with the pressing priority of preventing the world’s recession from becoming something more serious.  But what should be Mr Obama’s priorities in this regard, for example in the run-up to the G20 summit in early April – which, given the timetable for these things, will have an unofficial dry run of sorts at the Davos meetings next week?

The obvious message could be: a large US fiscal stimulus is coming, but the rest of the world needs to do more.  In this option, Mr Obama could devote considerable effort to encouraging others to expand their government spending and/or cut taxes.

While worldwide cooperation of this form may have been a constructive thought last year at Davos, when the idea was first broached publicly by the IMF, a joint global fiscal stimulus is a glorious idea whose time has for now passed.

Much of Europe is facing impending fiscal pressures that mount by the day.  The issue there is not fiscal stimulus but “fiscal capacity,” meaning the ability of governments to take banks’ (bad) assets onto the public balance sheet, and the danger is that not all European governments will feel able to even let their “automatic stabilizers” work fully (i.e., government spending goes up and tax revenue goes down in recession, without any discretionary change in fiscal policy.)  There is currently hot debate on and around this issue at the European Commission.

Most emerging markets are similarly facing the prospect of difficulties in rolling over their sovereign debt – at least that part which is not placed directly with the domestic banking system.  And the global social safety net that wants to give them some general reassurance and specific fiscal encouragement in this situation – the IMF – looks sorely frayed.  Governments in middle income countries sensibly feel it is wiser to keep their fiscal powder dry.  If you think they are overly worried, look at the latest data from Singapore today – 16.9% decline in GDP (a subscription link, but the summary data are in the free part) at an annualized rate in the 4th quarter of 2008 compared with the 3rd quarter; think of Singapore as a bellweather for international trade in goods and services at this time.

The exception of course is China, where there is long-standing scope for a stimulus. But the Chinese economy is only about 6% of world GDP and their effective additional stimulus per year is likely to be around 3% of GDP.  3% of 6% is essentially the rounding error in measuring the world’s economy, and you are unlikely to notice the effects of China’s stimulus globally – although it might just keep oil prices higher than they would be otherwise.

So what should Mr Obama emphasize?  Given the latest economic and financial developments, three potential priorities stand out:

First, a world system-wide plan for recapitalizing banks and removing any toxic assets.  This has to be implemented country-by-country and of course plans should vary according to circumstances, but the cross-border nature of banking calls out for a more coordinated approach.  The US has always been a taste-setter in terms of what constitutes responsible economic policy, and Mr Obama should help persuade other leaders to adopt plans that broadly mirror his.  And if they don’t follow suit, their domestic financial situations may well become more complicated.

Second, in the global bank clean up, some countries will find themselves short of cash, particularly foreign currency.  Rather than risking more Iceland-type situations, the US should help arrange financial assistance where appropriate. This could be through the IMF but if there are historical objections (e.g., from Asia), alternatives can be arranged.  The use of regional arrangements – including in Asia – should be encouraged, rather than discouraged; this would be a major departure for US policy.

Third, the world needs to avoid deflation.  Moving the US to an explicit inflation target would help, particularly if the announcement is strongly supported (and explained) by the White House at the same time as there is dramatic further monetary easing among leading central banks.  The point would be to demonstrate that the US can and will keep its inflation rate above zero without depreciating the dollar – and thus without exacerbating the difficulties of our trading partners.  Remember that if countries do not want to cooperate with this approach, they risk appreciation of their currencies – this fear should concentrate minds in the eurozone.

This constitutes a major agenda with many difficult tasks.  President Obama not only can do it, but he should.  The alternative is a much deeper global recession with greater risks of further sovereign collapse – and many more American job losses.

5 responses to “Global Fiscal Stimulus: Should It Be An Obama Administration Priority?

  1. “The point would be to demonstrate that the US can and will keep its inflation rate above zero without depreciating the dollar”

    Sorry to seem dense but how could this be done? Increasing something like a sales tax?

  2. Dear Dr Johnson. :

    Perhaps you will have read the late Mancur Olson’s famous paper, Big Bills Left on the Sidewalk? Olson presents an economist, who when seeing a hundred-dollar bill on the sidewalk, says he is not picking it up because if it were real, someone else would already have picked it up. Is it possible that myopia is an economist’s genetic defect? Let me know if you can see ‘big bills’ in the ‘price differentials diplomacy’ outlined below. Thanks!

