Sherle R.
Schwenninger is director of the Economic Growth Program at the New America Foundation, a senior fellow at the
World Policy Institute, and was the founding editor of World Policy Journal.
How to Save the World
Sherle R. Schwenninger
Dear Mr. President: By now, you are painfully
aware of the gravity of the economic crisis
you will soon inherit. It is clear that this is
no ordinary business-cycle downturn. The
crisis is the product of the bursting of one
of the largest credit and asset bubbles in
modern financial history that has set off a
painful deleveraging process in America’s
household and financial sectors. This de-
leveraging process has now spread across
other sectors of the world economy. In fact,
few countries have been immune from
falling asset prices and collapsing financial
institutions, or from falling demand for
their goods and services. This is the stuff
great depressions are made of, and that is
why Time magazine devoted its November
24 cover to you, Mr. President, in the guise
of FDR.
Unfortunately, the outgoing administra-
tion was often one step behind the curve in
dealing with this fast-moving crisis. You
will therefore need to anticipate the condi-
tion the economy will be in when you take
office and the risks that require your urgent
attention. Over the past several months, the
Federal Reserve and Treasury have under-
taken extraordinary measures—from extend-
ing federal guarantees to most parts of the
financial system to direct capital injections
into the nation’s leading banks—to unfreeze
© 2008 World Policy Institute
the credit markets and prevent the collapse
of the nation’s economy. The European Cen-
tral Bank and the central banks of Britain,
Switzerland, Japan, and other countries have
also stepped forward to inject money into
the world’s banking systems. Nearly all of
the G-20 economies have approved some
form of stimulus to try to offset the down-
ward pressure on their economies.
Yet, as you know, these measures have
not been enough to stop the rapid deteriora-
tion of the economy. By the time you take
office, unemployment will have ticked up
another point or two; more businesses, in-
cluding U.S. automakers, will be on the
brink of failure; and budget-strapped state
and local governments will have been forced
to lay off more people and cut social servi-
ces. Thus, there is a risk that cascading job
losses and bankruptcies could further desta-
bilize the American financial system, adding
to the danger of deflation taking hold.
What is worse, the crisis will have taken its
toll on a number of emerging and newly de-
veloped economies, requiring more interna-
tional rescues of the kind that have already
been undertaken in the cases of Iceland and
Hungary.
It is therefore not too much of an exag-
geration to say that the fate of the world
economy rests on the recovery program
3
you pursue upon taking office. It also de-
pends upon the international cooperation
you are able to organize around a coordi-
nated global economic recovery.
As you surely recognize, this crisis is
increasingly global in scope and is clearly
too big for the United States to handle
alone. We will need to see more coordinated
rate cuts, financial injections, sovereign
debt rescues, and fiscal policy expansion
on the part of G-20 governments if we
hope to avoid a deep and protracted world
recession—if not a global depression. At
the same time, you must design your eco-
nomic recovery program not just with the
goal of preventing the worst from happen-
ing. You must also structure the program
with the objective of putting the American
and world economies onto a new, more-
sustainable growth path—one that does
not depend upon debt-financed consump-
tion in the United States to drive global
economic growth, as it has over the past
decade. In this sense, you will be judged not
only on whether you have avoided the worst
but also on whether your program has made
the U.S. and world economies stronger and
more productive in the longer term.
Redesigning Recovery
The two-year economic recovery package
you have broadly outlined—extension of
unemployment benefits, assistance to state
and local governments, middle-class tax
cuts, incentives for green technology, and
some infrastructure spending—is a clear
improvement over the first stimulus pack-
age Congress passed in February 2008. Yet
it still falls far short of what is needed given
the nature of the economic crisis.
To begin with, your program is too
short in duration to generate a sustainable
recovery. I know you have been told by your
economic advisers that stimulus is best if it
is made temporary, especially if you are con-
cerned about inflation down the road. But
4 WORLD POLICY JOURNAL • WINTER 2008/09
as the experience of Japan in the 1990s sug-
gests, economies suffering from burst credit
and housing bubbles tend to relapse once
the short-term stimulus is taken away.
