International reaction to Obama budget

LISA MULLINS: I’m Lisa Mullins, and this is The World. Today, President Barack Obama submitted his first budget outline to Congress, and there are some staggering numbers on it. Let’s start with $1.75 Trillion dollars. That’s how big the federal budget deficit for 2009 is projected to be. The figure represents about 12 percent of the US economy ? the highest deficit level in decades. President Obama’s budget makes a financial commitment to comprehensive healthcare reform. There are also large investments in education. And unlike President Bush, President Obama includes the cost of wars in Iraq and Afghanistan in his regular budget plan. But this morning, President Obama said he’s not focusing just on the spending side of the equation.

PRESIDENT OBAMA: We need to be honest with ourselves about what costs are being racked up, because that’s how we’ll come to grips with the hard choices that lie ahead, and there are some hard choices that lie ahead. Just as a family has to make hard choices about where to spend and where to save, so do we as a government. You know? There are times when you can afford to redecorate your house, and there are times when you need to focus on rebuilding its foundation.

MULLINS: President Obama said this is a time to concentrate on the foundation of the American economy. That’s what many people around the world might be thinking as well. Simon Johnson is an economist at MIT, with special expertise in financial and economic crises ? similar subjects that he worked on as former chief economist at the International Monetary Fund. We suspect you are very busy these days dealing with the crisis going on now, Professor Johnson. Suppose that you are the leader of the UK or China, for instance, or Iceland for that matter. Was there anything that you heard in the budget blueprint today from President Obama that would make you feel any better?
SIMON JOHNSON: I think the blueprint today and the speech that President Obama gave on Tuesday evening would generally have a reassuring effect. First of all, his tone is very good. It’s very positive. And there’s a lot of recognition that we’re in serious trouble. And there’s a lot of sort of ideas about how to get us out of it. At a more technical level, there’s a fiscal stimulus. Obviously, we have a stimulus package and we have a push on healthcare spending, education spending and energy spending that is going to boost the US economy relative to what it would be otherwise, and that will help everyone around the world who sells us goods and services.

MULLINS: And in terms of what might worry you? Certainly the $1.75 Trillion dollar figure worries a lot of people in the United States. How about if you’re elsewhere?

JOHNSON: No. I don’t think that’s the worry. You know, the US has relatively low debt to GDP so the total amount of debt outstanding compared to the size of our economy is actually on the low side for industrialized countries. It’s clearly going to go up as a result of spending and also what will be done and what has to do be for the financial system, for housing. But that’s really still at manageable levels. Now, I think the problem ? the weakness, the thing that would sort of nag in my mind a little bit, although I have not quite wanted to say it this week, if I were a foreign leader is the strategy for pulling the US out of the financial morass that we’re in, the problem with the bank system. That strategy remains rather vague and unconvincing. And so President Obama said that it’s a big problem. He’s got to deal with it. And he’s got a vision, a collective investment four years down the road that makes sense and would particularly make sense to people outside the US who don’t have hang-ups about collecting investments of those kind. But how you get from here to there is not very well mapped out right now.

MULLINS: So what specifically do leaders in other countries need to hear and want to hear in terms of what the United States is going to do to shore up the financial system? I mean, would it be saying that it’s going to be nationalizing banks? I mean, what would it be?

JOHNSON: The word ?nationalization? is a red herring, I think, in this context. I don’t think anybody’s asking for that word to be used. But a clear strategy through which you intervene and take over for banks that are deficient in capital and re-privatize them and sell them back to the private sector. Unless and until we have that kind of policy and go through that, you know, the experience from around the world ? the experience from Japan, experience from Sweden, experience from other European countries right now, many emerging markets, the experience is very simple. If you don’t confront that reality, if you don’t deal with it sooner rather than later, then the costs of the whole cleanup become much higher, and any kind of longer term spending plans you may have, the dream of rebuilding education and healthcare, and so on, those are not implemented.

MULLINS: Iceland is pretty much on the brink of collapse economically. Are there other countries that are similarly poised?

JOHNSON: Yes. Most of East Central Europe is in very bad shape, and from East Central Europe, I’m afraid to say, the problem’s spread directly to Western Europe because most of the banks in East Central Europe are West European banks. And I’m afraid to say that the Europeans are quite far from having a strategy that’s capable of containing this or dealing with it.

MULLINS: All right. Thank you very much. Simon Johnson teaches at MIT’s Sloan School of Management. He’s also a senior fellow at the Peterson Institute for International Economics and he co-founded a website on the global economic and financial crisis, which we’re going to link to you at our website, theworld.org. Nice to speak with you, Simon. Thank you.

JOHNSON: Thank you.