Forecasts prepared for the IMF's 'Spring Meeting' in Washington last week predict global growth of around 3.5% this year, about the same as in the last few years. This is not the 'slowing' discussed so often in earlier Fund documents, but nor is it the normal robust recovery that might be expected after a deep downturn like the 2008 crisis.
Larry Summers and Raghuram Rajan, Governor of the Reserve Bank of India, during the 2015 IMF/World Bank Spring Meetings, Washington DC. (Flickr/IMF)
Managing Director Christine Lagarde clearly thinks growth is too slow and that more should be done. Given the constraints on blunt speaking, however, Lagarde's policy message lacks punch: keep monetary policy accommodating; those countries not weighed down by excessive official debt should implement fiscal easing; and, as usual, everyone should implement structural reform.
But the post-2008 recovery has been so feeble that others are talking in terms of 'secular stagnation', the idea that the advanced economies have run out of dynamism and are stuck with chronic slow growth.
This idea was last in vogue in 1938. Rapid post-World War II expansion then took it off the table for a generation, but the slow recovery from 2008 has revived it. Robert Gordon blamed the stagnation partly on slower population growth. More controversially, he asserted that most of the really good ideas (innovations in technology, education and labour markets) have already been put into practice.
Since then a group of heavyweight economists have refined their arguments and policy prescriptions. Former US Treasury Secretary Larry Summers agrees with the idea of secular stagnation, but sees it as a shortage of demand rather than a supply-side limitation. The 'animal spirits' that should drive investment have become dormant. With policy interest rates already close to zero, monetary policy can't do any more to stimulate demand. But, at the same time, these low interest rates open the opportunity for countries (especially America, but Germany as well) to greatly expand fiscal spending on infrastructure, which is woefully run down in both countries.
Former US Fed Chairman and now avid blogger Ben Bernanke agrees that the problem is deficient demand. While he supports the idea of more infrastructure spending as a short-term palliative, he worries about the longer-term implications for official debt if stagnation is indeed a chronic problem. As an alternative policy prescription, he has enlarged on his earlier view that the demand-sapping problem is global excess saving. Nearly a decade ago, he pointed the finger of blame at China, which supported its domestic economy by keeping its exchange rate artificially undervalued. This promoted exports, boosting Chinese production and income. Most of this boost was saved rather than spent, in the form of a substantial current account surplus.
Bernanke's preferred policy prescription focuses on the ongoing global current account surpluses. He sees this 'excess saving' as resulting from market-distorting policy settings in the surplus countries, which should be corrected. More 'naming and shaming' of foreigners is needed so that they rectify these policies.
How can these ideas be translated into policy?
Even if Bernanke is right about global excess savings (and his own table shows that the global imbalances have dramatically fallen since 2006), there doesn't seem much that policy can do about it. China was an easy target in 2006, but its surplus is now small. Germany isn't ready to do anything about its external surplus, running at over 7% of GDP, and the depreciating euro will actually strengthen its international competitiveness. Switzerland and Singapore (whose external surpluses are far larger than Germany's as a ratio to GDP) haven't even been named as recalcitrants.
That leaves Summers' idea of greatly expanding infrastructure spending in America, Germany and some emerging economies. But what about the debt concerns that put an end to fiscal expansion in 2010?
Summers and Brad DeLong argue that the hand-wringing about government debt has been unwarranted for most advanced economies (Japan is the notable exception). Investors seem only too happy to take up government debt (Germany's 10-year bond yield is less than one-fifth of a percent; almost free money). They could borrow a lot more, and if they use it for beneficial purposes (some would say that is a big 'if'), it can be self-funding as it adds to GDP as well as to debt. In any case, DeLong argues that as countries get richer, they should have more public debt, because richer consumers want more of the goods which governments supply.
Meanwhile, the financial markets are fixated on something largely irrelevant to the challenge of boosting growth. They are trying to pick exactly when the Fed will raise the short-term policy interest rate, outdoing each other to name the day. All this single-minded anticipation might actually encourage the Fed to repeat the mistake of 1937 by raising rates too early in the recovery (a mistake made more recently by the Swedish central bank). Bernanke says that the rate should be set so as to bring savings and investment into equality at full employment. With all this talk of secular stagnation, the interest-rate rise should be much further off than the markets (or some members of the current Fed Board) are thinking.