This recession could be particularly long
because many American households are seri-
ously over-leveraged and are experiencing a
decline in the value of their homes. With
home prices falling, many households are no
longer able to maintain consumption levels
by tapping home equity as they have in the
past. Moreover, with unemployment rising,
they cannot easily or quickly replace the
credit they previously relied on with new
sources of income. Thus they will have no
choice but to cut consumption and increase
savings. In light of the fact that housing
markets by their nature are slow to correct,
this household deleveraging process could
take years to play out. Household consump-
tion, which at its peak accounted for more
than 70 percent of the economy, may thus
be a drag for some time to come—at least
until wages rise or home values begin to
increase again.
Second, your program, although bigger
than the initial proposal, is still too modest
to make a substantial difference to an econo-
my damaged by the unwinding of the burst-
ing of the housing and credit bubbles. You
should note that economists as politically
diverse as Paul Krugman, Stephen Roach,
and Ben Stein agree that you should err on
the side of overkill and that a massive recov-
ery package is called for. Even the bursting
of the tech bubble in April 2000, which had
relatively little impact on most Americans
and resulted in only a modest increase in
unemployment, required a fiscal stimulus
the equivalent of more than 6 percent of
gross domestic product (GDP) (measured by
the increase in the budget deficit) over a
three-year period, in addition to 16 cuts in
the federal funds rates to 1 percent. In light
of the much larger effect housing and credit
has on consumption and employment, the
unwinding of the housing and credit bub-
bles will require an even larger stimulus.
Third, even with the addition of incen-
tives for green technology and increased
infrastructure spending, your package is
still too heavily weighted toward short-term
consumption and not enough on job-
creating investment. Thus, to the extent
your package is successful, it will merely re-
inforce a suboptimal and ultimately unsus-
tainable pattern of economic growth that
over the past decade
has been too depen-
dent on debt-financed
consumption and in-
flated asset prices. The
root cause of this sub-
optimal pattern of
“ The root cause of this suboptimal
pattern of growth has been the excess
savings generated by Asian export
growth has been the
excess savings gener-
ated by the Asian ex-
economies and petro-dollar states.
port economies and the petro-dollar states of
the Persian Gulf, which were recycled into
the U.S. financial system, fueling the credit
and housing bubbles. The housing bubble
in turn helped inflate consumption, as U.S.
households took advantage of poorly regu-
lated new financial instruments to purchase
more expensive homes and tap rising home
equity. Domestic consumption in turn
helped drive Asian export growth, resulting
in even larger trade surpluses. The weakness
in this pattern of economic growth lay in
the fact that U.S. consumption was made
possible not by real wage and income gains
but by unsustainable increases in home
prices and household debt.
Seen from this perspective, the bursting
of the housing and credit bubbles was a nec-
essary, albeit painful, adjustment in the pat-
tern of U.S. and world economic growth.
The goal of your recovery program, there-
fore, must not be to recreate this pattern
with more short-term, consumer-oriented
stimulus but to steer the economy onto a
more sustainable growth path. Future eco-
How to Save the World
nomic growth should be driven less by
debt-financed consumption and more by
investment that leads to the creation of
good jobs and rising wages, and by rising
exports to those economies that have under-
consumed for much of the past decade.
A new economic recovery program
would obviously include measures such as
the extension of unemployment insurance
or assistance to state and local governments
to ease the adjustment many households
are now experiencing. But these worth-
”
while measures are no substitute for what
must be the overriding goal of your eco-
nomic recovery program, namely finding a
big, new source of economic growth that
can replace personal consumption as the
main driver of economic growth and job
creation in the short term and that, over
the medium term, can lead to higher wages
and incomes to support increased household
consumption.
There are two areas of enormous
pent-up demand on which such a recovery
program can be based. The first and most
important is the critical U.S. need for
public infrastructure improvements in
everything from roads and bridges to
broadband and air traffic control systems
to new energy infrastructure. We not only
need to repair large parts of our existing
basic infrastructure but also put in place
the twenty-first century infrastructure for a
more energy-efficient and technologically
advanced society. This project, entailing
several trillion dollars in new government
5
spending over the next decade, would pro-
vide millions of new jobs for American
workers.
