NDN Blog

This morning, Rob Shapiro, Chair of the Globalization Initiative at NDN, had the closing quote in a front-page Washington Post article on imbalances in the global economy and the dangers they pose to an economically sustainable future:

"These imbalances weren't accidental," said Robert Shapiro, chairman of the economic advisory firm Sonecon and head of the globalization initiative at think tank NDN. "They solved large political and economic problems for a lot of countries and were the result of successful political arrangements. That's why they're so hard to untangle."

The article addressed the problem that much of the global economic recovery has been based on global imbalances, particularly Americans saving less while spending money they don’t have, while other countries overproduce and rely on Americans as “consumers of last resort.” It identified that while this may ease economic pains in the short run, such imbalances could undermine sustainability in the long run and even cause future economic crises.

Laura is the summer Globalization Initiative Intern at NDN and a Summer Academy Fellow with the Roosevelt Institute. She is a Political Economy and Mathematical Economics double major at Tulane University in New Orleans, Louisiana.

NDN has long argued that the state of the economy is the most important driver of instability in the American electorate. Unsurprisingly, the same tends to be the case globally. The Pew Global Attitudes Project released a survey June 17th that included information on public perception of the economy in different countries (see graph).

Interestingly, no countries in the survey where 50% or less of the population felt that the economy was in trouble were experiencing significant political instability. Conversely, only 5 out of 17 countries surveyed where 55% or more of the population felt that the economy was in trouble were experiencing relative political stability. The other twelve countries exhibited signs of political instability, such as governing party changes and declining approval ratings for elected officials. Below are some comparisons between the economy and the political climate in each country:

Japan: In Japan 88% of the public feels that the economy is doing poorly. This has been reflected strongly in Japanese politics: Prime Minister Yukio Hatoyama stepped down June 2nd in part due to his inability to fulfill economic improvement promises made during his campaign. The Finance Minister from his cabinet, Naoto Kan, was voted to replace Hatoyama 291 to 129.

Spain: Eighty eight percent of the Spanish public thinks that the economy is doing poorly. This has been strongly reflected in Spanish politics as well - Prime Minister Jose Luis Rodriguez’s proposals to bring down the deficit have only been seen as desperate acts to remain in office. The Prime minister, whose economic policies have been called inconsistent at best, might have to call early elections due to looming budgetary disagreements. 

France: Eighty seven percent of the French people feel that the economy is doing poorly. This has strongly affected French politics – due to the deficit fears, the French government proposed a series of austerity measures, including raising the retirement age by two years and increasing income taxes on the rich. Nicholas Sarkozy, whose ratings in opinion polls have been tumbling, has spread these reforms out over the course of several years to ease the pain, but still show that he is taking measures to reduce France’s budget deficit.

Lebanon: The economic situation in Lebanon has had less of an impact on politics, perhaps due to the strong growth prospects. The IMF predicts that Lebanon’s GDP growth could top 8% in 2010 thanks to improved domestic stability and prudent policies. Yet, serious structural problems remain, including a debt-to-GDP ratio higher than that of Greece, gaps in infrastructure (particularly electricity), and weak domestic production, which contribute to the weak opinion on the economy.

 South Korea: The economy has had a relatively weak effect on South Korean politics. South Korea recovered relatively quickly from the global economic recession and before President Lee shifted the focus of mid term elections to the sinking of the Cheonan, his public approval rating hovered around 50%.

Pakistan: Pakistan is plagued with several economic problems, including severe energy deficits, water shortages, and rampant corruption across most of the government. These problems have resulted in a very unstable political environment. In 2008, The Eurasia Group’s Global Political Risk Index found Pakistan to be the most unstable emerging market in the world, with a score of only 41, citing events like the assassination attempt on Prime Minister Yousuf Raza Gilani. 

Egypt: The improving economic outlook in Egypt is keeping the political environment relatively stable. Although surging inflation and food shortages last year led to vast public unrest, President Mubarak was able to maintain control. Now Egypt is experiencing significant growth, though markets are somewhat rattled by the lack of a clear successor to Mubarak.

Britain: The poor economic situation in Britain did in part lead to a change in party control. Britain recently underwent a change in Prime Ministers. Gordon Brown, who presided over one of the worst periods in recent economic history, was ousted for David Cameron, who pledged fiscal austerity while reviving the economy.

