Samuelson: It's Really a Global Crisis

We should all want President Obama to succeed in reviving the economy, but that shouldn't obscure the long odds he faces. We need to recognize that we're not grappling with a single economic crisis. We face three separate crises, which are interwoven but which are also distinct and different. The solution to any one of them won't automatically resuscitate the larger economy if the others remain untreated and unchanged.

Here are the three.

FIRST: the collapse of consumer spending. American consumers represent 70 percent of the economy. Traumatized by plunging home values and stock prices—which have shaved at least $7 trillion from personal wealth—they've curbed spending and increased saving. That's led directly to layoffs and higher unemployment. In December, auto and light-truck sales were down 36 percent from a year earlier.

SECOND: the financial crisis. Lending has atrophied, depriving the economy of the credit to finance new factories, homes and costly consumer purchases (cars, appliances). The deepest cuts involve "securitization"—the sale of bonds. Investors have gone on strike. In 2008, the issuance of investment-grade corporate bonds dropped 35 percent, reports Thomson Financial. Bonds backing credit-card loans fell 41 percent, and those backing car loans, 51 percent.

THIRD: the trade crisis. There's a mismatch between national spending and saving patterns. High-saving Asian countries relied on export-led growth that, in turn, required American consumers to spend ever-larger shares of their income. Huge trade imbalances resulted: U.S. deficits, Asian surpluses. But as Americans shift from spending to saving, this pattern is no longer sustainable. Asia is tumbling into recession. China may grow 6 percent or less in 2009, half its 2007 rate.

Overcoming any of these crises alone would be daunting. Together, they're the economic equivalent of a combined triathlon and Tour de France.

Consider consumer spending. The proposed remedy is the "economic stimulus" plan. On paper, this seems sensible. If government doesn't offset declines in consumer spending, housing and business investment, might not the economy spiral downward for several years? Last week, House committees considered an $825 billion package, split between $550 billion in additional spending and $275 billion in tax cuts.

The trouble is that, in practice, the program could disappoint. Parts of the House package look like a giant political slush fund, with money sprinkled to dozens of programs. There's $50 million for the National Endowment for the Arts, $200 million for the Teacher Incentive Fund and $15.6 billion for increased Pell Grants to college students. Some of these proposals, whatever their other merits, won't produce many new jobs.

Another problem: construction spending—for schools, clinics, roads—may start so slowly that there's little immediate boost for the $14 trillion economy. The Congressional Budget Office examined $356 billion in spending proposals and concluded that only 7 percent would be spent in 2009 and 31 percent in 2010.

But suppose the stimulus is a smashing success. It cushions the recession. Unemployment (now 7.2 percent) stops rising at, say, 8 percent instead of 10 percent. Still, a temporary stimulus can't fuel a permanent recovery. That requires, among other things, a strong financial system to supply the credit needs of an expanding economy. How we get that isn't clear.

The pillars of a successful financial system have crumbled: the ability to assess risk, adequate capital to absorb losses and trust among the players—banks, investors, traders. A common denominator in these ills has been the consistent underestimation of losses. Economists at Goldman Sachs now believe that worldwide losses on mortgages, bonds and consumer and business loans total $2.1 trillion, with $962 billion belonging to U.S. banks. In March, the Goldman estimate was about half that. Economist Nouriel Roubini's estimate of losses is higher than Goldman's.

All the new credit programs—the Treasury's Troubled Asset Relief Program and various Federal Reserve lending facilities—aim at counteracting these problems by providing government money and government guarantees. Probably Obama will expand these efforts, despite some obvious problems: if government oversight becomes too intrusive or punitive, it might deter much-needed infusions of private capital into banks. Again, let's assume Obama's policies surmount the obstacles. Credit flows and confidence rises.

Even then, we have no assurance of a vigorous recovery, because—at bottom—the economic crisis is global in scope. The old trading patterns simply won't work anymore. If China and other Asian nations try to export their way out of trouble, they're likely to be disappointed. Any import surge into the United States would weaken an incipient American recovery and possibly trigger a protectionist reaction. Down that path lies tit-for-tat economic nationalism that might harm everyone. Growing trade and investment barriers would shrink markets.

Indeed, if the rest of the world doesn't buy more from America, any U.S. recovery may be feeble. What's needed are policies that correct the underlying imbalances in spending and saving. As Americans save more of their incomes, Asians should save less and spend more, so that they rely more on satisfying their own wants to generate jobs and economic growth as opposed to exports. The great trade discrepancies would shrink. Americans would export more, import less; Asians would do the opposite.

But this sort of transformation requires basic political changes in Asia to complement changes in U.S. policies. Whether China and other Asian societies can make those changes is unclear. The implications are sobering. The success of Obama's policies lies, to a considerable extent, outside Obama's hands.