The other significant source of potential
growth is the enormous pent-up demand in
China and other emerging economies for
both consumer goods and the productivity-
enhancing and energy-efficient technology
needed to sustain both corporate profitabil-
ity and rising living standards. For years
now, these economies have suppressed do-
mestic demand at the expense of the living
standards of their workers and have been
able to use low wages to offset the rising
cost of energy and other materials. But with
the American consumer laid low by the
housing and credit crisis, relying on exports
is no longer a viable growth strategy. These
economies will have to do more to generate
their own consumer demand to offset the
slower rate of consumption in the United
States. And with higher energy prices loom-
ing again in the future, they must also do
more to increase productivity and energy
efficiency by increasing their investments
in technology.
This shift in growth on the part
of high-savings but energy-inefficient
economies like China will increase demand
for U.S. goods and services, allowing the
United States to improve its trade balance
and remove a drag on economic growth.
In particular, it will help fuel demand for
American technology across a broad range
of new growth clusters where U.S. compa-
nies enjoy a leadership position or, with new
investment, might assume such a role in the
future. These areas include not just such tra-
ditional American strengths as aerospace,
information technology, and networking,
but emerging growth areas associated with
what might be called the “triple green
revolution” in agriculture, efficiency-
enhancing clean technology, and renewable
energy sources. Your recovery program,
Mr. President, should be designed with
6 WORLD POLICY JOURNAL • WINTER 2008/09
this ultimate goal of spurring demand for
American technology.
Public Infrastructure Investment
The main pillar of your economic recovery
program must be a massive increase in
public infrastructure investment, in part
because it would provide a sustained boost
to job creation and also the foundation for
private investment in the productive econ-
omy. There is increasing public recognition
that two decades of underinvestment in
public infrastructure has created a backlog
of public infrastructure needs that is under-
mining our economy’s efficiency and costing
us billions in lost income and economic
growth. The American Society of Civil
Engineers estimates that we need to spend
$1.6 trillion over the next five years to
bring our basic infrastructure—roads, rail,
bridges, mass transit—up to world stan-
dards. In addition, we need to spend size-
able sums in newer areas of infrastructure,
like broadband access and new energy
infrastructure for wind, solar, and clean
coal.
Public investment of this magnitude
would give a significant boost to the econo-
my, filling the gap left by the fall off in
housing construction and consumer spend-
ing, while laying the foundation for expand-
ed productivity. Indeed, public infrastruc-
ture investment is the most effective way to
increase demand and investment at the same
time, and thus the best way to counter an
economic slowdown caused by the unwind-
ing of the housing and credit bubbles. If, in
spite of low interest rates, companies will
not commit to more investment spending
because of weak demand or uncertainty, the
best way to jump-start investment will be
to do so by increasing public outlays. Public
investment in turn will help stimulate new
private investment by increasing the effi-
ciency and potential returns, and by adding
demand to the overall economy.
 Public infrastructure investment would
have the advantage of creating more jobs,
particularly more good jobs, and thus would
help counter the negative employment ef-
fects of the collapsing housing bubble. For
example, the U.S. Department of Trans-
portation estimates that for every $1 billion
in federal highway investment, 47,500 jobs
would be created, directly and indirectly.
Similarly, an analysis by the California
Infrastructure Coalition concludes that
each $1 billion in
transit system im-
provements, includ-
ing roadways, would
produce 18,000 di-
rect new jobs and
nearly the
“ China has announced an impressive
stimulus program of $586 billion
over two years. On closer examina-
same level of induced tion, it is mostly a re-packaging of
indirect investment.
If all public infra-
structure investment
existing spending commitments.
created jobs at the same rate as transit im-
provements in California, $300 billion in
new infrastructure investment spread over
two years would create more than 5.4 mil-
lion jobs directly, more than offsetting the
jobs lost since the bursting of the housing
bubble.
Public infrastructure investment not
only creates jobs but generates a healthy
multiplier effect throughout the economy
by creating demand for materials and servic-
es. The U.S. Department of Transportation
estimates that for every $1 billion invested
in federal highways more than $6.2 billion
in economic activity would be generated.