Mexico: Politics in Mexico were strongly affected by the economic downturn. Mexico’s economy took a hit in 2009 due to its ties to the U.S. economy, the decline in tourism due to violence and the threat of H1N1, and declining crude oil prices. President Calderon’s PAN political party took a hit in the midterm elections, losing control of Congress.

Argentina: The economy played a big role in political change in Argentina. President Fernandez lost control of Congress in the mid term elections in part due to a slowing economy. However, the recovery that Argentina is now experiencing is boosting President Fernandez’s ratings.

Jordan: The economic downturn has played a significant role in Jordan’s politics. King Abdullah II dissolved parliament in late November 2009, a move seen as an attempt to clear the way for new elections and speed up economic reforms.

Russia: Despite recent economic troubles, the political climate in Russia is stable. The Kremlin’s $200 billion stimulus package and the recovery in oil prices led to an improved economic situation, and the country has seen increased political stability.

Nigeria: Although there is a positive growth outlook for Nigeria, corruption and undisciplined fiscal policy prove problematic for the country and could threaten political stability. Elections are set for 2011, and the incumbent government is increasing spending and holding the interest rate at 6%, producing possible inflation problems.

Turkey: Though Turkey was somewhat affected by the global recession in 2009, its economic prospects are largely positive moving forward. According to Goldman Sachs, Turkey has the 17th top economy in the world and political stability is on the rise.

Kenya: Political stability is a huge problem in Kenya, though political stability threatens the economy more than the other way around. The perceived instability largely results from deep divisions in government, which have kept the Cabinet from meeting for a long time.

Germany: The current economic climate is having a significant impact on German politics. Two recent polls found that a majority of Germans believe the government won’t serve out its four-year term. Current events in Europe have created an overriding emphasis on fiscal austerity, which Chancellor Merkel has taken to heart with her own $97 billion austerity package, but this threatens to alienate some in her governing coalition.

Indonesia: Indonesia, the largest economy in Southeast Asia, is enjoying a period of relative economic and political stability. On June 21, 2010, Moody’s raised the outlook on Indonesia’s local and foreign debt to positive from stable, underlining the country’s ability to sustain strong economic growth and praising the stability and effectiveness of its fiscal and monetary policies.

Poland: Following a steep depreciation due to the global recession, the zloty stabilized in early 2009 and has recovered since, contributing to Poland's role as an anchor of stability in the region despite the dismal economic climate. Poland’s economic and political stability remain strong despite the plane crash killing a large swath of Poland’s top government officials.

India: Indian GDP has increased 7.9% over the last four quarters, and there is high political stability. The Reserve Bank of India has increased interest rates in an attempt to tighten monetary policy, though there is fear that this may squeeze credit.

Brazil: Since curbing inflation and instituting market reforms in the 1990s, Brazil has shown an impressive rate of economic growth in the range of five per cent. Also, unlike most other BRICs, Brazil is a democracy, allowing it to enjoy political stability and economic growth.

China: China is experiencing massive economic growth, and despite recent labor protests, China’s government remains very stable.

Here is the letter President Obama sent to Congressional leadership on Saturday:

Dear Speaker Pelosi, Senator Reid, Senator McConnell, and Representative Boehner:

We are at a critical juncture on our nation’s path to economic recovery. I know that each of you is committed to continuing our efforts to help America’s families and businesses turn the corner on the deepest and most painful recession America has experienced since the Great Depression. While our efforts over the past 18 months have helped break the freefall and restore growth, it is essential that we continue to explore additional measures to spur job creation and build momentum toward recovery, even as we establish a path to long-term fiscal discipline.

Given the urgency of the continued economic challenges we face, I am writing to urge swift action on several critical priorities that will give our Nation’s small businesses added impetus to hire and grow and address the devastating economic impact of budget cuts at the state and local levels that are leading to massive layoffs of teachers, police, and firefighters.

As you know, America’s small businesses are key drivers of job creation. They have been at the forefront of the dramatic change in the trajectory of private sector job growth we have experienced over the past eighteen months. At the beginning of 2009, our economy was losing over 700,000 jobs per month. Through the first five months of 2010, nearly 500,000 private sector jobs have been created. While this is good news for those who have found work and for businesses large and small that are once again beginning to expand and add more workers, it is cold comfort for the millions of others who want to get back to work.

