Is the OECD right that fiscal stimulus is required to boost growth in the global economy?

Can governments be trusted to apply stimulus sensibly? (Source: Getty)
Olivier Vardakoulias, an economist at the New Economics Foundation, says Yes.

It is now well established that the idea of “contractionary expansion” – that cutting deficits during economic downturns enhances growth – is wrong. Recent IMF evidence suggests that additional public expenditure has a positive effect on growth, while public expenditure cuts undermine economic performance. Meanwhile, since 2008 western governments have mainly relied on monetary policy to support economic activity. But monetary policy is now ineffective: even at near-zero interest rates, private sector investment is sluggish, and savings are hoarded rather than being channelled into productive investment. This undermines both productivity and potential growth. In this context, more public investment in infrastructure, education, research and development, and innovative green technologies would be a win-win-win. First, it would raise our productivity potential. Second, it would crowd in private capital. And third, it would create more demand in the economy, encouraging private sector investment and preventing a prolonged period of sluggish economic performance.

Julian Jessop, chief global economist at Capital Economics, says No.

The OECD’s analysis is selective, backward-looking and full of contradictions. In reality, global prospects are much brighter than the recent market turbulence suggests. There are pockets of weakness, as always. But while the strong dollar is a headwind for the US, it is supporting demand elsewhere. What’s more, the drag on investment from low oil prices is last year’s story. Looking forward, more of the benefits should now start to come through in the form of higher spending on other goods and services. Similarly, a handful of emerging markets face financial problems, but debt ratios are generally lower than in advanced economies, and many –including China and India – are net gainers from lower commodity prices. That just leaves a few countries that might be helped by fiscal stimulus, mostly in Western Europe, but only if debts are low to begin with and (an even bigger if) their governments can be trusted to apply stimulus sensibly.

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