Writing in the New Republic, John Judis argues that the "fiscal equivalent of war" is necessary to prevent another Great Depression. In this excellent article, Judis makes some great points about the need for revitalize American manufacturing and to undertake large scale projects such as building high-speed rail systems. Judis presents a strong case for radical action by the incoming Obama Administration to avoid the coming economic disaster.
by John B. Judis
Why I worry that Obama doesn't realize just how bad things are.
The New Republic www.tnr.com
Friday, January 09, 2009
Does Barack Obama understand the seriousness of the economic crisis?
Yesterday, he laid out his economic agenda, and it was filled with
all sorts of important exhortations and proscriptions. He
appropriately condemned the "anything goes" policies of the last
administration. He declared that government is now the solution to
our woes, not the problem. Still, I worry that the president elect is
underestimating the problem he and the country faces.
We may not simply be facing a steep recession like that of the early
1980s, from which we can extricate ourselves in a year or two, but
something resembling the Great Depression of the 1930s. For starters,
the current crisis is global, which means that one part of the world
can't lift the other out of its misery; everyone will go down
together, which is what happened in the 1930s. Secondly, the downturn
has combined an unusual decline in the real economy--employment in
durable-goods manufacturing fell by 21.9 percent from 2000 to 2008--
with a financial crash precipitated by the bursting of the housing
bubble. The bubble resulted from an attempt to sustain growth and
employment in the face of an underlying decline, which, too, is what
happened in the late 1920s.
Over the past six decades, policymakers have used some tactics from
the Great Depression to quell recessions--such as spending on roads
and bridges to create jobs, transferring payments to raise consumer
demand, and infusing money into the credit system. But these stopgap
measures, which are at the heart of Obama's recovery program, may
prove inadequate.
There's much to like in Obama's plan. But there are two important
ways he may have to go further. Most economists agree that what
finally pulled the U.S. out of the Great Depression was military
spending for World War II. Some liberals argue that if the Roosevelt
administration had not abandoned a Keynesian stimulus strategy in
1937-38, the U.S. might have gotten out of the depression without a
war. But in 1936, unemployment was still at 16.9 percent; by 1942,
after two years of war spending, it was 4.7 percent, strongly
indicating that it was war spending that did it. I am not suggesting
that the United States start a world war in order to solve the
world's economic problem. But I am suggesting a strategy that could
be called the fiscal equivalent of war.
It would consist not merely of updating or repairing the nation's
infrastructure, but in undertaking massive new investments that would
expand the scope of American industry, and address other urgent
problems in the process: global warming, over-reliance on petroleum,
and the need to revive America's domestic manufacturing capabilities--
not just to provide jobs, but also to provide tradeable goods that
can reduce the country's current account deficit.
One area that is ripe for such investment--and that is not, from what
I have seen, a declared priority of the Obama administration--is high-
speed rail. Amtrak's Acela trains--the closest thing we have to one--
average less than 100 mph between Washington D.C. and Boston, whereas
trains in Western Europe and Japan go more than twice as fast. Many
of them also run on electricity. They would be the most energy-
efficient and quickest means of getting between places like Boston
and New York, or Los Angeles and San Francisco. But they would
require a massive investment. For instance, installing high-speed
rail in the Northeast corridor could cost about $32 billion, while
California's high-speed rail system would require up to $40 billion.
A system that would address the other areas of the country could
easily raise the cost to the hundreds of billions. The House
transportation and infrastructure committee has currently proposed $5
billion in stimulus funds for intercity rail--not even a down payment
on what it would cost to convert the U.S. to high-speed rail.
Investing in high-speed rails would be very expensive, but unlike tax
cuts--the benefits of which can be siphoned off in the purchase of
imported goods--the money spent would go directly to reviving
American industry and improving the country's trade balance. That
doesn't just mean jobs creating dedicated tracks or new rail
stations: Though the U.S. abandoned train manufacturing decades ago
to the French, Germans, Canadians, and Japanese, this kind of
production could be undertaken by our ailing auto companies or
aircraft companies--if the federal and state governments were to
place orders. And building trains that would run on electricity would
be a paradigmatic example of the "green jobs" that Obama often touts.
Though a massive investment in high-speed rail brings its own set of
complications, it's worth keeping these kind of examples in mind when
one hears from the Obama people that they can't find sufficient
infrastructure projects to fund. The question I would pose is this:
Are we not at some point going to have to go beyond repairing roads
and bridges in our conception of public spending and public works,
and contemplate the kind of ambitious industrial expenditures that
the country made on war production in 1941?
The second arena that needs radical action from Obama is
international. One reason that the depression of the 1930s endured
and deepened was because the international monetary system, which had
been based on gold, broke down; and one reason that the world economy
enjoyed reasonable prosperity between 1945 and 1971 was because the
International Monetary Fund--created as part of the Bretton Woods
system in 1944--ensured a measure of international monetary
stability. Countries controlled their capital inflow and outflow, and
the IMF oversaw--if imperfectly--surpluses and deficits, and
devaluations and revaluations. Currency exchange was regulated by
nations, not by private companies or speculators. And the only
country that ran a large surplus after World War II--the United
States--took it upon itself to spend much of it helping the other
countries to revive their industries.
Since 1971, the breakdown of Bretton Woods has given way to a
perverse anti-system that combines floating rates, fuelled by
speculation, and behind-the-scenes currency manipulation by counties
like China and Japan that don't want their exports priced out of
foreign markets. The result, as Martin Wolf and others have argued,
has been decades of financial crises, which began on the fringes of
the system but have now engulfed the center. This system, which
features huge surpluses in China and Japan, and huge deficits in the
United States, has not proven viable, and is breaking down right now.
If China is "losing [its] taste for debt from the U.S.," as a recent
New York Times story reported, the U.S. will have trouble financing
its deficit expenditures. Interest rates will go up, investment will
go down, income will sink, and more Americans will be out of jobs; on
the other side of the Pacific, China will be able to sell less goods
to the U.S., its investment will fall, its workers will be jobless,
and so on. It's not a pretty picture.
What's needed, it appears, is a new international system that will
prevent the kind of global imbalances that are plaguing the current
system. Like Bretton Woods worked initially in practice, it will
place the onus of regulating these imbalances on countries running
surpluses, not deficits. It would also permit countries to develop
economic strategies without fearing that speculators would create a
run on their currency. Larry Summers and Tim Geithner are well-suited
to work out the details of such broad reform, but Obama has yet to
make this a priority within his economic policy. The U.S. also needs
to begin working on its own strategy to reduce its current account
deficits. That may require not only very large government subsidies
to manufacturing industries, but also some currency manipulation of
our own to get the price of our goods competitive with those produced
in Asia.
Obama is certainly right to abandon the "anything goes" mentality of
the Bush administration and to promote an $800 billion stimulus
program. But to reverse to current economic collapse, the new
administration may have to go even farther than this in the direction
of a fiscal equivalent of war and a new Bretton Woods.
John B. Judis is a senior editor of The New Republic and a visiting
scholar at the Carnegie Endowment for International Peace.
http://www.tnr.com/politics/story.html?id=611d21dd-edb6-45f8-802c-568e35493234
.jpg)
