(Will Governments start spending more to boost growth?)

Over the last few months there has been a notable shift in the narrative around economic policy.

Since the GFC, the main tool of policymakers has been monetary policy (think record low interest rates). 

While monetary policy has been effective in preventing some really horrible things from happening (a major depression), it takes more for good things to start happening. This is where fiscal policy starts to come in.

Fiscal policy simply means Government spending, and over 2016, more people have started calling for Governments to start spending more. They all make the point that monetary policy cannot do more to stimulate growth, and one option is more Government spending. Proponents include many central bank heads, and President-elect Donald Trump.

There are many reasons why monetary policy won’t do more, but one is the presence of “zombie” banks and companies throughout much of the world. These are organisations that have huge debts and their whole focus is on surviving and living day to day, hand to mouth. In some countries, this can go on seemingly forever.

The case for more Government spending goes like this:

 “Borrow long term at current record low interest rates, use the money to build productive infrastructure and the multiplier effect of the initial build, plus the productivity boost to the whole economy will boost growth, employment and taxes.”

The main condition for this to work, is that the infrastructure must be “productive”. Japan, in past decades spent big on infrastructure, but failed to get the boost. Main reason was that much of it was wasted. I have seen freeway off-ramps in Japan that end in mid-air. Roads to nowhere. Still, I suppose the initial spend helped re-elect the local member.

 

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