OECD Worries Governments Are Caught In A Low Growth Trap But Their Solution Is Wrong:VIDEO
OECD Worries Governments Are Caught In A Low Growth Trap But Their Solution Is Wrong
Tim Worstall
CONTRIBUTOR
The Organisation for Economic Cooperation and Development (otherwise known as the OECD, or rich nations’ club) worries that there’s something wrong with the world economy. Specifically that monetary policy is being asked to do too much of the heavy lifting in generating economic growth and that other things must be tried. I would agree so far myself: it’s the bit that comes next that I disagree with. For effectively they’re advocating a return to a rather archaic Keynesianism and that’s not the way to go in my opinion. Given the vast inefficiency with which government spends money, most especially upon infrastructure, that’s just not the way that I would do it. If it must be fiscal policy then cut taxes and if it’s not to be fiscal policy then it should be what we should be doing anyway: supply side reform.
source oecd.org
edited by kcontents
As the OECD is saying:
The world economy is locked in a “low-growth trap” and will expand this year at its slowest pace since the financial crisis, the Organization for Economic Cooperation and Development said on Wednesday, urging governments to increase spending.
With businesses wary of investing and consumers cautious about spending, the global economy will grow only 3 percent this year, the O.E.C.D., the research and policy organization estimated in its Economic Outlook report, which it releases twice a year.
The underlying concern is that:
According to the OECD, firms are too cautious to invest, are holding back innovation and productivity. As a result, households are getting more pessimistic about jobs and the future. The ensuing weaker consumer spending then feeds back into pessimism among companies, creating a vicious cycle.
And monetary policy is being asked to carry too much of the weight:
“Monetary policy has been the main tool, used alone for too long,” OECD Chief Economist Catherine Mann said in the semi-annual report released Wednesday. “In trying to revive economic growth alone, with little help from fiscal or structural policies, the balance of benefits-to-risks is tipping.”
Now I look at this all somewhat askance. For I’m convinced that it’s microeconomics that really matters. Macroeconomics is important in the short term, yes, but in the long term get the basics of the market structure right and she’ll be fine. And the thing is, you might have to press an economist really hard but eventually you’d get the agreement that this is correct. What fiscal policy is this year is going to have almost no effect whatsoever on how rich the place will be in 30 years. The point itself is correct, it’s whether it’s 95% or 99% correct that might be discussed.
I then go on to say that monetary and fiscal policy might well be useful in the short term. But they’re not really goals in and of themselves. I always regard them as being just things which make it easier to get the supply side right: to make those structural changes we need so as to increase future growth.
Thus I’m right with the OECD: growth looks like being not very good so we should be doing something. Monetary stimulus has done well but it’s not enough. They then go on to say that fiscal stimulus is that next thing. At which point I go, well, hmm: the inefficiency with which any government these days builds a bridge or other piece of infrastructure means that I just don’t see it as solving anything. Thus, if fiscal policy there must be then I’d advocate cutting the payroll tax: which is what Keynes himself came to think as well.
But then I would go that one step further. It is reform of the supply side which is the key to long term growth prospects. That stimulus is more of an analgesic for the pain of doing that supply side reform than anything else to me. And my analysis is that the modern economies need to take a chainsaw to the regulations which restrict new economic activity. Free up that economy, bring back a bit more of the room for economic growth to happen in and economic growth will happen.
That is, contra the OECD’s analysis, we don’t need to stimulate the economy: we need to carve out the space into which growth can occur.
http://www.forbes.com/sites/timworstall/2016/06/01/oecd-worries-governments-are-caught-in-a-low-growth-trap-but-their-solution-is-wrong/#5c30094d57f9
