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Nations eye public spending to stimulate economies

WASHINGTON — 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.

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 Nicholas 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.

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.

Spending pitfalls

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 on new public works projects. Those projects not only failed to prevent a decadelong 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.

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 skeptical of their fiscal health.

"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 the building of more bridges and roads and the introduction of measures to put more cash into the hands of strapped consumers.

In the United States, 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 from 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 pre-existing infrastructure plans that are now being accelerated. Nicholas 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.

In a move that may offer a guide to helping the ailing Big Three automakers in Detroit, the French are planning to assist their hard-hit auto industry by awarding government grants to boost research into hybrid and battery-power technology.

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."

Bold plans

President-elect Obama has said his administration will create or preserve 2.5-million jobs over three years. Some lawmakers have floated the possibility of a package of as much as $700-billion. While no other country has proposed that level of spending, some plans are particularly bold.

China: A $586-billion stimulus plan will accelerate projects to build more nuclear power plants and a vast natural gas pipeline.

Italy: It may erect the first bridge connecting Sicily to mainland Europe.

European Union: Called for member countries to spend $258-billion to spur growth.

Britain: Has already unveiled a $30-billion proposal.

Spain: Has a $14-billion plan.

France: One of the bloc's largest economies, it is expected to announce a huge package next week.

Nations eye public spending to stimulate economies 11/28/08 [Last modified: Thursday, November 4, 2010 10:35am]
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