Mark Zandi, chief economist at Moody’s
Economy.com, offers a more conservative
but still impressive estimate of the multi-
plier effect of infrastructure spending, calcu-
lating that every dollar of increased infra-
structure spending would generate a $1.59
increase in GDP. By comparison, a combina-
tion of tax cuts and rebates is estimated to
produce only 67 cents in demand for every
How to Save the World
dollar of lower taxes. Thus, by Zandi’s
conservative estimates, $300 billion in
infrastructure spending would generate a
nearly $480 billion increase (or close to a
4 percent increase) in GDP in the first two
years alone.
Public infrastructure investment would
not only help stimulate the economy in the
short term but help make it more produc-
tive over the long term. America’s current
economic structure—relying heavily on fi-
”
nancial services, entertainment, and certain
tech industries—reflects our low investment
in public infrastructure over the past two
decades. However, many of the potential
new growth sectors of the economy (agricul-
ture, energy, and clean technology) will re-
quire major improvements or new public
infrastructure altogether: new transmission
grids to tap the potential of wind and solar
power in the Southwest and the Great
Plains, better broadband access, new airports
to support the growth of agribusiness and
new tech companies in the lower-cost areas
of the American heartland, and a new gener-
ation of information technology to reduce
traffic congestion and speed up all manner
of transactions.
Finally, by making public infrastructure
investment the centerpiece of your economic
recovery program, you would send a signal
to the rest of the world that you plan to
move the U.S. economy away from its de-
pendence on debt-financed consumption,
to strengthen the productive economy, and
7
create jobs in the United States. This would
have two positive effects: it would help at-
tract new foreign investment into the
United States and underscore the need for
China, Japan, and other Asian export-
dependent economies to do more to expand
their own domestic demand.
A Coordinated Global Recovery
The U.S. economy is no longer in a position
to be the demand locomotive that pulls the
rest of the world out of recession. Other
economies will need to pull alongside ours.
Indeed, they will need to do some heavy
lifting if we are to rebalance the world and
avoid a protracted global economic slow-
down. But there is a danger that, rather
than being an engine for recovery, slumping
economies in Europe and Asia could prove
to be a drag on our recovery. You must
therefore have a well-thought-out interna-
tional economic strategy to complement
your domestic economic recovery program.
The global glut of savings produced
by China, Japan, Germany, and the petro-
dollar states was a major cause of the credit
and housing bubble. These economies thus
bear responsibility with the United States
for the current crisis, and must take the
lead in making the adjustments necessary
to create a more balanced world economy.
Indeed, they are in the best position to do
so because they have large current account
surpluses and significant foreign currency
holdings. China, Germany, and Japan are
running current account surpluses, respec-
tively, of 8.5 percent, 6.5 percent, and 4
percent. The Gulf states have even larger
current account surpluses, as do other petro-
dollar economies. All have sizeable foreign
currency reserves. China’s reserves now
top $2 trillion, and Japan has more than
$1 trillion in reserves.
For better or worse, these economies
must be your main partners, Mr. President,
in carrying out a global economic recovery
8 WORLD POLICY JOURNAL • WINTER 2008/09
program. They must become the collective
substitute for the American locomotive, ei-
ther by stimulating demand in their own
economies or by recycling their surpluses
to stimulate demand in other economies.
None of these countries, however, can be
expected to exercise the global leadership
necessary to make a world economic recov-
ery program work.
You must therefore take the lead in es-
tablishing the agenda and twisting the arms
as necessary, but you must do so in a way
that does not remind these countries of the
worst of America’s international economic
diplomacy of the 1990s when the Clinton
administration forced an agenda of financial
liberalization on emerging economies that
led to the 1997–98 financial crisis. That
means the measures you propose must be
seen as essential to the rescue of the world
economy and as mutually beneficial to all
concerned in the long run—even if they
seem to call for uncomfortable changes in
the short term. It also means that you
will need to be prepared to make some
meaningful concessions, such as ceding
more power to international institutions like
the International Monetary Fund (IMF) and
the World Bank, in return for their active
participation in your recovery program for
the world economy.
The first meeting of the G-20 economies
on the world financial crisis in November
provided the framework for some parts of
the global recovery program you must ad-
vance. It will be important to build on that
framework by enlisting the support of key
G-20 countries, especially the large current
account surplus economies, around a three-
part program. That program would entail:
1) a coordinated fiscal expansion led by the
current account surplus economies; 2) the
re-alignment and active management of
the world’s principal currencies to facilitate
a rebalancing of the global economy; and
3) the creation of a world economic recovery
fund of sufficient size to handle emerging
debt and solvency crises and to undertake a
global stimulus program of spending and
investment to complement fiscal expansion
at the national level.
