How We Learnt To Stop Worrying And Love Austerity: Attitudes To Fiscal Stimulus Version 2.0
How quickly we forget
Two years ago, the Financial Times’ Martin Wolf warned ominously that “The world economy is slowing, both structurally and cyclically.” The International Monetary Fund’s (IMF) latest World Economic Outlook opens by telling us that “The global economic upswing that began around mid-2016 has become broader and stronger.” The best global growth upswing since the financial crisis started just as the Financial Times told us we were sinking into secular stagnation.
The 2016 Financial Times article called for fiscal stimulus, arguing that “The austerity obsession, even when borrowing costs are so low, is lunatic.” Dutifully launched a year later, U.S. fiscal stimulus has been promptly condemned as procyclical and the Financial Times now calls it “an act of folly”. Two years ago the IMF also called for fiscal stimulus. Today, the Financial Times concurs with the IMF that high public debt levels are a major risk, and could have disastrous consequences.
Lest we forget, two years ago the Financial Times and a number of experts called for policymakers to consider helicopter money — a fiscal expansion directly and permanently financed by central bank money creation — a truly desperate policy measure for desperate times.
How times have changed.
Two years ago, the IMF forecasted average global growth for 2018–2021 of 3.8%. Today it forecasts…3.8%.
With the same global growth outlook, two years ago we were told that governments would be crazy not to leverage to the hilt in additional public debt, and today we are told that governments have been crazy not to reducepublic debt. With the same growth outlook.
It appears that we have learnt to stop worrying and love austerity.
I suspect this happened because of two misguided biases in the economic policy debate.
The first is that anything the current U.S. Administration does attracts immediate outsized criticism: if it chooses fiscal stimulus, then fiscal stimulus is bad, period. This attitude is irresponsible: credible economic analysis should be honest and consistent, not partisan.
The second is an unshakeable headline-grabbing pessimism. In 2016 global growth was ‘too slow for too long’; today it is ‘cyclically stronger but structurally fragile’, to use the IMF catchphrases. When the IMF admitted in January that we are experiencing the strongest and broadest synchronized upswing since 2010, with U.S. business confidence at record highs, I thought they would let us enjoy these good economic times for a while. Clearly not.
This belated rediscovery of the virtues of fiscal rectitude should certainly be celebrated — even if reached for the wrong reasons. It can allow us to finally focus on the real drivers of economic growth. Durable strong economic growth, the kind that lifts average living standards for a prolonged period, comes from investment, innovation and hard work. Here the latest IMF analysis does bring an important contribution with its focus on labor force participation, manufacturing employment, and the cross-border diffusion of technological know-how.
The next step should be to bring these issues front and center of the public debate on economic policy, in a common-sense way that everyone can understand.
In its latest litany of risks, the IMF highlights the surge in populism, which it blames on rising income inequality. Inequality certainly played a role — though it is disingenuous to ignore how inequality has also been driven by Quantitative Easing (QE), which inflated asset prices (as the rich own a disproportionate share of financial assets). Yet those who worry U.S. corporate tax cuts will exacerbate inequality through valuation-boosting stock buy-backs, still favor loose monetary policy, which has had a much stronger impact on asset prices and consequently inequality.
Populism thrives on a vicious circle of voters looking for magical painless solutions and politicians pretending they can provide them. And this is exactly what we have today: just look at the recent demonstrations in France or the latest election campaigns in Italy and the U.S.. The media have often been complicit, presenting quantitative easing, helicopter money and unfunded public spending as the best way forward. To fight populism, we need to stir the debate back to the true, and sometimes unpleasant choices our economies face.
The IMF is right that we should use the current upswing to put economic growth on a stronger footing. We should start with an open debate that recognizes the hard decisions this will require in a number of countries: public spending cuts, structural reforms, tougher education standards. Rediscovering the reality of government budget constraints could be the first step.