8 December, 2019
This is a remarkable editorial from the Financial Times. Reproduced below.
The global slowdown is not making the politics of macroeconomic policymaking any easier. While doves insist that softening growth requires more muscular support for aggregate demand, hawks legitimately point to the structural sources of the slowdown. This week brought more bad news for the worldwide industrial recession that is holding back global growth. In the US, UK, the eurozone and Japan, manufacturing is below where it was one to two years ago. Dismal new manufacturing data from Germany show the worst is far from over there. Simply boosting aggregate demand does not address the long-term structural challenges to manufacturing, which include hostile trade policy and the push towards carbon-neutral economies. That is not to say it is unnecessary: demand stimulus can at least contain the damage to directly affected sectors and prevent the weakness from spilling over into the services that make up a much larger share of gross domestic product. But the long-term response to green transition challenges, such as a shift from internal combustion to electric vehicles, and to any permanent trade disruption, must involve policies to smooth structural transformations. For this, the mix of fiscal and monetary tools matters as much as the overall policy stance. In most economies that balance is tilted heavily to the monetary side, with unfortunate consequences. Economically, ultra-loose monetary policy has inflated asset prices and may be slowing productivity growth by keeping uneconomic businesses alive. Politically, it has put central banks under enormous pressure from banking lobbies, hard-money ideologues — and in the eurozone, from those in creditor countries who think low interest rates are a way to bail out profligate governments on the sly. In truth, central banks should not be blamed for loose monetary policy. As long as governments are not willing to expand on the fiscal side, central bankers are legally obliged to make up the shortfall in demand support. It is, and should be, for democratically elected politicians to steer the fiscal-monetary mix by setting the balance of government budgets. They would be wise to shift that mix sharply to the fiscal side. Low interest rates have turned out to do more for consumption than for the investment structural transformations demand. Government tight-fistedness, meanwhile, has starved public investment budgets. Greater budget deficits should be welcomed if they finance spending to fit out economies for the future. There are signs that this is slowly happening. The Japanese government has announced an unexpectedly large stimulus for next year. This is in part justified by motivations specific to Japan, to offset a rise in its consumption tax, low compared to most rich economies. The package allows the tax structure to be reformed without an unnecessary hit to short-term growth. Even so, the magnitude of the measures sends a bold signal to other countries. In an environment of permanently low interest rates — which Japan has known longer than anybody else — constraints on government budgets are looser than conventionally thought to be. The concern is not about spending too much, but about spending money well — a change of mindset for policymakers scarred by the financial crisis. There are signs of it happening. The Netherlands is looking to expand investment; even Germany is questioning its balanced-budget dogma. Good. When governments can borrow for free there is little reason not to invest to the hilt. The sooner finance ministers learn to love this situation, the better.