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Not Doing Enough

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.