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Fiscal policy, which, as an engine of economic growth, went out of style in the inflationary 1970s, is now at the forefront of the fight against COVID-19. Governments subsidized wages, sent checks home, and provided guarantees for business loans.
In the process, they have grown to record budget deficit levels, an approach that has gradually gained support from economists after a decade of slow growth that ushered in the most recent deep crisis in 2008.
Furthermore, public spending in the context of a pandemic recession is increasingly seen as a vital condition for a sustainable recovery. When they start to decline, as happened in the United States last week, investors begin to worry.
The enigma of how long to keep the taps running will be one of the main topics of this week’s International Monetary Fund (IMF) meetings and the biggest challenge for politicians in charge of national budgets when they finally get out of the anti-crisis regime. Today, its own limitations on borrowing appear to be a major barrier as traditional barriers disappear.
Financial markets, where “bond market regulators” used to be seen as a robust mechanism for financing government deficits, are willing to lend them money at very low interest rates.
Investors are concerned that, in the short term, policies will hamper recovery by promoting underutilization policies. JPMorgan forecasts that this year’s fiscal stimulus to the world economy could lead to 2.4 percent. growth in 2021 as emergency support programs to reduce the impact of the pandemic are coming to an end.
This is also a matter of concern for monetary institutions, whose autonomy from the rest of government has been designed so that they can resist overly lenient fiscal policies. Lacking their own mechanisms to revive economies, with interest rates at zero or below, central banks are now doing the opposite. They encourage higher deficit spending, buy a lot of accumulated debt, and promise low prices for long-term loans.
“Fiscal policy is now becoming a major goal in the city,” said Stephen King, senior economic adviser at HSBC Holdings Plc. “In this sense, central banks must recognize that they have given up some influence in the political process.”
What do Bloomberg economists say?
According to benchmark forecasts from Bloomberg Economics, global growth will slow by 4.5 percent in 2020 and grow by 4.8 percent in 2021, bringing the level of development back to pre-levels. viral.
This approach assumes that case growth in Europe and the United States is weakening but not undermining the recovery, that the United States will introduce an additional fiscal stimulus package in the first quarter of 2021, and that the vaccine will be widely distributed by mid-2021.
Tax incentives are a stronger force than monetary incentives, as they can direct funds directly to households or businesses, and are better suited to provide targeted support to those who need it most in difficult times, such as the unemployed. Central banks can only inject more purchasing power into the economy through indirect channels: through the cost of borrowing from banks or financial markets.
But at least they have the ability to act quickly and decisively. Budgeting processes, on the other hand, can become difficult to control, as seen in the United States.
In recent months, both parties have already recognized the need for higher spending. As they were unable to agree on how much spending should be increased and in what specific areas, additional incentives were ultimately abstained in general. Even if no deal is reached before the November presidential election, economists at Goldman Sachs and other banks predict that fiscal support will resume after the election.
“Leadership of the parade”
US President Donald Trump promises to cut taxes even further if he wins the election. Democratic candidate Joe Biden, who leads the way in public polls, plans for $ 3.5 trillion. Spending program in US dollars and cautioned against committing to the idea that economies should necessarily perform better when governments intervene less.
“Milton Friedman is no longer leading the parade,” Biden told Politico magazine in April.
In a Europe where fiscal prudence is deeply ingrained and largely explains Germany’s concerns about debt and inflation, leaders have taken an important step this year to pool their budgetary resources, an initiative that has long been considered doomed to collapse when a pandemic threatens Europe. the European Central Bank (ECB) to support economies.
German officials say the country will not be able to return to a balanced budget in the near future. In the United Kingdom (UK), the ruling conservatives, who defended the austerity program after the collapse of 2008, rule out the possibility of a recurring scenario, although they have already hinted at possible tax increases to finance support for the pandemic.
According to the new Prime Minister of Japan, Yoshihide Sugao, it is not yet time to consolidate the debt; we will have to wait for growth to return. The Prime Minister also hinted that there is no hard limit to the extent to which a government under his leadership can borrow.
Japanese trends
Japan was the first major state of the modern era in which interest rates fell to zero when the credit bubble burst some three decades ago. Monetary policy has struggled to fuel growth by cutting lending, and households and businesses in general have been in no rush to borrow more, even though the government could and did. This was the first sign that the world’s central banks could breathe fast and be ready to take fiscal policy back to the main stage.
After 2008, much of the developed world faced a similar situation. Unable to cut short-term interest rates, central banks have tried to limit the cost of long-term borrowing by buying securities, mainly government debt, as governments have been the main borrowers in weak economies. And as a result, they received a new wave of criticism.
“Asset buybacks have a wide range of political and distributional implications,” said Charlies Ben, former deputy governor of the Bank of England. “We need to move away from a world where central banks are seen as a solution and instead focus on an environment where government and fiscal policy will often have to take control and move on.”
From JM Keynes to P. Volcker
In response to the 2008 collapse, governments also increased spending. Economists now agree that the move to austerity was premature and slowed growth over the past decade even before the coronavirus pandemic hit. Many advocates of fiscal policy fear that history will happen again.
In the past, the “start-stop” approach has “contributed to discrediting fiscal policy,” said Robert Skidelski, an economic historian who wrote a biography of John Maynard Keynes, a British economist and advocate of fiscal activity.
After the 1930s, the Keynesian policies of the Great Depression became dogma for most Western governments, who used their budgets to stimulate demand and create jobs. However, the system collapsed in the 1970s, when unemployment and prices rose at the same time, and inflation-oriented central banks emerged as key macroeconomic stewards.
The new page was turned in the early 1980s with the chairman of the Federal Reserve (FED) rising in interest rates, says Catherine Mann, chief economist for global markets at Citigroup Inc., who was writing her thesis. doctoral at that time. He is not entirely convinced that the political response to COVID-19 falls into the same category of revolutionary change.
To that end, governments should start using fiscal policy not only for the short-term goal of “getting the economy out of stagnation,” but also for long-term goals, such as reducing inequality or reducing carbon emissions, he said. Mann.
“The end of the claim”
There are signs that it is moving in that direction. Some European recovery programs focus on job creation and environmental sustainability, and Biden promises a $ 2 trillion green energy transformation in the United States. AMERICAN DOLLAR.
In the world of economics, the new School of Modern Monetary Theory, which proclaims that governments tend to have more room to spend money in low-inflation conditions, is of interest to champion boldly funded programs like Green New Rate.
All of this speaks to the transformation of economic governance that should have taken place a decade after the financial crisis, says Paul McCulley, former chief economist at Pacific Investment Management Co. Then politicians resisted the size of deficits and debts, told Bloomberg Odd Lots. Now, in his view, the coronavir has finally ended with this blow. “Any pretense has come to an end,” he said. “There is no question that we live in a world dominated by fiscal policy.”
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