Was Larry Summers right after all?
Around the world, governments are planning fresh spending to boost growth and support wages, heeding the advice of the Harvard University economist and others who have argued that economies need the jolt as society ages and productivity sags. That’s signaling the ascendancy of energizers like Japanese Prime Minister Shinzo Abe, and the firing of austerity advocates such as former U.K. Chancellor George Osborne.
The shift away from budget rigor and reliance on monetary policy has been subtle and isn’t universal. So while countries like Canada and South Korea are among those rolling out fiscal stimulus, others such as Germany are still holding firm. Borrowing heavily to support growth in the euro area is still out of favor.
Nevertheless, the global mood music now is different from most of the period since the last financial crisis. Instead of the doctrine of belt-tightening and spending cuts, today’s political narrative talks about higher-quality jobs, investment, or the dangers of inequality. In few economies is this more obvious than in America. Where once the government shut down during a spat over spending, now neither candidate in the U.S. presidential election is talking much about the deficit.
“We might be starting to see some chinks of light among the fiscal gloom,” said Steven Barrow, head of G-10 strategy at Standard Bank in London. “The global economy needs a kick up the backside from a demand perspective, and fiscal is probably the way. Monetary policy is just not doing it.”
Asia is leading the drive. Japan is assembling a 28 trillion yen ($273 billion) round of stimulus. While much of that total is made up of loans and longer-term projects with little immediate implication for growth, the package is also set to include fresh spending.
For the current year, Abe’s cabinet on Tuesday approved an extra 4.6 trillion yen earmarked for upgrading port facilities for cruise ships, as well accelerated construction of a high-speed maglev train line.
China, the world’s second-biggest economy, is pumping cheap credit into banks, companies and local governments in an effort to stoke growth. In June alone, the nation’s broadest measure of financing and credit rose by $244 billion. South Korea has unveiled an 11 trillion won ($9.9 billion) supplementary budget to support the jobs market.