There was a moment a couple of weeks ago when hyperbolic commentators were saying we had just tripped over the precipice into another financial crisis. Bank shares had dropped, investors fretted that the economy was headed for a recession and Japan surprised everyone by adopting negative interest rates.
This came barely two months into a year in which the stock market in China has popped, the oil price has plumbed new depths, a US recession has been mooted and everyone – from financial markets to policy-makers – is looking to central banks to sort it out.
The OECD lumped in more bad news when it reduced how much it thought the world economy would grow by this year to 3 per cent from an already pretty paltry 3.3 per cent. The Paris-based think-tank also urged policy-makers not to rely solely on their central banks to boost flagging demand.
The doomsayers are too downbeat but the OECD got it completely right. Since the financial crisis, a disproportionate amount of responsibility for getting the global economy back on track has fallen on the shoulders of central banks. Hastily convened conferences of global leaders in the teeth of the crisis led to some bold policies. But the momentum has since withered. Central bankers duly cut interest rates and embarked on quantitative easing. Many are now urging central banks to renew the momentum by adopting “helicopter money”, where newly-printed money is given directly to consumers. It would boost demand for sure but it won’t solve the problem.
The efficacy and wisdom of these policies is now being openly questioned. But these critics (including politicians) neglect to realise that the monetary policies of central banks should act in concert with the fiscal and supply-side policies of government. Now is the time for the latter to step up.
A good start for policy-makers would be to cut taxes. They should be directed at the lower paid as this group tends to spend more readily. Cutting income tax or increasing tax credits would distort the economy less than other policies. Or governments could stimulate specific sectors by, for instance, cutting VAT on certain items to boost discretionary spending.
Spending more on infrastructure can increase income at a national level by more than the initial cost. It would also help support future growth. It is vital that spending on infrastructure is done with a view to the long term and distanced from the short-term electoral windows of politicians. Governments can take advantage of ultra-low interest rates to borrow money to finance these much-needed capital projects. By leading from the front, they may also encourage companies and consumers to spend, when at present they are hoarding cash given the uncertain environment.
More could be done in labour markets too. One measure that would help would be for governments to fund schemes which retrain the unemployed and much more actively match them with available vacancies.
Here in the UK we are acutely aware that not enough new housing is being built. But we are not alone and other countries need more new housing. Removing the barriers to new construction would help stimulate the economy and, over the long term, bring down housing costs if done at sufficient scale.
Sadly I am not hopeful that we will see the action required following the G20 meeting. Increasing spending on long-term capital projects is anathema to many political parties across the developed world, which have put a great deal of stock in the idea that austerity alone will return our economies to health. It won’t. We need action and spending may be the only way of digging ourselves out of this malaise.