Forget the Central Bankers. Build Some Roads.
If the economists at Citigroup are correct, the world risks slumping into a global recession. So there's a lot of talk about the need for the Federal Reserve to resist the temptation to raise borrowing costs or even introduce yet more quantitative easing. The European Central Bank and the Bank of Japan are under similar pressure to augment their QE programs. But if cutting interest rates more than 600 times since Lehman Brothers went bankrupt in 2008 hasn't worked, maybe central bankers dropping more money into the economy from their helicopters is the wrong solution. Maybe the world needs less Milton Friedman and more John Maynard Keynes.
The minutes of the Fed's most recent policy meeting published Thursday show policy makers "decided that it was prudent to wait for additional information confirming that the economic outlook had not deteriorated." Speaking at the International Monetary Fund's annual meeting Friday, Bank of England Governor Mark Carney said, "This is a pretty unforgiving environment; everybody needs to recognize there isn't going to be a big surge of demand from abroad."
According to Andy Haldane, Carney's chief economist, some 40 percent of the world already enjoys interest rates of less than 1 percent, while borrowing costs for two-thirds are below 3 percent. And yet the calls for more central bank action are growing as shown by this chart, compiled by Bloomberg from more than 100 media providers, showing references to the Fed doing more QE:
If free money hasn't cured what ails the economy so far, it's hard to see what more of the stuff can do. And there's no use expecting robots and virtual reality glasses to ride to the rescue, since it seems that new technology isn't boosting productivity. Northwestern University economics professor Robert Gordon (a self-confessed "technopessimist") says that, if anything, productivity improvements are dissipating because the gadgets and software we use aren't really that different from what was available a decade ago:
For the total economy, productivity growth was 2.7 percent from 1920 to 1970, 1.6 percent from 1970 to 1994, 2.3 percent from 1994 to 2004 during what we call the dot-com era, and just 1.0 percent from 2004 to the second quarter of 2015. So the productivity growth of the last 11 years was not only slower than in the dot-com era, but even slower than in the so-called slowdown period beginning in the early 1970s.
So maybe -- just maybe -- it's time for government to step into the breach with some kind of "New Deal" of the sort Keynes might have supported. Economist Paul Krugman made a case this week that it wasn't central banks that prevented the credit crisis from metastasizing into a full-blow Great Depression; it was the existence of "big government," with tax and spending a much bigger part of the economy than in the 1930s:
I'd argue that the fiscal environment was probably more important than monetary actions in limiting the damage.
Earlier this week, IMF chief Christine Lagarde sang the praises of increased infrastructure investment as a fiscal reaction to slowing economies:
The research that we have done most recently shows that it's a win-win option for an economy. It's a winning option for the short term because it's clearly going to support growth activity when you build new roads, when you maintain existing infrastructure. You put people to work (to increase) short-term activity, and it also improves medium to long-term perspectives for growth.
Note that this isn't about paying people to dig holes and fill them back in; instead, it's a call for those countries that can afford to be a bit more relaxed about spending government money to recognize that with central banks now firing blanks, investing in the future of infrastructure might make both short- and long-term sense.
A few years ago, the chief executive officer of one of the world's largest construction companies told me that when pricing for contracts in the U.S., his company doesn't use the model built for developed economies, which makes certain estimates about the logistics surrounding a project. Instead, it reaches for the emerging market template, which assumes everything will be more broken than it first appears, and that building will always take longer and be more difficult. U.S. Senator Tom Carper, writing for Bloomberg View earlier this month, had this to say about U.S. infrastructure:
Our roads, highways, bridges and transit systems are in terrible shape in many parts of the U.S., and they're getting worse. Our public works are in such a dire state largely because our nation's Highway Trust Fund, which helps pay for transportation systems, has been broken since 2008.
The U.K. government seems to have recognized the opportunity. It has just created a new National Infrastructure Commission that will advise the government on new projects such as Crossrail 2, which would run trains from London to the southeast of the country, and a third high-speed rail link to connect cities in the north of England. If a Conservative administration -- one that's implacably opposed to the concept of more government and has been at the vanguard of championing austerity -- can see the benefits of easing its stance on spending, maybe other countries will also wake up to the need for fiscal policy to do its bit now that monetary policy seems to be exhausted.
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