This is why the extenders legislation being considered in the Senate is so important. It includes provisions like tax cuts to keep research and development jobs in the United States and extends lending programs through the Small Business Administration so that our Nation’s small business owners have access to the capital they need to grow their businesses and create jobs.

The small business legislation that I have called for includes a new lending initiative to help creditworthy firms access loans through community banks and innovative state partnerships. It also calls for the complete elimination of capital gains on small business investments so that small business owners have even greater incentives to expand and create good jobs in their communities. Also important are proposals to bolster our infrastructure and create clean energy jobs here in the United States, including the Home Star program of rebates for home improvements and additional tax credits for clean energy manufacturing here in America, both of which have the potential to unlock private sector investment. All of these targeted, temporary measures are directed at spurring private investment and are cost-effective ways of spurring job creation.

I believe that these targeted investments to help our Nation’s small businesses grow and create jobs will boost the economic recovery. I am concerned, however, that the lingering economic damage left by the financial crisis we inherited has left a mounting employment crisis at the state and local level that could set back the pace of our economic recovery. Because this recession has been deeper and more painful than any in 70 years, our state and local governments face a vicious cycle. The lost jobs and foreclosed homes caused by this financial crisis have led to a dramatic decline in revenues that has provoked major cutbacks in critical services at the very time our Nation’s families need them most. Already this year, we have lost 84,000 jobs in state and local governments, a loss that was cushioned by the substantial assistance provided in the Recovery Act. And while state and local governments have already taken difficult steps to balance their budgets, if additional action is not taken hundreds of thousands of additional jobs could be lost.

If we allow these layoffs to go forward, it will not only mean hundreds of thousands fewer teachers in our classrooms, firefighters on call and police officers on the beat, it will also mean more costs helping these Americans look for new work, while their lost paychecks will mean less tax revenues and less demand for the products and services produced by other workers.

That is why the actual cost of saving state and local jobs is likely to be 20 to 40 percent below their budgetary cost. The increased matching for Medicaid FMAP currently being considered in the Senate as well as the Teacher Firing Prevention Fund that I have called for would help prevent these layoffs at the state and local level while keeping classroom sizes down and maintaining vital education, health and public safety services. These measures are among the most cost-effective ways of promoting economic growth, as measured by the Congressional Budget Office and numerous independent experts. And they can be designed with appropriate safeguards to ensure that they achieve their objective of keeping people working, rather than rewarding states for poor past policy choices.

Because the urgency is high – many school districts, cities, and states are already being forced to make these layoffs – these provisions must be passed as quickly as possible. In addition, we should take steps to continue the Recovery Act program that has already helped millions of unemployed workers pay for continuing their health care coverage.

Taken together, these measures to jump-start private sector job creation, avoid massive layoffs at the local and state levels and help the unemployed are critical and timely ways to further the economic recovery and spur job creation. At this critical moment, we cannot afford to slide backwards just as our recovery is taking hold. We must take these emergency measures.

While robust economic growth is essential for achieving deficit reduction, we must also take additional steps to establish a fiscally sustainable budget path over the medium- and long-term. That is why, as we move forward, we must continue to work to ensure that investments are made as efficiently as possible. I have called for a three year freeze in non-security discretionary spending – which the Democratic and Republican Congressional leadership embraced at our bipartisan meeting – and a fee on the largest Wall Street firms to eliminate any increase in the cost of TARP to the deficit. In recent weeks, I have also proposed additional measures to discipline the budget process with expedited rescissions, agency incentives to identify ways to save money, and a process to better use our federal property and sell off the property we do not need.

Ultimately, reigning in our deficit will take major steps, including the effective implementation of health reform and laying the conditions for the success of the bipartisan fiscal commission.

Only through this approach of aggressive and well-designed targeted and temporary actions, alongside measures to ensure a sustainable and responsible long-term budget outlook, will we be able to fulfill our economic potential. I know you share my sense of urgency and look forward to working closely with Congress as we continue our efforts to jumpstart job creation and restore fiscal discipline in Washington.

Sincerely,

Barack Obama