The headlines are full of gloom about the world economy: “Global Slowdown Threatens Recovery,” The Wall Street Journal warns. “Emerging markets slowdown fuels concern for global outlook: Unease that low growth has become ‘the new normal,’ ” says the Financial Times. Christine Lagarde, managing director of the International Monetary Fund, sees “the risk of a new mediocre, where growth is low and uneven.”
Some of this reflects unfortunate, enduring after-effects of the global financial crisis and the Great Recession. But the notion that all this is inevitable and economic policy has done all that it can do is defeatist and wrong.
Take the U.S. and Europe.
The Federal Reserve has done a lot, more than some Fed policymakers would have liked, not enough for its critics. But fiscal policy in the U.S. at the local, state and federal levels has been a restraint on growth. (See the Hutchins Center’s Fiscal Impact Measure for the facts.) And gridlock in Congress is an obstacle to anything that might give the economy a lift–be it a dose of infrastructure spending (which has the double benefit of boosting demand and supply) or thoughtful corporate tax reform or your favorite remedy.
Matters are even worse in Europe. Mario Draghi is stepping up his efforts at the European Central Bank with resistance from Germany. German politicians appear reluctant to take the widespread advice that a country with strong government finances, a trade surplus, decaying infrastructure, a slowing (if still low-unemployment) economy, and a huge stake in the European project should be investing more in infrastructure, considering pro-investment tax cuts, and raising wages. As Mr. Draghi put it last week: “For governments that have fiscal space, then of course it makes sense to use it. You decide to which country this sentence applies.” Europe as a whole desperately needs a coherent fiscal policy, along with more movement on some of those much-discussed structural reforms, particularly those that would make doing business easier.
“There is a real risk of subpar growth persisting for a long period of time, but what is important is that we know it can be averted,” Ms Lagarde said at the end of the weekend meetings of economic policymakers from around the world. “We know it can be averted. And, it will require some political courage, some will, some degree of realism on the part of national legislatures, but it can be done.”
In other words, settling for the “new mediocre” is a choice.