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 This week brought another slew of disappointing figures from Europe
and Japan, the weakest links in the world economy since the collapse
of Lehman Brothers, despite the fact that the financial crisis
originated in the United States. But even in the United States,
Britain and China, where growth appeared to be accelerating before
the summer, the latest statistics -- disappointing retail sales in
the United States, the weakest wage figures on record in Britain and
the biggest decline in credit in China since 2009 - suggested that
the recovery may be running out of steam.
As Stanley Fischer, the new vice chairman of the Federal Reserve
Board, lamented on August 11 in his first major policy speech: “Year
after year, we have had to explain from mid-year onwards why the
global growth rate has been lower than predicted as little as two
quarters back. ... This pattern of disappointment and downward
revision sets up the first, and the basic, challenge on the list of
issues policymakers face in moving ahead: restoring growth, if that
is possible.”
The central message of Fischer’s speech - that central bankers and
governments should try even harder than they have in the past five
years to support economic growth - was closely echoed by Mark
Carney, the governor of the Bank of England, at his quarterly press
conference two days later.
This consistency should not be surprising: Carney was Fischer’s
student at the Massachusetts Institute of Technology in the 1970s -
as, even more significant, was Mario Draghi, president of the
European Central Bank. Because of Fischer’s influence on other
central bankers, as well as his unparalleled combination of academic
and official experience, he is probably now the world’s most
influential economist.
When President Barack Obama appointed him vice chairman of the
Federal Reserve, Fischer was widely viewed as more hawkish than
Chairwoman Janet Yellen. He was considered a restraining influence
on her instinct to focus on jobs and growth rather than inflation
control.
So investors and business leaders should pay attention when Fischer
makes his first major speech a call for more explicitly
growth-oriented monetary policies - a call that other central
bankers are already heeding.
Carney made this clear when he surprised financial markets by
revealing no hint of anxiety about inflation or financial bubbles.
He instead reiterated the Bank of England’s interest rate policy of
“lower for longer” than almost anyone expects. To the chagrin of
currency traders, who had been buying sterling on the assumption
that Britain would be the first major economy to raise interest
rates - perhaps as early as this year.
Even at the European Central Bank, the once taboo idea that monetary
policy can be used to stimulate growth is suddenly open for
discussion - if not yet conventional wisdom.
Draghi, in his recent policy statements, has unequivocally promised
that the European Central Bank would keep interest rates at zero far
longer than the Fed and has openly welcomed the weaker euro this
policy should produce. There has also been no criticism for this
ultra-dovish policy from German Chancellor Angela Merkel or the
Bundesbank - if only because the German economy is reeling from the
body-blow of the sanctions war with Russia and the violence in
Ukraine.
But what of Fischer’s discouraging caveat at the end of his quote?
The challenge, he said, “is restoring growth, if that is possible.”
Many economists now say there is nothing more that policy can do to
stimulate growth or employment, a view shared by many
industrialists, financiers and politicians. Fischer is clearly not
among these skeptics, and neither are the other leading central
bankers.
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Though official statements from leading policymakers are invariably
hedged with qualifications, the gist of Fischer’s speech is clear:
Restoring pre-crisis growth rates should be possible - but only if
economic policy is reformed to deal with three issues that have been
treated as taboo, especially among central bankers:
First, central banks must be allowed to interpret their inflation
targets flexibly, to ensure that monetary policy promotes growth, as
well as maintaining stable prices. In support for European debtor
nations that are wrestling with Germany over the ECB’s exclusively
inflation-fighting mandate, Fischer insists that “in practice, even
in countries where the central bank officially targets only
inflation, monetary policymakers also aim to stabilize the real
economy around some normal level or path.”
Second, policymakers must distinguish weak demand, which is likely
temporary, from weak supply-side growth, which may well be
structural. This is essentially the issue discussed last month in
this column. In the United States, Fischer attributes the weakness
of demand to housing, Europe and fiscal drag, and suggests that all
these “headwinds” could be counteracted with better policies.
Housing, for example, could be helped by avoiding a repeat of the
“sharp rise in mortgage rates in mid-2013.” Reversing the drag from
Europe requires resolution of the euro crisis. On fiscal policy, the
obvious solution is simply to stop raising taxes or cutting public
spending.
Third, Fischer points out that some of the supply-side obstacles to
growth that seem structural - such as falling labor participation,
low investment and weak productivity - can be caused by temporary
weakness of demand rather than by permanent changes in technology or
human nature.
A key objective of monetary policy is, in his view, to ensure that
any temporary weakness of demand does not translate into a permanent
reduction of supply by eroding work habits, discouraging investment
and slowing productivity growth. “There are real risks that cyclical
slumps can become structural,” Fischer said, “and it may be possible
to reverse or prevent declines from becoming permanent expansive
macroeconomic policies.”
As for the idea that productivity growth is permanently declining
because technological ideas are near exhaustion, Fischer concludes
wryly: “It is unwise to underestimate human ingenuity.”
It may also be unwise to underestimate the ingenuity of central
bankers - now that they are really determined to get faster growth.
(The opinions expressed here are those of the author, a columnist
for Reuters.)
(Anatole Kaletsky)
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