The gloomy view that the global economy faces a prolonged period of slow growth and high unemployment holds increasing sway among mainstream economists. A new eBook from the Centre for Economic Policy Research (CEPR), “Secular Stagnation: Facts, Causes, Cures” edited by Coen Teulings and Richard Baldwin includes interesting contributions from such luminaries as Paul Krugman, former US Secretary of the Treasury Larry Summers, and the International Monetary Fund chief economist Olivier Blanchard.
While the authors look at the issue from diverse perspectives, it is striking that the solutions offered by many are more radical than those commonly discussed in Canada.
The global economy has failed to fully recover from the Great Recession despite a prolonged period of ultra low interest rates. Highly stimulative monetary policy has been unable to spark a strong recovery but is, many argue, leading to dangerous new asset bubbles and financial risks. The editors and Messrs. Summers, Blanchard and Krugman argue that the real interest rate would have to fall below zero to return to full employment, which is impossible given very low inflation and the fact that nominal rates cannot fall below zero. The situation, especially in Europe where output is still below the 2008 level and unemployment is very high, is not helped by severe fiscal austerity which is depressing already inadequate demand.
Interest rates are very low due not only to monetary policy, but also to a global glut of savings (especially in developing countries and oil economies), weak business demand for new credit due to anticipated low growth, and attempts by households to reduce their debt. Growing income inequality is also a factor behind a weak recovery since the affluent have a much higher propensity to save, while the middle-class have stagnant incomes and cannot spend without going further into debt.
On the structural side, economists agree that ageing populations in advanced industrial societies are a drag on growth, and some think business investment will remain low as many innovations linked to the information economy require little capital investment. There is disagreement among contributors as to the potential of new technologies like robotics to spark higher productivity, rising incomes and growth.
The key issue is that monetary policy, the macro-economic tool of choice before the Great Recession and today, cannot power a strong and sustained recovery. This has also been argued along similar lines in a recent, and again rather gloomy, C.D. Howe commentary on the growth outlook for Canada by McGill University economist Christopher Ragan.
Unlike Mr. Ragan, many contributors to the CEPR book, notably Larry Summers, Barry Eichengreen of Berkeley and Richard Koo of the Nomura Institute, think that fiscal policy could and should step into the breach to put excess savings to use. Mr. Summers in particular argues that significantly higher public investment financed at low interest rates could not only boost demand in the here and now, it could also raise future potential growth by boosting productivity.
Mr. Blanchard of the IMF endorses the view that, in the likely context of sustained low interest rates, “increases in debt-financed government spending, especially public investment, may not lead to increases in public debt in the medium-term.”
It is also pointed out by Mr. Summers and the editors that expansionary fiscal policy might better serve the needs of the great majority than very loose monetary policy. The relatively affluent are doing fine despite a sluggish economy, and many benefit the from the asset bubbles inflated by very low interest rates.
Barry Eichengreen and Larry Summers argue the case for inequality-reducing fiscal policies to boost growth by redistributing income from savers to spenders. By contrast, Mr. Ragan, probably in line with most other mainstream Canadian economists, believes that expansionary fiscal policy should be an option only if we are hit by a new outright recession. That is certainly the position of the Harper government.
In fairness to Mr. Ragan, he thinks that we should address some of the worst consequences of a prolonged period of slow growth by improving unemployment benefits and investing in training. Nonetheless, one is struck by the fact that the support of many leading economists for expansionary fiscal policy to deal with sluggish growth is not more widely echoed in Canada. This is, it could be added, notwithstanding the low level of public debt in Canada compared to other industrial countries.
This piece originally appeared in The Globe and Mail.
Andrew Jackson is senior policy adviser to the Broadbent Institute.
Photo: jubilo. Used under a Creative Commons BY-NC-ND 2.0 licence.