The first element of your international
strategy, Mr. President, must be to encour-
How to Save the World
age China and other large current account
surplus economies—Japan, Germany, and
the large oil-exporting countries—to expand
domestic demand to offset weaker U.S. con-
sumer growth. Germany, Japan, and the
Gulf states all are well positioned to expand
their economies—preferably by cutting
9
taxes and increasing social spending to spur
more domestic consumption. China has an-
nounced what at first glance appeared to be
an impressive stimulus program of $586
billion over two years. On closer examina-
tion, it was mostly a re-packaging of already
existing spending commitments by local
governments and state companies heavily
weighted toward infrastructure investment,
which in China’s case will do little to create
more domestic consumer demand. Worse,
the central government at the same time
took steps to shore up the export economy
by increasing export subsidies and slowing
the appreciation of the yuan.
A true shift in the direction of China’s
economic growth, however, is critical to the
success of your economic recovery program.
Over the past decade, investment and sav-
ings in China have grown much faster than
consumption. Consequently, China has an
unusually high savings rate of nearly 50
percent, while consumption constitutes only
35 percent of the economy (the overall aver-
age of the other “BRIC” economies, Brazil,
Russia, and India, is closer to 50 percent).
Thus, there is enormous pent-up consump-
tion demand in China, as there is in other
Asian export economies. China, for example,
has one-half the televisions, one-quarter the
computers, and one-third the cell phones
per capita as Europe.
Your administration, Mr. President,
needs to do a better job of sending a mes-
sage to Beijing that China needs to do more
to generate its own consumer demand. In
particular, you need to make clear to Chi-
nese officials that they ultimately have the
most to lose from a collapse of the world
economy, since they depend more than other
economies on exports to drive growth and
employment. Indeed, China has the greatest
excess production capacity. The Chinese
leadership needs to understand that you are
not totally opposed to some of the retaliato-
ry trade measures a Democratic Congress
10
might consider if China continues to manip-
ulate its currency and suppress domestic
demand. But the first and main appeal to
Beijing should not rely on the threats of
future trade retaliation—in the context of
the current crisis, this should be seen as a
last resort.
Indeed, the message of your interna-
tional economic statecraft should be over-
whelmingly positive in that you will not be
preaching austerity and painful budget cuts
as the Clinton administration did after the
1997–98 crisis. Instead, you will be asking
the Chinese leadership to raise the living
standards of their workers, spend more on
health care and education, and do more to
provide a decent pension for older citizens.
These are initiatives that should endear
China’s leaders to their people. Indeed, you
are urging your counterparts in Beijing to
join you in becoming modern-day FDRs by
using this crisis to create a truly modern
safety net for Chinese workers. Because
China lacks real welfare and pension systems
and does not have reliable systems of health
care and education, the country’s workers
engage in a level of precautionary saving
that is restraining consumption. The best
way to reduce this high level of precaution-
ary savings is to encourage the leadership
in Beijing to put in place a modern social
safety net and do a better job of providing
education and health care for its citizens.
Chinese companies are overflowing with
retained profits (another source of China’s
high savings) and could easily help finance
health and pension benefits.
China’s leaders, of course, are concerned
with creating enough jobs to maintain po-
litical stability. You therefore need to point
out to the Chinese leadership that domestic-
generated demand in the end would be a
more reliable way of ensuring job growth
than the current strategy of financing ex-
ports to stagnating U.S. and European con-
sumer markets. The reason you must press
WORLD POLICY JOURNAL • WINTER 2008/09
China and other Asian economies to raise would create the best of both worlds for the
wages and improve living standards is not U.S. economy: it would provide continued
so the United States can reclaim jobs lost support for the dollar while also increasing
to Asia over the past decade, but to increase domestic demand within the Asian and oil-
global demand so that all economies can exporting economies, thus expanding the
begin to create more jobs. Higher wages in market for U.S. goods and services. For this
China and other high-savings Asian reason, you should move quickly to a new
economies would increase
the purchasing power of
Asian workers and aug-
ment consumer demand.
