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It's a Global Economic Meltdown -- Why Are We Shouldering Most of the Burden of Bailing Out the World?

We need to fill the biggest hole in the current global response to the deepening recession: the lack of coordinated international fiscal policy.
 
 
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According to its critics, the "Buy American" provision of President Obama's economic recovery package will set off a vicious cycle of 1930s-style retaliatory protectionist measures that will only push us and the rest of the world deeper into recession. Concern about a return to a version of "beggar thy neighbor" retaliatory trade policies, however, completely misses the real problem facing the global economy today: international foot-dragging on stimulus that has given birth to "beggar thy neighbor" fiscal policy.

As the United States undertakes a major stimulus package in order to pull the U.S. and world economies out of a tailspin, many of our trading partners are implicitly relying on U.S. fiscal stimulus to save the world economy, so they don't have to. A simple tweak to the controversial "Buy American" clause, however, could actually help to turn this all around.

The U.S. stimulus currently under consideration weighs in at about 2.9 percent of GDP per year for two years. This is almost certainly well short of what we'll need to right the economy, but even this level of stimulus is already substantially more than what most of our major trading partners have put on the table.

The European Union (EU) has announced a coordinated plan for a one-time expenditure of about 1.5 percent of its collective GDP. Some EU countries will top up these EU-wide expenditures, but taken together, the European economies are still lagging far behind the United States. 

Germany, for example, is on course to spend about 1.25 percent of its GDP on stimulus in 2009, followed by an additional 0.5 percent of GDP in 2010. France has committed to spend not quite 0.7 percent of GDP per year this year and next year. Even giving credit to Germany or France for their share of the combined EU spending, the average annual level of stimulus over the next two years in both countries amounts to only about 1.5 percent of GDP per year, barely half the size of the U.S. plan.

The stimulus package proposed by our biggest trading partner, Canada, meanwhile is even less generous. Canada is planning to spend only 1.2 percent of GDP and only for one year.

China is one of the few U.S. trading partners that is rising to the current fiscal challenge. The Chinese will use some of their massive reserves to fund a stimulus equal to almost 7 percent of GDP per year in 2009 and 2010.

This is exactly where a modified "Buy American" clause can help. The President could rewrite the current "Buy American" restriction to allow U.S. recovery funds to be spent on U.S. goods -- as well as those from any country that passes an economic stimulus program that is at least as large (as a percent of their national GDP) as the package ultimately passed here. Call it a "Buy Keynesian" plan.

The "Buy Keynesian" clause would let the President thread the political needle. He gets to keep the "Buy American" provision that many taxpayers (and Senators) are demanding. And, when foreign leaders accuse him of protectionism, he can rightly respond that their goods have been excluded not because they are foreign, but because their countries aren't pulling their weight in the international recovery.

More importantly, a Keynesian clause would increase the effectiveness of both the U.S. and foreign stimulus packages by encouraging a virtuous circle of fiscal stimulus. Access to the U.S. stimulus expenditures increases the incentives for the rest of the world to carry out stimulus of their own. The larger the scale of these international efforts, the more effective each national stimulus plan will be.

As the world's largest economy -- with a voracious appetite for imports -- the United States is uniquely placed to lead the world out of a recession. Replacing "Buy American" with "Buy Keynesian" could actually go a long way toward filling the biggest hole in the current global response to the deepening recession: the lack of coordinated international fiscal policy.

John Schmitt is a Senior Economist at the Center for Economic and Policy Research (CEPR). He has worked as a consultant for national and international organizations including the American Center for International Labor Solidarity, the Global Policy Network, the International Labor Organization, the United Nations Economic Commission for Latin America.
 
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