Nations Spend in Tandem To Stall Global Recession

By Anthony Faiola
Washington Post Staff Writer
Saturday, November 29, 2008

In a bid to jump-start the beleaguered global economy, countries around the world are introducing massive public spending programs aimed at creating millions of jobs, boosting the use of green energy and modernizing infrastructure in a way that could transform urban and rural landscapes.

The viability of some of the plans remains unclear. But observers say the number of countries moving in tandem underscores the perceived severity of the coming global recession and the view that governments must at least temporarily pick up the slack as the hard-hit private sector sheds jobs and cuts spending.

It is time "to invest massively in infrastructure, in research, in innovation, in education, in training people, because it is now or never," French President Nicolas Sarkozy said in a recent public address.

World leaders are pursuing a variety of strategies to tame the economic crisis, including moves to unclog credit markets, strengthen financial institutions and ease monetary policy. But fiscal stimulus packages, in particular, have emerged as a favorite tool of policymakers. Some countries' plans are particularly bold: China is accelerating projects to build more nuclear power plants and a vast natural gas pipeline; Italy may erect the first bridge connecting Sicily to mainland Europe.

This past week, the European Union called for member countries to spend $258 billion to spur growth; France, one of the bloc's largest economies, is expected to announce a huge package next week. Britain has already unveiled a $30 billion proposal, and Spain a $14 billion plan.

In Washington, President-elect Barack Obama has said his administration would create or preserve 2.5 million jobs over three years. While he hasn't said how much his "economic recovery plan" would cost, some lawmakers have floated the possibility of a package of as much as $700 billion.

Worldwide, economists say, the increase in public spending, if executed wisely, could add as much as 1 or 2 percent to global growth next year, perhaps easing recessions in the United States, Europe and Japan while cushioning the slowdown in the developing world, which had until recently seen red-hot growth.

Yet if the promise of combating a global recession with public funds is big, so too, experts say, is the danger that billions worth of taxpayers' dollars could be spent in vain.

Analysts point out that the pitfalls of growth-by-spending were exposed by Japan, which launched a huge infrastructure program in the 1990s. To spur expansion after stock market and real estate crashes, the Tokyo government spent billions of dollars on public works projects. Those projects not only failed to prevent a decade-long economic slump, but produced a herd of white elephants including new, but little-used airports and ports, as well as a $250 million bridge to Kourijima Island. Population: 361.

"There is a huge danger of bridges to nowhere, and as Japan showed us, that is no way to get out of a recession," said Grant Aldonas, a former high-level Bush administration trade official and a senior fellow at the Center for Strategic and International Studies.

While China and Japan enjoy a surplus of reserves, spending increases will drive the United States, Britain and many other European countries deeper into debt. The cost of raising cash on world markets by some rich nations, such as Ireland, has surged as investors grow increasingly skeptical of their fiscal health, limiting their options to spend more now.

"In normal times, we would be telling countries, 'Please reduce your debt,' " said Olivier Blanchard, chief economist at the International Monetary Fund, which has taken the unusual step of calling on nations to raise public spending by 2 percent of gross domestic product to combat a global recession. "But these are not normal times."

A snapshot of how governments plan to increase spending is emerging. Those plans include not only the building of more bridges and roads but the introduction of measures to put more cash into the hands of strapped consumers.

The Federal Reserve and Treasury Department have moved to boost consumer spending and lower home mortgage rates, committing as much as $800 billion to make it easier for Americans to borrow money for cars, tuition and homes. The British said they would slash the national sales tax to 15 percent from 17.5 percent. The Germans are set to offer temporary tax breaks to consumers buying cars or renovating homes. The Japanese are giving out cash rebates to taxpayers.

Some of the projects being proposed are preexisting infrastructure plans that are now being accelerated.

Nicholas R. Lardy, a senior fellow at the Peterson Institute for International Economics, estimates that only about half of the "new projects" in Beijing's $586 billion package amount to previously unplanned spending. "But that is still a great deal of money," Lardy said. That figure also does not include a number of measures China is taking to stimulate consumer demand, such as a recently announced $16 monthly increase in social security benefits for more than 40 million Chinese.

A number of countries are gearing up for projects that offer long-term benefits, both economic and environmental. In a move that may offer a guide to helping the ailing Big Three automakers in Detroit, the French are in the early stages of plans to assist their hard-hit auto industry by awarding government grants to boost research into hybrid and battery-power technology.

In comments last week, Obama suggested that an expansion of wind and solar power generation would be part of his stimulus plans. Such targeted spending may be able to spur private-sector job growth. Last month, Flabeg, a German maker of solar mirrors, announced plans to create 300 manufacturing jobs in the Pennsylvania rust belt. The move follows the arrival of a Spanish company, Gamesa Technology, that took over an abandoned steel plant in the state last year to make wind turbines, creating 850 new jobs.

Obama also cited a plan being circulated by environmental groups that would offer government loans to help schools update their heating and cooling systems, creating quick construction jobs and stimulating demand for building materials. Those schools would theoretically save enough money in the long run to pay back federal loans.

"I think the fervor in which [the Obama team] is seeking suggestions right now tells me that this kind of spending is something they are very serious about," said Carl Pope, executive director of the Sierra Club.

Critics say some governments, however, may not be spending enough to stimulate growth.

In its call for public spending, the E.U. said member countries should spend at least 1.5 percent of their gross domestic products on fiscal stimulus. That's short of the 2 percent in fresh spending recommended by the IMF. By comparison, if the U.S. Congress were to approve a fiscal stimulus package in the ballpark of, say, $500 billion, it would represent roughly 3.5 percent of GDP in the United States.

Some countries in Europe, such as Germany, appear more concerned about overspending. That is at odds with the leadership in France, where Sarkozy has seen the crisis as an opportunity to boost the role of government.

"My sense is that yes, the fiscal spending will help, and we are seeing governments moving this way," Blanchard said. "As to whether this is on the dimensions of a [global] New Deal, probably not yet, but it may well get there."