The American economy
“ The has $250 billion at its
IMF
disposal for managing national
would indirectly benefit
from higher wages and liv-
debt crises—a mere pittance.
ing standards as the demand for American
goods and services increases, especially
labor-saving and efficiency-enhancing
”
set of understandings about world currencies
that would facilitate these adjustments. The
goal should be to manage the dollar over the
technology. next few years to assure that it does not ap-
Beyond this, Mr. President, you need preciate so much as to prevent an expansion
to tell the Chinese leadership that the of American exports or fall so far as to pro-
quickest way to raise the living standards voke a currency crisis.
of their people is by engineering a signifi-
cant one-time appreciation of the yuan A Global Recovery Fund
against the dollar and other international Most of the current account surplus
currencies. You might also note that yuan economies will not be able to stimulate
appreciation is the best way to fight future consumer demand sufficiently in the short
inflation caused by the accumulation of for- term to reduce their excess to acceptable
eign currency reserves and by higher energy levels. Your world economic plan therefore
and food costs. A significant one-time ap- must provide for the alternative, which is to
preciation of the yuan, rather the gradualist recycle some of those surpluses in a way that
approach now being pursued, would help is more supportive of economic growth than
stop some of the speculative inflow of hot the current practice of buying U.S. treasur-
capital into China while reducing the cost of ies and adding to the build-up of foreign
food, energy, and other exports for Chinese currency reserves. The United States, of
consumers. course, will need to have access to some of
The strengthening of the yuan would these surpluses to help fund its recovery
be an essential first step in a broader re- program. But some of the surpluses could
alignment of world currencies that is needed also be redirected to support another part of
to help correct the global imbalances that your plan—namely, to create a world eco-
have developed over the past the decade. nomic recovery fund to deal with national
The best short-run option would be for the debt and solvency crises and to support pub-
current account surplus economies in Asia lic works projects in developing economies.
and the Gulf state petro-dollar economies Already, a number of countries—
to re-peg their currencies—by letting them Iceland, Hungary, Pakistan, and Ukraine—
appreciate against the dollar but without have suffered serious debt and liquidity
abandoning the dollar peg entirely. This problems related to the current crisis,

How to Save the World 11

and have sought money from the IMF and
other sources. These countries may need
additional money in the months ahead.
Other countries in Eastern Europe, Africa,
Asia, and Latin America may also experience
currency-related crises before the world
economy is stabilized.
The problem, as you know, is that the
IMF’s resources have not kept up with the
growth of the world economy. Today, the
IMF has $250 billion at its disposal for man-
aging national debt crises—a mere pittance
compared with the rescue plans that the
United States, Britain, and other G-20 gov-
ernments have embarked upon (or those that
are still needed to deal with the crises wait-
ing to happen in Turkey, the Baltic states,
and other affected economies). It would be
better to have the IMF in a position to re-
spond to these currency and balance of pay-
ment problems than to rely on countries
like China and Saudi Arabia to use their
sovereign wealth funds for this purpose.
It is therefore important to shore up
quickly the resources available to the IMF
and the World Bank. The IMF could be a
helpful stabilizer in global financial markets
if it had access to the sizeable reserve assets
of the current account surplus economies.
In order to do so, Mr. President, you will
need to tap contributions from China,
Japan, Germany, Saudi Arabia, and other
G-20 economies in return for giving them
more power and influence. Just as it was
necessary in October 2008 to assemble a
Troubled Assets Relief Program (TARP) fund
of considerable size to inject capital into the
U.S. financial system, you will need to cre-
ate a world economic fund of comparable
size. Over the years, your predecessors re-
peatedly blocked efforts to increase the
working capital of the IMF and the World
Bank. They did so in part because the pro-
posed measures threatened Washington’s
preeminent position in these institutions—
and, in the case of the IMF and the World
12
Bank, its de facto veto, since increasing the
allocations of Japan, Germany, and other
surplus economies in the G-20 would have
increased their weighted vote.
