As world business leaders gather in Davos, a long-overdue paradigm shift in monetary policy – subordinating the targeting of inflation to the targeting of growth – is slowly taking shape.
In what some call a “reverse Volcker moment,” US Federal Reserve Chairman Ben Bernanke has specified a target of 6.5% unemployment alongside his inflation target; Japan’s new government has proposed a minimum inflation target; and Mark Carney, the next governor of the Bank of England, has argued that “there could not be a more favorable case for nominal GDP targeting.” Meanwhile, China has pledged to double average domestic per capita income by 2020.
Sadly, it has taken four years of gross underestimation of the impact of fiscal austerity and a chronic shortage of demand (with the economy’s supply potential beginning to decline accordingly) for us to agree to target growth – which the G-20 called for in 2009.
So why, with change materializing, is there so little optimism about growth as we enter 2013, and why is there so much talk of a “lost decade”? The answer is that the problem of low growth requires more than a shift in national monetary policies: it also requires an agreement to coordinate global growth – a solution that has not been forthcoming.
Of course, some of the pessimism arises from the weakness of Europe, which has agreed only that the European Central Bank be lender of last resort; and some stems from recognition of the limits of quantitative easing. In part, we are victims of a self-fulfilling pessimism – the view that a debt overhang dooms us to unemployment and stagnation, with nothing to be gained by attempting to use fiscal expansion or monetary innovation to counter it.
But I believe that we have failed to grow faster for a more fundamental reason. Put simply, ten years ago, America could deliver a global recovery. Perhaps ten years from now, Asian consumer spending will fill this void. But today, for the first time in decades, no single economy can drive the global economy forward.
For 150 years, until 2010, the West (America and Europe) was responsible for the majority of global output, manufacturing, trade, investment, and consumption. Now we are in a transitional era, with the rest of the world out-producing, out-manufacturing, out-trading, and out-investing Europe and America – but not yet out-consuming them.
This imbalance means that producers of most goods and services are outside the West, but rely on Western consumers to absorb their output. Until the transition is complete, we depend on each other: no one can succeed alone. But, in the absence of global coordination, the world is stuck in a rut, acting out its own global version of the “prisoner’s dilemma” – a universe in which no major economy can succeed on its own, yet none trusts any other enough to attempt cooperation and coordination.
Nominal-GDP targets may be a necessary way forward, but they are not a sufficient response to slow global growth. Even the boldest of national initiatives may fail – not because targeting economic growth is the wrong approach, but because there is no way to sustain the higher levels of growth that we need without better global coordination. In the absence of a favorable global context, any change in economic policy that is purely national, like employment targeting, will have limited benefits (and may discredit the pursuit of a national employment goal).
So today’s fundamental policy void – yet to be addressed – lies in national governments’ unwillingness to contemplate global leadership. Cynics might argue that this is dysfunctional national decision-making replicated at a global level. But there is a more compelling explanation: nobody will confront pervasive protectionism.
Of course, economic nationalism is obvious in America, with its nervousness about China and hostility to global agreements; but Europe, too, is now witnessing both a wave of anti-immigrant sentiment and rising resistance to helping poorer countries.
Indeed, it is safer for politicians to offer the opposite of a global vision: to renationalize every economic problem and attribute all of them to the mistakes of domestic opponents. So, for four years, budget deficits – which do, of course, have to be addressed by long-term debt-reduction plans – have virtually monopolized economic-policy debate in Europe and America, at the expense of sensible discussions about growth, employment, and trade.
Put crudely, it is more beneficial politically for an opposition politician to claim that his country’s problems are self-induced, caused by domestic profligacy, and have little to do with global financial failures. Citizens would be excused for concluding that the 2008 global financial crisis had nothing to do with a global banking collapse and was entirely caused by a few spendthrift national governments racking up deficits.
As a result, millions of people are unemployed unnecessarily, and millions more face reductions in their living standards. Economics is now global, but politics remains local. Global challenges grow, while the agendas of international summits contract, reinforcing the myth that they are mere talking shops.
But, even as protectionist sentiment frustrates cooperation, there is a global growth deal waiting to be done. It starts from the recognition that large surplus savings and much unused capacity are waiting to be mobilized, and that expanding consumer demand among Asia’s rising middle class holds the key to expansion. Yet China, whose consumers are perfectly able to absorb imports from the West, will remain wary of boosting middle-class demand while it is in fear of losing some of its Western export markets. India’s government wants to open up its economy to Western imports, but the rest of the world is not addressing its fears of over-exposure to global volatility.
Only a coordinated policy response covering all of the G-20 economies can break this vicious cycle of low confidence and slow trade growth. If China could be confident that its export markets will not falter, it could expand domestic consumer demand and take in Western goods. Likewise, if America were confident that it could sell in Asia, Western consumer confidence would rise.
Three years ago, the International Monetary Fund showed that by coordinating the expansion of Asian demand and investment in Western infrastructure, we could mobilize private funds for big private-public partnership projects. Global output would rise 3%, employment would grow by 25-30 million, and 100 million people would escape poverty.
Global economic coordination is no longer a luxury. Winston Churchill’s gibe about the policies of the 1930’s haunts us as well. Governments, Churchill said then, were “resolved to be irresolute, adamant for drift, solid for fluidity, and all-powerful for impotence.” In 2013, it is irresolution, drift, and the resulting impotence that we, too, must address.