No Quick Fix for Structural Reforms

Finance ministers and central bankers from the Group of 20 leading nations met in Cairns Australia over the weekend.  The clever fellows believe, with the right balance of fiscal and monetary policies, they can improve the global economy.  This, of course, means greater stimulus and fabricated demand.

‘“We are determined to lift growth, and countries are willing to use all our macroeconomic levers – monetary, fiscal and structural policies – to meet this challenge,’ said Australian Treasurer Joe Hockey, who hosted the event.”  The G20 leaders want to increase global growth by 2 percent.  So far they can’t quite seem to get there.

The way things are going, it looks like they’ll fall about 0.2 percent short of their goal.  But it’s not because they aren’t trying.  “Almost 1,000 measures had been proposed that would boost global growth by 1.8 percent by 2018, nearing the ambitious goal of 2 percentage points adopted back in February.”

Perhaps the goal will be achieved.  But here at the Economic Prism we believe this will be more by luck than by erudite policy.  Taxes, interest rates, infrastructure spending…what’s good for one country may not be good for another.

U.S. Treasury Secretary Jack Lew wants greater efforts to boost demand.  German Finance Minister Wolfgang Schaeuble wants strict budget controls.  We’ll see what they come up with when the G20 leaders formally approve the global growth proposals in November.

Neither Supply nor Demand

Meanwhile, former Treasury Secretary Larry Summers believes bold reform is the only answer to what he calls secular stagnation.  “Almost a year ago,” says Summers, “I invoked the concept of secular stagnation in response to the observation that five years after financial hemorrhaging had been staunched, the business cycle was cycling back to what had been previously thought of as normal levels of output.”

As Summers notes, these normal levels of output haven’t been attained.  This, according to Summers, is because sufficient demand hasn’t been maintained.  In addition, if employment growth is slow economic growth could be restrained by supply side potential.

“Why has the economy’s supply potential declined so much relative to the pre-2007 trend?  This will be debated in the years to come.  Part of the answer lies in the damaging effect of past economic weakness on future potential.  Part is the brutal demographics of an ageing population, the end of the trend towards increased women’s labor force participation, and the exhaustion of the gains from an increasingly educated workforce.  And part is the apparent slowing of at least measured productivity.

“To achieve growth of even 2 percent over the next decade, active support for demand will be necessary but not sufficient.  Structural reform is essential to increase the productivity of both workers and capital, and to increase growth in the number of people able and willing to work productively.  Infrastructure investment, immigration reform, policies to promote family-friendly work, support for exploitation of energy resources, and business tax reform become ever more important policy imperatives.”

In other words, fiscal and monetary policies are not working.  Moreover, it’ll take more than cheap credit and stimulus spending to get things back on track.  It’ll take structural reforms, which take time.

No Quick Fix for Structural Reforms

These days inflation, taxes, and regulations all seem to work against the middle class worker.  Stimulus and cheap credit from the Fed were supposed to help them.  This hasn’t been the case.

Monetary and fiscal policies were supposed to create demand.  New spending would result in new jobs, we were told.  Before long the economy would be running like a well-oiled machine.

But we all know what happened.  Stocks ran up and the wealthy – the primary holder of stocks – benefitted.  In addition, while the unemployment rate did come down it was more of a result of a falling labor participation rate than new jobs creation.  The middle-class worker saw little relief.

Day after day the middle class can’t seem to catch a break.  In fact, just yesterday housing, the middle-classes largest financial asset, stepped on a banana peel.  According to the National Association of Realtors data released on Monday, sales of existing homes fell 1.8 percent from July.

What’s the point?

The point is, there’s no quick fix for structural reforms.  Economic distortions take time and difficulty to deal with.  Old structures must be demolished.  New footings must be poured.  Eventually these will be the new foundations for a healthy and thriving economy.  In the meantime, the G20 doesn’t stand a chance.

Sincerely,

MN Gordon
for Economic Prism

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