But that has turned out to be a short-
sighted policy. We have been left with cash-
strapped and ineffective international insti-
tutions. That has put more burden on the
Federal Reserve to use U.S. monetary policy
as a crisis stabilizer, which has contributed
to the build-up of the large asset bubbles in
the past decade. It has also left the door
open for the big current account surplus
economies of Asia and the petro-dollar states
to use their sovereign wealth funds to influ-
ence the course of the world capital markets.
A world economic recovery fund (call it
“WERF”) would make it possible for the IMF
and the World Bank, along with regional
development banks, to carry out a globally
applied macroeconomic stimulus program to
supplement national fiscal expansion. The
IMF could tap WERF’s resources to carry out
currency stabilization programs and help
countries manage their way through balance
of payments problems. The World Bank
and regional development banks could tap
WERF resources to accelerate lending for
job-creating public works and social invest-
ment in developing countries. Money from
this global fund could also be made avail-
able to specialized agencies of the United
Nations to carry out social investment
projects related to health care, education,
and the environment. This increased social
and public spending would help stabilize
consumption and investment in vulnerable
developing and emerging economies.
As you know, Mr. President, there is a
broad array of urgent public investment
needs in many economies, ranging from
road building to clean water development,
environmental repair to new telecommuni-
cations infrastructure. Many of these proj-
ects could be expanded without sacrificing
loans or environmental quality. Programs to
WORLD POLICY JOURNAL • WINTER 2008/09
meet educational, health, and nutritional
needs are also of critical necessity around the
globe. In this way, WERF funding could help
bring basic health care, education, housing,
and clean energy within the reach of billions
of people, relieving poverty across Africa
and South Asia.
To ensure that this expansion of lending
does not disrupt the World Bank’s regular
lending programs, the United States, as the
bank’s largest shareholder, could ask for an
immediate increase in the institution’s
statutory lending limit (with the under-
standing that capital increases could be paid
over a three-year period or borrowed from
the WERF). Such an increase would, in effect,
increase the bank’s gearing ratio without
compromising its credit rating. It would
thus give World Bank lending an additional
stimulative effect. You could push for simi-
lar arrangements for each of the regional de-
velopment banks.
There is an underlying rationale for
such a global stimulus program. It would be
more effective and less potentially inflation-
ary over the longer term than relying solely
on domestic fiscal expansion. Equally im-
portant, such a program would yield a sig-
nificant security dividend. Directing public
capital into the depressed areas of the world
economy that are undergoing balance of
payments or currency problems would help
ease the potential for political turmoil in
those regions—without undermining the
discipline necessary for adjustment efforts to
succeed. By restoring growth in those areas,
it could help improve profits and invest-
ment levels. Finally, a global public sector
program would point the way to the longer
term institutional reform that is now needed
to maintain a growing and healthy world
economy. Mr. President, if you succeed in
creating institutions at the global level to
do what the New Deal once did for our
How to Save the World
national economy, you will be remembered
as a truly global FDR.
A Strategy of Mutual Prosperity
In the short term, the new economic recov-
ery and growth program outlined here will
help sustain U.S. and world growth during
a period of painful adjustment following the
bursting of the housing and credit bubbles.
Over the longer term, it will put the U.S.
and emerging economies on the path to mu-
tually reinforcing productivity revolutions
and mutually rising living standards. In-
creased public investment in the United
States will lead to greater private invest-
ment and productive capacity, enabling
American-based companies to take advan-
tage of rising export demand for their goods
and services. It will also lead to rising
wages, enabling households to reduce their
debt burdens without cutting back on
consumption.
Meanwhile, in large emerging
economies, higher wages and additional
consumer spending will increase domestic
demand, allowing these export-oriented
economies to weather a slowing of U.S. con-
sumer demand. Rising living standards in
turn will accelerate the transition in these
economies to more sustainable models,
based on rising productivity and resource
efficiency. This new growth orientation in
turn will open up even greater growth op-
portunities for American companies at the
forefront of technology.
It will be up to you and your adminis-
tration to turn this crisis into an opportuni-
ty, and this opportunity into reality. To do
so, Mr. President, you must quickly adopt a
bold and optimistic economic recovery plan
that goes beyond conventional thinking and
harnesses the American economy to the new
growth drivers of public infrastructure in-
vestment and rising global demand. •
13