"Out of ammo", "helicopter money", "monetary impotence", "infrastructure push", "savings glut". These are the kind of strange handles economists are using when debating why the world's economy is stuck--and what governments should do to jolt it out of its lethargy. The data is clear. Growth in global output is about half what it was before the great recession of 2008-09. Nobody expects that to improve much this year or next--on the contrary. And the blues have spared almost no country. From Europe to Japan, and from China to Brazil, economic growth is flat, falling, or failing. Why can't policy-makers do something about it?
To be fair, they are trying. But the old weapons don't seem to work anymore. Central banks, especially in rich countries, have reduced interest rates all the way down to zero--and, in some cases, even below zero--in a sensible attempt to make credit cheaper. But it turns out that there were not enough investors and consumers willing to take on more credit. Those same central banks then opted for their equivalent of heavy weaponry and began to trade bonds for cash--a.k.a. "quantitative easing". That helped, but not much. And now, they are seriously considering a nuclear option: just printing money and giving it to the government to spend. They hope that some more public infrastructure here or a tax cut there can spur the economy. You get a sense for what "helicopter money" means.
What's happening? In a nutshell, the world is saving too much and investing too little. This is not new. It has been in the making for the past quarter century. The telling symptom that there is a yawning gap between how much we save and how much we invest is in the price of savings, that is, in the interest rates we pay for loans. Controlling for inflation, those rates have been on the decline since the early 1990s. In recent research, Lukasz Rachel and Thomas Smith, two economists at the Bank of England, show that, on average, long-term real interest rates in advanced economies have fallen by more than four percentage points--that's a lot, as anyone who has ever had a mortgage will tell you.
More to the point, when you look at its probable causes, the chasm between saving and investment shows no signs of closing any time soon. Rising income inequality, aging populations, and lack of trust in government have all played a role. Because they lack for little, the rich save a larger proportion of their income compared to the poor. So do those of working age, compared to the young and the old. And, with the price of commodities booming, many countries blessed with oil, gas, or minerals set up "sovereign wealth funds" to put away some of the windfall for a rainy day, just to make sure that politicians did not squander it.
On the investment side, things are less obvious. Nobody knows for sure what has been restraining it all these years. Some point to the steep fall in the price of capital goods like cranes or computers--they say that when projects get cheaper, investors do not necessarily do more projects. Others blame it on a protracted retrenchment of public investment since the early 1980s, driven mostly by ideology. Governments in the industrial world are estimated to have cut back on capital expenditures, on average, by one percent of GPD--not minor, if you consider that their level of investment currently stands at about three percent of GDP. These changes in both private and public attitudes towards investment could not come at a worst time, as nobody expects the world economy to recover its turbo-charged growth of the 1990s. Short of a game-changing technology suddenly raising our productivity--like the internet did--long-term global growth will stay modest at best. Why invest if business will be soft?
So, the world may need to get used to super-low interest rates. Is that really a problem? It certainly makes life more difficult for central bankers. They cannot be counted on to smooth downturns in the economy. But some will argue that the time has never been better for governments to borrow as much as they need to build first-class infrastructure. This should boost the economy now--welcome to the "infrastructure push"--and in the future: better ports, roads, and power grids should make us all more productive. Others scratch their heads at the idea of giving a blank check to politicians. It can forever shatter any sense of fiscal discipline, and it assumes that civil servants have the capacity to get projects done fast enough. Fair worries.
But, if central banks are "impotent" and governments must be kept on a leash, how do we break the saving-investment conundrum? The answer, in two words, is "structural reform". This is old religion among economists--well-known, hard, glamor-less. But it works. It just means making life easier for investors, big and small, foreign and local. It involves basic virtues like open trade, smart regulation, reasonable taxes, skillful workers, secure contracts, accessible land, and reliable logistics. Maybe, just maybe, in a world where cheap loans alone fail to entice entrepreneurs, we should look at what else is holding them back and fix it.
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To be fair, they are trying. But the old weapons don't seem to work anymore. Central banks, especially in rich countries, have reduced interest rates all the way down to zero--and, in some cases, even below zero--in a sensible attempt to make credit cheaper. But it turns out that there were not enough investors and consumers willing to take on more credit. Those same central banks then opted for their equivalent of heavy weaponry and began to trade bonds for cash--a.k.a. "quantitative easing". That helped, but not much. And now, they are seriously considering a nuclear option: just printing money and giving it to the government to spend. They hope that some more public infrastructure here or a tax cut there can spur the economy. You get a sense for what "helicopter money" means.
What's happening? In a nutshell, the world is saving too much and investing too little. This is not new. It has been in the making for the past quarter century. The telling symptom that there is a yawning gap between how much we save and how much we invest is in the price of savings, that is, in the interest rates we pay for loans. Controlling for inflation, those rates have been on the decline since the early 1990s. In recent research, Lukasz Rachel and Thomas Smith, two economists at the Bank of England, show that, on average, long-term real interest rates in advanced economies have fallen by more than four percentage points--that's a lot, as anyone who has ever had a mortgage will tell you.
More to the point, when you look at its probable causes, the chasm between saving and investment shows no signs of closing any time soon. Rising income inequality, aging populations, and lack of trust in government have all played a role. Because they lack for little, the rich save a larger proportion of their income compared to the poor. So do those of working age, compared to the young and the old. And, with the price of commodities booming, many countries blessed with oil, gas, or minerals set up "sovereign wealth funds" to put away some of the windfall for a rainy day, just to make sure that politicians did not squander it.
On the investment side, things are less obvious. Nobody knows for sure what has been restraining it all these years. Some point to the steep fall in the price of capital goods like cranes or computers--they say that when projects get cheaper, investors do not necessarily do more projects. Others blame it on a protracted retrenchment of public investment since the early 1980s, driven mostly by ideology. Governments in the industrial world are estimated to have cut back on capital expenditures, on average, by one percent of GPD--not minor, if you consider that their level of investment currently stands at about three percent of GDP. These changes in both private and public attitudes towards investment could not come at a worst time, as nobody expects the world economy to recover its turbo-charged growth of the 1990s. Short of a game-changing technology suddenly raising our productivity--like the internet did--long-term global growth will stay modest at best. Why invest if business will be soft?
So, the world may need to get used to super-low interest rates. Is that really a problem? It certainly makes life more difficult for central bankers. They cannot be counted on to smooth downturns in the economy. But some will argue that the time has never been better for governments to borrow as much as they need to build first-class infrastructure. This should boost the economy now--welcome to the "infrastructure push"--and in the future: better ports, roads, and power grids should make us all more productive. Others scratch their heads at the idea of giving a blank check to politicians. It can forever shatter any sense of fiscal discipline, and it assumes that civil servants have the capacity to get projects done fast enough. Fair worries.
But, if central banks are "impotent" and governments must be kept on a leash, how do we break the saving-investment conundrum? The answer, in two words, is "structural reform". This is old religion among economists--well-known, hard, glamor-less. But it works. It just means making life easier for investors, big and small, foreign and local. It involves basic virtues like open trade, smart regulation, reasonable taxes, skillful workers, secure contracts, accessible land, and reliable logistics. Maybe, just maybe, in a world where cheap loans alone fail to entice entrepreneurs, we should look at what else is holding them back and fix it.
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