One year ago, Brookings experts wrote a series of 12 memos to the incoming president on the most pressing policy issues facing the country. Now they assess the administration’s progress on those issues in The Status Report, a daily series of commentary with video to be featured in POLITICO’s Arena. Kemal Dervis and Eswar Prasad give President Obama a B+ for what the new administration accomplished on global economic policy during the crisis, but temper the high grade with an incomplete for the big tasks that lie ahead, partly the result of problems created by the very policies that got us out of the crisis.
Leadership in Restoring Global Financial Stability: B+
President Obama has shown leadership domestically and globally by undertaking decisive actions to pull the U.S. and global economies back from the edge of the abyss, challenges described by Eswar in a memo to the president-elect last January. But a rocky road lies ahead before we see the recovery entrenched and the global financial system back on the path to stability.
Domestically, the administration deserves credit, given the nature and size of the economic crisis, for taking decisive and massive action to prevent the U.S. economy from sliding into a deeper recession and instead move towards a recovery. Some mistakes were certainly made in getting the financial system back on its feet, but the combination of direct intervention in the financial sector, low interest rates, monetary “easing” and strong fiscal stimulus was crucial in avoiding a more serious crisis. While temporary nationalization of the weakest financial institutions was an alternative that could have sent a stronger message that the cost of huge mistakes by private actors would have to be more fully borne by shareholders and managers, this radical approach probably would have faced technical obstacles and resistance from Congress.
Internationally, the global nature of the crisis necessitated a multilateral response and a more robust international policy architecture. This was where the Obama administration made major strides. It took the initiative to make the G-20 into a new, enlarged “steering group” for the global economy, recognizing that the G-8 no longer reflected the nature and structure of the world economy. This was a bold and significant move to bring a major group of emerging market countries to the “head table” of global collective action. This reconfiguration while not just supported by the U.S., could not have become a reality without a strong U.S. push.
President Obama and his Sherpa played key roles in making the London and Pittsburgh G-20 summits into more than just photo opportunities, laying the foundation for much more effective global collective action in a cooperative framework that includes China, India, Brazil and other key emerging markets. Obama championed a substantial strengthening of the IMF’s financial capacity, which helped restore confidence in its ability to weather the crisis. Incorporating key emerging markets into an expanded Financial Stability Board will also have important implications for global financial regulation. However, the U.S. failed to deliver meaningful and decisive progress on a new global climate change framework despite pledging to raise substantial funds to help alleviate the climate financing needs of developing countries.
Broadly speaking though, both the domestic and international actions designed to restore financial stability and limit the existing damage of an inherited financial crisis have been positive and successful.
Still, huge challenges lie ahead. The consequences of policies undertaken during the crisis have cast a long shadow on the U.S. economy. Action now seems stalled on many fronts, creating a dangerous loss of momentum and progress on reforms to stabilize the macroeconomy and financial system.
Therefore, on the domestic front, the administration must back up its rhetoric on reigning in budget deficits with a clear plan. President Obama must begin preparing the U.S. body politic for tough measures to tackle the massive growing deficit and public debt, such as a value-added tax on consumption. The proposal to mobilize greater fiscal revenue from the financial sector could also contribute to an overall improvement in fiscal balance. The threat is real and long term in nature, the response must be comprehensive and effective, but it should not, and need not, be formulated in a panic mode.
On the global stage, the U.S. seems to be less in the forefront of the international reform efforts as compared to where it was during a very pro-active period before the London meeting. In tackling global imbalances, the Obama administration must lead by example—mainly by policies that encourage a long-term increase in private savings and by bringing its fiscal deficit under control, as this is legitimately seen by other countries as a destabilizing factor in international financial markets.
The U.S. should find ways to add teeth to the G-20 proposal for a global framework for sustainable and balanced development, which the G-20 has asked the IMF to help facilitate. It is also important for the administration to push for bolder governance reforms at the World Bank and IMF, along with a capital increase for the World Bank and some other development banks, at minimal cost to the U.S. taxpayer.
Finally, Obama’s focus on stimulating U.S. job growth is welcome and necessary. The message should be loud and clear that a global economy that does not deliver decent jobs and increases in median incomes of American citizens and citizens around the world cannot be considered as successful, even if it delivers rapid GDP growth. The fruits of growth will have to be much more equitably distributed than in the past decade. Ultimately, the huge potential benefits of global trade and investment flows can only be realized and receive political support if the large majority of citizens are actual beneficiaries of the globalization process.