    Walton Cook

    Change! Would any U.S. leader, political or military, reject these economic, strategic and moral advantages: one new strategy–clean-cut, simple, highly profitable and diplomatic?

    …Superior returns-on-investment to U.S. ($150 billion annually)
    …Superior returns to other OECD nations ($160-180 billion annually)
    …Reduction in regional tensions (Afghanistan, Pakistan, India, Iran, Iraq and Latin America)
    …Reduction in loss of lives, military and civilian
    …Reduction in conflict levels
    …Reduction in terrorism levels
    …Reduction of military personnel needed
    …More effective use of both military and civilian personnel
    …Reduction in costs related to ISAF/NATO and U.S. military presence
    …Reduction in terrorist abilities to recruit among disenchanted youth
    …Reduction in terrorist ability to finance a WMD event
    …Increase of recipient nation ‘budget-support’ and better general economics.
    …Increase of recipient nation education
    …Increase of qualified expatriate returns to recipient nations
    …Increase in recipient nation’s health care and life expectancy
    …Increase in needed infrastructures for recipient nations
    …Reductions in tensions between EU and U.S
    …Supports Islamic religious and moral standards against narcotics
    …Gives many reasons for hope, winning hearts and minds–for all of us

    Q. How is this possible? A. Diplomatically! What drug crop farmers get paid $2 billion annually to grow costs richer OECD societies (for two drugs only, opiates and cocaine) $317 billion annually for using. This huge gap puts big bills on the sidewalk, (U.S. annual ‘societal cost’ is $150 billion of that OECD total.) We compensate Afghan (and Andean) farmers in full, and for 10 years, for not cultivating narcotics producing plants. In addition, we add $10 billion annually for 10 years to support democratic nation building. In that decade alone, the U.S. narcotics cost savings can be $1.5 trillion—a timely, cost free stimulus! And it is not only the U.S. that benefits from finding a new source of revenue, big bills found left on the sidewalk—but the entire world.

    There is no better platform than a moral high ground. This is a bold response, one that fulfills President Obama’s mantra of change. It restores American moral standing in the world and improves world economics at a time of crisis. Change requires creating new diplomatic incentives and reward systems. ‘Change We Can Believe In’ becomes a real result, not a T-shirt slogan. ‘It’s big bills, not small change to be left on the sidewalk!’

    Can political leadership lead the way to bold reform to restore America’s standing? Yes, I think they can, and must; because given easily weighed choices, policy mistakes are not inevitable. Without virtue, U.S. leadership will never regain its proper world standing. This is change that can begin immediately—there is no reason to wait.

    An important note: There is much more detail to our full proposal, of course, but not all that fits in a one page outline. We haven’t forgotten security issues, land reform, alternate crops, vocational education, infrastructure, rule-of-law or governance issues. Email me for greater detail at I hope to hear you views.

    Walton Cook authored the 2001 political-thriller, Buzzword and in 2002, Birthright of Freedom, on Social Security reform. He can be reached by phone at (814) 466-8747.

  3. Does the demand go away if we compensate Afghan and Andean farmers? And, if not, are there large barriers to entry to producers in other parts of the world which would try to meet demand? Maybe the Somali pirates might take up farming to avoid getting seasick. Farming illegal drugs is probably more profitable too. But, they could probably just threaten farming for ransom and get paid like Afghans and Andeans? Are there not at least 100 countries when people would rather get paid not to farm illegal crops…so 100 countries times, say $1bn…and we could pay everyone 100bn or more not to farm.


    I do agree with you to some extent,however,let me point out where I disagree with you.First,The hope that came with obama’s inauguration and his repeated calls for helping out the middle class and main street may hinder his political will to justify to the American populous that a trillion + of our money needs to be placed in a so-called bad bank to alleviate the calamity of all the toxic assets on banks who were responsible for this mess in the first place.While he is definitely popular now,I feel that he will not jeopardize the good will he has received so far by going down that route(even though it is probably the right way).

  5. Response to Ted Stevens

    I mentioned that the longer (50+ pages) version covered what can’t be done in a page. The penalties and disincentive to picking up cultivation elsewhere would be fatally severe, as the OECD sponsors are not concered with demand, only a lack of supply. If there are 100 nations that would like to take up the slack, that is a rich nation incentive to see that they develop much healthier long term prospects than drug cultivation. The Afghans and Andeans are the final nice guy alternatives, whether you consider that good or bad, as the next guy will not fare well. Without teeth, no diplomacy can be successful in the long run. One set of teeth would be biologial control, now far along in development.