Three Economic Crises in one

By Robert Samuelson

WASHINGTON -- We all want President Obama to succeed in reviving the economy, but that shouldn't obscure his long odds. We need to recognize that we're grappling with three separate crises that, though interwoven, are also quite distinct. The solution to any one of them won't automatically resuscitate the larger economy if the others remain untreated and unchanged.

Here are the three.

First: the collapse of consumer spending. American consumers represent 70 percent of the economy. Traumatized by plunging home values and stock prices -- which have shaved at least $7 trillion from personal wealth -- they've curbed spending and increased saving. That's led directly to layoffs. In December, vehicle sales were down 36 percent from year-earlier levels.

Second: the financial crisis. Lower lending deprives the economy of the credit to finance businesses, homes and costly consumer purchases (cars, appliances). The deepest cuts involve "securitization" -- the sale of bonds. Investors have gone on strike. In 2008, the issuance of bonds backing credit card loans fell 41 percent and those backing car loans 51 percent.

Third: a trade crisis. Global spending and saving patterns are badly askew. High-saving Asian countries have relied on export-led growth that, in turn, has required American consumers to spend ever-larger shares of their income. Huge trade imbalances have resulted: U.S. deficits, Asian surpluses. As Americans cut spending, this pattern is no longer sustainable. Asia is tumbling into recession.

Overcoming any of these crises alone would be daunting. Together, they're the economic equivalent of a combined Ironman triathlon and Tour de France.

Consider consumer spending. The proposed remedy is the "economic stimulus" plan. This seems sensible. If government doesn't offset declines in consumer and other private spending, the economy might spiral down for several years. Last week, House committees considered an $825 billion package, split between $550 billion in additional spending and $275 billion in tax cuts.

But in practice, the stimulus could disappoint. Parts of the House package look like a giant political slush fund, with money sprinkled to dozens of programs. There's $50 million for the National Endowment for the Arts, $200 million for the Teacher Incentive Fund and $15.6 billion for increased Pell Grants to college students. Some of these proposals, whatever their other merits, won't produce many new jobs.

Another problem: construction spending -- for schools, clinics, roads -- may start so slowly that there's little immediate economic boost. The Congressional Budget Office examined $356 billion in spending proposals and concluded that only 7 percent would be spent in 2009 and 31 percent in 2010.

Assume, however, that the stimulus is a smashing success. It cushions the recession. Unemployment (now: 7.2 percent) stops rising at, say, 8 percent instead of 10 percent. Still, a temporary stimulus can't fuel a permanent recovery. That requires a strong financial system to supply an expanding