Just about everyone will tell you the Obama administration’s response to the recession has barely made a dent in the misery gripping the country. Every day, the euro zone wobbles on the precipice, one misstep away from dragging the global economy down into the terrifying depths below. In the United States, signs of a second recession are mounting, and the White House’s latest rescue plan, the American Jobs Act, has about as much chance of passing Congress as Michele Bachmann has of being elected president.
But it’s no surprise that none of the usual fixes have kept the crisis from getting worse, says a new paper published Wednesday by the New America Foundation. Written by Daniel Alpert, a partner at the investment bank Westwood Capital; Robert Hockett, a professor of law at Cornell University; and Nouriel Roubini, a professor of economics at New York University, the sweeping proposal, titled “The Way Forward,” argues that the economic crisis has been seriously misunderstood. Because the predicament we face is much more severe than generally believed, the traditional tricks used to pull the economy out of a slump—mostly fiscal stimulus through tax cuts and government spending—have been far too limited to make much of an impact. “They have not produced a sustainable recovery,” the authors write, adding that “there is good reason to worry that most of the measures tried so far … have reached the limits of their effectiveness.”
Policymakers and economists, according to the paper, have seen the crisis as a particularly severe “downturn”: uncomfortable, sure, but a natural part of the ebb and flow of capitalism. Alpert, Hockett, and Roubini think this view is catastrophically wrong. Instead, the current economic mess represents the simultaneous explosion of several trends that have radically destabilized the U.S. and Europe and shifted the advantage to “high-savings, export-oriented” economies such as China’s. “Fiscal demand stimulation,” things like Obama’s stimulus and his new jobs plan, are designed to give quick, temporary jolts to the economy. But they don’t stand a chance against the devastation wrought by the largest, most destructive global credit bubble in 70 years, and by the arrival of 2 billion new workers—mostly in Asia—in the world marketplace.
This confluence of destructive trends in Western economies and strong challenges posed by the rise of Eastern economies has brought the U.S. and Europe to a moment of truth in which political and monetary decisions will affect the lives of their citizens for decades. Alpert, Hockett, and Roubini argue that only an expansive program of forward-looking investment and backward-looking reform will change what has become a bleak long-term outlook. “Current economic conditions call for a much different kind of recovery program than those proposed or attempted thus far—one that is more sustained, more substantial, more concentrated, and more strategically aimed at creating new sources of growth,” they write.
The proposal is divided into three “pillars”:
1. An expansive five-year infrastructure investment. “U.S. public infrastructure is in a shambles, and is rapidly deteriorating,” the authors warn. We spend only 3 percent of our GDP on infrastructure, while China spends 9 percent, an investment that has vast economic returns. Aside from costing the economy billions in lost growth, many of the problems with American roads, tunnels, bridges, and other infrastructure are subject to “cost-acceleration,” meaning problems get exponentially more expensive to fix the longer repairs are postponed. Because so many Americans are unemployed and so many resources are idle right now, making the necessary restorations will never again be as cheap as it is now. The authors propose spending $1.2 trillion in addition to what the government has already budgeted to bring the total up to the bare minimum $2.2 trillion over the next five years.
2. Debt restructuring. The U.S. economy desperately needs to reduce debts at both the individual and the governmental level, or what the authors call “de-lever.” But saving to pay down debt contracts the economy and has the potential to push the recession so deep that paying off debt will be impossible. A complex, modern economy cannot save or cut its way out of a recession, and inflation—another way to reduce debts—has very dangerous risks. So the only option left is to restructure debt: debt will have to be adjusted and in some cases forgiven, and lenders will have to accept losses on loans they never should have made. Heavy indebtedness in relation to assets leads to the dire example the authors hope the U.S. can avoid—the “debt-deflationary” experience of modern Japan.
3. Global rebalancing. Alpert, Hockett, and Roubini say that none of the domestic reforms they advocate will matter “without complementary global reforms” by the G-20 and the International Monetary Fund, among others. The basic framework of these types of agreements has been international orthodoxy for a while: indebted nations like the U.S. and the U.K. need to reduce their deficits through tax increases and spending cuts, and high-surplus economies like China and Germany have to pick up the slack by expanding domestic demand. But the authors propose a more complex global rebalancing scheme, in which the U.S. shifts its demand from public consumption to more direct government-driven job creation, and emerging nations like China will be urged to continue their development into modern welfare states.
A program this large will inevitably raise concerns about the government bearing the financial burden, but the authors dismiss this as a “short-sighted” response to their proposal. “The program we are suggesting should be seen as taking advantage of a historically unique opportunity to put idle capital and labor to rebuild our economy at an extremely low cost and with potentially high returns, given the slack of the economy.” Because the economy is in such miserable shape, the government has a rare opportunity to remodel it cheaply—a project that would more than pay for itself when things, one hopes, get better.