German officials say there’ll be no return to balanced budgets in their own country anytime soon. In the U.K., governing Conservatives who championed austerity after the 2008 crash are ruling out a repeat, though they’ve started talking about tax increases to finance pandemic relief efforts.
Yoshihide Suga, Japan’s new prime minister, has said debt consolidation will have to wait until growth is back -- and suggested there’s no hard limit to how much his government can borrow.
Turning Japanese
Japan was the first major country in the modern era where interest rates fell to zero, after a credit bubble burst some three decades ago. Monetary policy was left with no easy way to stimulate growth by making borrowing cheaper -- and households and businesses weren’t keen to take on more debt anyway, while the government could and did. It was an early-warning sign that the world’s central banks might run out of steam, and bring fiscal policy back to the fore.
After 2008, much of the developed world found itself in a similar predicament. Unable to lower short-term rates, central banks tried to cap longer-term borrowing costs by buying securities –- mostly public debt, since governments were the main borrowers in depressed economies. That exposed them to new criticisms.
“Buying assets has all sorts of political and distributional side effects,” said Charlie Bean, a former Bank of England deputy governor. “We have to move out of the world where central banks are seen as the solution, to one where the government and fiscal policy will often have to pick up the ball and run with it.”
Keynes to Volcker
Governments boosted spending in response to the 2008 crash too. There’s now a consensus among economists that they pivoted to austerity too early, holding back growth in the decade before the coronavirus struck. Plenty of fiscal advocates fear that history could repeat itself.
The start-stop approach “contributed to discrediting fiscal policy” in the past, said Robert Skidelsky, an economic historian known for his biography of the British economist and champion of fiscal activism John Maynard Keynes.
After the Great Depression of the 1930s, Keynesian policy became the orthodoxy for most Western governments, who used their budgets to stimulate demand and create jobs. But the edifice came crashing down in the 1970s when unemployment and prices surged at the same time, and inflation-targeting central banks emerged as the primary macro-economic managers.
The watershed moment came with Fed Chair Paul Volcker’s interest-rate hikes at the start of the 1980s, according to Catherine Mann, Citigroup Inc.’s global chief economist, who was working on her PhD around that time. She’s not yet convinced that the policy response to Covid-19 falls into the same game-changing category.
For that to happen, governments would have to start using fiscal policy not just for the short-term purpose of “getting the economy out of the doldrums” but in pursuit of longer-term goals, like lowering inequality or carbon emissions, Mann said.
‘Pretense Is Over’
There are signs they are headed that way. Some recovery programs in Europe have put job-creation and environmental sustainability at their heart, and Biden is promising a $2 trillion green-energy overhaul in the U.S.
And in the world of economics, the new school of Modern Monetary Theory -- which says governments usually have more room to spend in times of low inflation -- has gained traction by advocating bold fiscally-financed programs like a Green New Deal.
It all points toward the revamp of economic management that should have happened after the financial crisis a decade ago, according to Paul McCulley, former chief economist at bond giant Pacific Investment Management Co. Back then, politicians balked at the size of deficits and debt, he told Bloomberg’s Odd Lots podcast. Now he thinks the coronavirus has completed the regime-change.
“Any pretense is over,” he said. “We’re clearly living in a fiscal-policy dominated world.”
This article was provided by Bloomberg News.