To me, I think the scariest part of the current recession is its inherently global nature. For all the sturm und drang of our domestic political debate, there’s no way for us to get back to economic health without other people reviving their economies and consuming more. Given our massive pre-crash trade deficit, it’s just impossible to see adequate demand coming from the U.S. consumer. It needs to come from the countries that, pre-crash, were running big surpluses. Rich surplus countries like Japan and Germany need to, instead, run at least modest deficits. And a poor high-growth countries like China ought to running big deficits as foreign capital finances its development. That’s the way it’s supposed to work. But instead before the crash capital was basically flowing uphill.
Unfortunately, to do this right means you need actual international coordination of stimulus measures, the subject of my new TAP piece. There was some initial talk of this when it looked like Germany wasn’t going to do any stimulus at all. Then folks got sucked into our congressional debate, and Germany agreed to a modest stimulus. But that’s probably not good enough. They need to do a stimulus that’s really big relative to their GDP, and that needs to be part of a larger global coordination that has all the non-trivial players pulling in the same direction. There’s no precedent for that kind of thing. But the alternatives that there are precedent for—the Long Depression of the late-19th century and the disastrous war that ended the Great Depression—are really terrible.