Might as well end the week where I started: talking—OK, complaining—about misguided fiscal austerity. And wondering, once again, why it’s only unelected central bankers, not politicians with jobless and wageless constituents, who are trying to do something about growth and unemployment (see figure below on the magnitudes of the liquidity they’re pumping into their economies).
I began the week touting the important speech by Federal Reserve Vice-Chair Janet Yellen and will end by commenting on this related WaPo piece about how the actions of Central Banks across the globe aren’t having much impact on jobs, investment, and growth.
There’s plenty of money in the world. That’s the good news.
The not-so-good news: The flood of dollars, euros, yen and pounds pumped into the global economy by major central banks in recent years has yet to pay off in the form of job creation, investment and stronger economic growth.
It has kept banks afloat, let corporations build large cash reserves and restructure debt and, arguably, staved off a worldwide depression. But the ultimate aim — strong and self-sustaining growth in the world’s core industrial economies — remains out of reach…
There’s definitely something to that, though you’ve got to consider the counterfactual—how all these economies would be doing absent their central banks’ interventions. But the piece only mentions the key Yellen point—fiscal contraction is pushing the other way—in passing, while I think it’s central.
Many of the traditional crisis-fighting tools are off limits. Governments already have high levels of debt, making officials hesitant to borrow and spend in hopes of boosting jobs and growth.
Well, it’s different in different countries, but in the US (and I’d add the UK), fiscal tools are off limits because we’ve put them there, surrounding much needed jobs measures with the ideological equivalent of yellow police tape. In the European periphery, it’s tougher as borrowing costs are far higher than either here or in the UK, as well as the political economy pressures as they try to negotiate between the currency union, the bailouts to the most troubled members, and the lack of a fiscal union.
But what’s often neglected in this part of the debate are the complementarities between monetary and fiscal policy at a time like this. The central banks can set the table with low interest rates, but absent more action on the demand side of the equation, consumers and investors are just a lot less likely to take advantage of the lower rates.
Bernanke has been explicit about this, asking the Congress to give his team’s work more traction with some fiscal stimulus, but he’s gotten nowhere. In fact, as his colleague Yellen’s figure 3 shows, this recovery is uniquely handcuffed by contractionary fiscal policy.
It’s of course still useful that our Fed and others are trying to help. And there’s a very interesting and curious political dimension to this: you would think that it would be elected officials who would be highly motivated to stimulate growth and bring down the unemployment rate, not unelected central bankers, typically technocrats who don’t have to answer to unemployed constituents.
But, in fact, it’s the other way around. That’s a real head scratcher, and, this being Friday afternoon, I should probably go have a drink and think about that.