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As 2013 comesto an end, it looks like the world economy will remain stuck in low gear. Forthose reading the tealeaves of global recovery, the third-quarter GDP numbers offered no solace. While the UnitedStates is ahead of the pack, some of its gains could soon be lost, asaccumulating inventories begin eroding profits. Despite glimmers of hope, theeurozone and Japan are struggling to cross the 1% threshold for annual economicgrowth. And the major emerging economies are all slowing, with Russiapractically at a standstill.
Notsurprisingly, a catchphrasein economic-policy debates nowadays is “secularstagnation,” the idea that excess savings chronically dampen demand. Theeconomist Robert Gordon has also argued that the world is low on economicallyproductive ideas.
But before we despair, there is work tobe done. The coordinated fiscal stimulus that saved the world from economiccollapse in 2009 disappeared too quickly, with governments shifting their focusto domestic politics and priorities. As domestic policy options have beenexhausted, economic prospects have dimmed. A renewed emphasis on stimulus mustbe augmented by global coordination on the timing and content of stimulusmeasures.
The crisis wasand remains global. Trade data tell the story: after increasing by about 7%annually in the decade before 2008, world trade fell faster than global GDP in2009 (and more sharply than during the Great Depression). Once the briefstimulus-fueled recovery faded, growth in world trade again slowed quickly,falling to 2% year on year over the past 18 months. Disappointing exportperformance is largely responsible for the recent weakening of economic-growthprospects.
At the end of2008, when the scale of the impending economic destruction was not yetapparent, OlivierBlanchard, the International Monetary Fund’s chief economist, boldly calledfor a global fiscal stimulus, stating that, in these “not normal times,”the IMF’s usual advice – fiscal retrenchment and public-debt reduction – did not apply. Hewarned that if the international community did not come together, “viciouscycles” of deflation, liquidity traps, and increasingly pessimisticexpectations could take hold.
Fortunately,world leaders listened, agreeing in April 2009 at the G-20 Summit in London toprovide a total of $5 trillion in fiscal stimulus. The US and Germany addedstimulus amounting to about 2% of GDP. And China’s banks pumped massive amountsof credit into the country’s economy, enabling it to sustain import demand,which was critical to the global recovery.
But hubrisrapidly set in, and parochialinterests took over. Before the wounds had fully healed, the treatment wasterminated.
The worstoffenders were the US and Germany, which shirked the responsibility to protect the globalcommon good that accompanies their status as economic hegemons. The UnitedKingdom, with its contrivedrationale for fiscal austerity, was not much better. Fiscal stimulus by thesethree countries – together with smaller contributions from France and China –could have continued the necessary healing.
Countries nowseem to think that monetary-policy measures are their only option. But, whereasfiscal stimulus boosts growth at home and abroad, enabling mutual reinforcementthrough world trade, monetary policy is guided primarily by domestic goals,and, in the short term, one country’s gain can be another’s loss.
America leadsthe world in monetary-policy ambition. The researchers Cynthia Wu and Fan DoraXia estimate that the US Federal Reserve’s open-ended asset purchases(so-called quantitative easing, or QE) have led to an effective US policyrate of -1.6%. QE helped American exports by weakening the dollar relativeto other currencies. Once the Japanese engineered their own QE, the yenpromptly depreciated. That has kept the euro strong.
The weakest ofthe “big three” developed economies – the eurozone – has thus been left withthe strongest currency. In the third quarter of 2013, Germany’s export growthslowed and French exports fell. After a spike earlier in the year, Japan’sexports have also contracted. Only US exports have maintained some traction, thanks to theweaker dollar.
In the 1930’s,after the gold standard broke down, world leaders could not agree oncoordinated reflationof the global economy. In his book Golden Fetters, the economist BarryEichengreen argued that the lack of coordinated action dragged out the globalrecovery process. Such delays are costly, and risk allowing pathologies to fester, prolonging thehealing process further.
Now, despiteunfavorable political circumstances, Blanchard should make an even bolder call.These are still not “normal” times, and the “vicious cycles” persist. Anotherglobal fiscal stimulus – focused on public investment in infrastructure andeducation – would deliver the adrenaline shot needed for a robust recovery.
More publicinvestment is twice blessed. It can shake the world out of its stupor; and itcan safeguard against “secular stagnation.” The US, Germany, the UnitedKingdom, France, and China should act together to provide that boost.Otherwise, a sustainable global recovery may remain elusive, in which case 2014could end in low gear as well.
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