Thinking through a global stimulus

Earlier this month, Harvard Kennedy School economist Dani Rodrik, who rose to prominence and a brilliantly quirky critic of the Washington Consensus, wrote a column about "the next capitalism," the political-economic regime that will emerge after the latest round of reforms and bailouts. His central and not unfamiliar point is that the "mixed-economy" model proved was badly undermined by globalization.

The postwar mixed economy was built for and operated at the level of nation-states, and required keeping the international economy at bay. ... The current crisis shows how far we have come from that model. Financial globalization, in particular, played havoc with the old rules. When Chinese-style capitalism met American-style capitalism, with few safety valves in place, it gave rise to an explosive mix. There were no protective mechanisms to prevent a global liquidity glut from developing, and then, in combination with US regulatory failings, from producing a spectacular housing boom and crash. Nor were there any international roadblocks to prevent the crisis from spreading from its epicentre.

And so, in Rodrik's view, we need a new regime.

This means imagining a better balance between markets and their supporting institutions at the global level. Sometimes, this will require extending institutions outward from nation states and strengthening global governance. At other times, it will mean preventing markets from expanding beyond the reach of institutions that must remain national. The right approach will differ across country groupings and among issue areas.

A new regime would come in handy right about now. As Boston University's Kevin P. Gallagher observes, stimulus efforts have been decidedly uneven across the world's major economies.

The G-20 issued a November 2008 call for a coordinated set of national responses to the global financial crisis and pledged that such responses would not be pro-cyclical in nature. With my graduate students at Boston University I conducted a survey of national stimulus packages and IMF rescue plans to examine whether these promises have been fulfilled. It seems they have not. [Link and emphasis addded.]

That is an understatement. Though Jeffrey Sachs has been critical of an overlarge stimulus package in the United States, he has called on emerging market economies, and India in particular, to take more aggressive stimulative steps. Given the parlous fiscal picture in India, you can see why they feel constrained. Last month, Robert Zoellick, the former Bush administration official turned World Bank president, squared the circle by calling for the North to back stimulus efforts in the South.

Starting with the United States, Mr. Obama should call for each developed country to pledge 0.7 percent of its stimulus package to a vulnerability fund for assisting developing countries that can't afford bailouts and deficits.

Sadly, it is easy to see the House Republicans turn this into an anti-stimulus talking point, despite the fact that grassroots evangelical conservatives might be receptive to the idea.

Matt Yglesias offered some thoughts on the need for a global stimulus in The American Prospect.

The world needs a coordinated response in which each country commits to undertake stimulus that's appropriate to the size of its economy and to its position in the global balance of trade. Further, we need a serious international commitment toward rebalancing in the medium-term -- to a weaker dollar, less U.S. consumption, more American exports, and less foreign economic dependence on the U.S. consumer market as an employment strategy.

But how might this kind of global coordination work in the future? One wonders if we'll need to institutionalize the G-20 along proto-EU lines, e.g., do the major economies need to start thinking about tax harmonization? The idea cuts against my instincts -- that decentralization and robust competition are a good thing -- but in light of the deteriorating fiscal picture, and in light of the new priorities of the Obama administration, this might be the only way to proceed.

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Reihan Salam is a policy advisor at Economics 21, a columnist for The Daily, and a blogger for National Review Online.

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