Untried, Untested, Ready: Remedies for the Global Economy

"Helicopter money"? It could work.

Photographer: Matthew Lloyd/Bloomberg

The deeper the slump, economists used to say, the stronger the recovery. They don’t say that anymore. The effects of the crash of 2008 still reverberate, with the latest forecasts for global growth even more dismal than the last. 

The persistently stagnant world economy is more than just a rebuke to economic theory, of course; it exacts a human toll. And while politicians and central bankers -- or economists, for that matter -- can’t be faulted for their creativity, their remedies might have more impact if they were bolder and better-coordinated.

By ordinary standards, to be sure, governments haven’t been timid. Without fiscal stimulus and aggressive monetary easing in the U.S. and other countries, things would look even worse. And yet, worldwide output is predicted to rise only 3.2 percent this year, falling still further below the pre-crash trend. Simply doubling down on current strategies is unlikely to work. Large-scale bond-buying, or so-called quantitative easing, has run into diminishing returns. Negative interest rates, where they’ve been tried, haven’t revived lending, and central banks are unable or unwilling to cut further.

Negative interest rates

What about new fiscal stimulus? Where possible, that would be good -- but it’s hardest to do in the very countries that need it most, because that’s where public debt is already dangerously high.

True, as the International Monetary Fund’s new fiscal report says, almost all countries could become more growth-friendly by combining measures to curb public spending in the longer term (for instance, raising the retirement age) with steps to increase demand in the short term (cutting payroll taxes, raising employment subsidies and building infrastructure). Getting fiscal policy right country by country would surely help -- yet probably wouldn’t be enough: No single country can adequately deal with a global shortfall of demand.

A finance ministry for the world isn’t happening any time soon. Still, it’s a pity that governments aren’t trying harder to coordinate their fiscal policies more intelligently, or indeed at all. The global slump persists partly because of international spillovers. Better coordination would take these into account: Countries that could safely deploy fiscal stimulus would give some weight to global as well as national conditions, and fiscal policy would be formed interactively.

Even within the European Union, where you’d expect economic coordination to be the norm, and where the single currency makes it essential, there’s no sign of it. At the global level, in forums such as the IMF, you might expect the U.S. to take the lead in any such effort. So it should -- but it will need to mend its shattered policy-making machinery first. If Washington can’t come to a decision on its own on taxes or spending, the question of coordination doesn’t arise.

The last resort, if the slump goes on and governments can’t coordinate better, might be to combine monetary and fiscal policy in a hybrid known (unfortunately) as helicopter money. Governments would cut taxes and/or spend more, but meet the cost by printing money rather than by borrowing. In one variant, central banks might simply send out checks to taxpayers.

That’s a startling idea, no doubt -- but so was quantitative easing not long ago. In one way, helicopter money would actually work better than QE: It acts directly on spending and couldn’t fail to stimulate demand. The danger is that it might raise inflation in a way that central banks couldn’t then control. Oh, and there is the minor detail that in Europe it would be illegal, while in the U.S. it would merely be politically toxic.

On one hand, then, you have the prospect of persistently slow global growth, and all the waste of talent and resources that entails. On the other, you have a few untried remedies that governments can’t or won’t use. Maybe, as the first point sinks in, governments will be willing to take a hard look at the second. Eight years after the crash, the problem sure isn’t taking care of itself. 

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.