Robert Kahn

Macro and Markets

Robert Kahn analyzes economic policies for an integrated world.

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The No-Growth Meetings

by Robert Kahn
April 19, 2013


My conversations with investors on the margins of the IMF/World Bank meetings shows a broad anxiety about growth.  Europe is first on the list of concerns, along with a slowdown in China and US fiscal drag.  You would think that it would be easy, therefore, to produce G-7 and G-20 communiques that were pro-growth and highlighted the need for countries to act where they have the space.  Apparently, that’s not the case, with the key players as divided as ever.

  • The U.S. Government continues to press for accomodative policies, focusing fire on Europe, while broadly endorsing recent measures in Japan.  Its hard to criticize a Japanese program that also promises fiscal and structural reform and is justified on domestic growth grounds. Thus, notwithstanding their statements last week that they would continue to monitor yen movements and oppose any country talking down its currency, concern about yen depreciation (so far) will be set aside for now.
  • Conversely, Germany and the other “austerians” stress the need for countries to adhere to planned consolidation measures.  There is no sense of any self-doubt here.
  • Finally, while China’s public statements acknowledging the possible benefits of Japan’s policy shift have dampened talk of currency wars, they likely will lead an emerging market press for more explicit warnings against competitive depreciation.

The IMF hasn’t helped.  Christine Lagarde’s speech highlighting “three-speed growth” in the global economy was a nice rhetorical framework for the meetings. The three speeds include countries (primarily emerging markets) that are doing well and need to focus on structural policies for long-term growth, a group that includes the United States that is doing ok and on the mend but can do better, and a low growth group (notably Europe) that need more ambitious policies.  And today she had a forceful pro-growth message to open the meetings.  But in their other communications the Fund has sent mixed messages, at times signalling that the degree of fiscal restraint in Europe is about right, that the pace of rebalancing is appropriate, and that growth prospects are improving.  It also must not make the U.S. Government happy that the early headline from the Fund is about excessive fiscal consolidation in…the United States.  True enough, but not the lead they wanted.  Controversy about the validity of work by Rogoff and Reinhart on the growth cliff once countries exceed 90 percent of GDP in debt probably doesn’t help either.

Bottom line, we are likely to get a muddied message this weekend in which countries will see validation in their own policies, a defacto endorsement of the status quo.  Not much more could have been expected, but hardly a comforting message for investors worried about where growth will come from.


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  • Posted by Clay Lowery

    Another good post, Rob. It opens the question I often have — does anyone really have a good idea as to what spurs economic growth from macro policy level. We have the debates of Fiscal Stimulus (capitalized because often called growth and to make it different from private sector stimulus) vs Austerity. I came to rough conclusion that both sides have a point.

    Or is thinking on what creates growth on an aggregated basis more of a microeconomic phenomenon — backed by a relatively sound macro framework.

    I guess I ask because every politician and commentariat talks about a growth strategy (or jobs strategy) and I’m not convinced there is a great answer?

  • Posted by rob kahn

    Clay, I don’t have a good answer for you. But I do think we can say confidently a few things:
    1. In situations of weak demand/significant economic slack, fiscal stimulus is a potentially direct and powerful way of stimulating growth. Monetary policy can be even more effective when the exchange rate is flexible (and often is better timed) and the easing causes a depreciation. In the U.S., looking at the employment and inflation data in particular, there still is slack that macro policy can address.
    2. Persistent unemployment can damage trend growth (hysteresis), which is at the core of the argument for doing something dramatic to assist the long-term unemployed. That said, most macro policies are aimed at returning an economy to trend, not raising the trend.
    3. Structural reform is central to raising long-term trend growth, and over time that’s most important to a country’s welfare. A problem, though, is that often structural reforms are dislocative in the short-term, which can be counterproductive during recession. I agree with the austerian argument that the right kind of structural reforms boost investment and raise consumption (through higher expected wealth in long term), if only we could agree on the “right” kind. This is why we see, for example, an strengthened emphasis on “growth-oriented” structural reform in IMF programs.
    4. Debt does matter. Through recent work challenges the Rogoff-Reinhart finding of a debt cliff, at some level of debt concerns about sustainability restrict fiscal space and can lead to crisis. That critical level, or range of debt will vary widely across countries. The US debt isn’t at that level now (though the debt of peripheral Europe is), but given our politics I am worried about the ability to fix our long-term fiscal problem if we wait till we reach the critical level. To paraphrase Rudi Dornbusch, crisis take longer to happen than we think, but when it does come, it happens in a day. More directly though, without a long-term fix it’s unlikely we will see a consensus to spend on our “other deficits” – infrastructure, education, environment.

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