By Robert J. Samuelson, Published: April 21
Robert J. Samuelson
Samuelson writes a weekly column on economics.
“We really don’t understand what’s happening in advanced economies,” Lorenzo Bini Smaghi, a former member of the ECB’s executive board, told the conference. “Monetary policy [policies affecting interest rates and credit conditions] has not been as effective as we thought.” Poor economic forecasts confirm this. In April 2012, the IMF predicted that the euro zone (the 17 countries using the euro) would expand by 0.9 percent in 2013; the latest IMF forecast, issued last week, has the euro zone shrinking by 0.3 percent in 2013. For the global economy, the growth forecast for 2013 dropped from 4.1 percent to 3.3 percent over the same period.
Since late 2007, the Fed has pumped more than $2 trillion into the U.S. economy by buying bonds. Economist Allan Meltzer asked: “Why is there such a weak response to such an enormous amount of stimulus, especially monetary stimulus?” The answer, he said, is that the obstacles to faster economic growth are not mainly monetary. Instead, they lie mostly with business decisions to invest and hire; these, he argued, are discouraged by the Obama administration’s policies to raise taxes or, through Obamacare’s mandate to buy health insurance for workers, to increase the cost of hiring.
There were said to be other “structural” barriers to recovery: the pressure on banks and households to reduce high debt; rigid European labor markets; the need to restore global competitiveness for countries with large trade deficits. But these adjustments and the accompanying policies are often slow-acting and politically controversial.
The irony is rich. With hindsight, excessive faith in macroeconomic policy stoked the financial crisis. Deft shifts in interest rates by central banks seemed to neutralize major economic threats (from the 1987 stock crash to the burst “tech bubble” of 2000). Prolonged prosperity promoted a false sense of security. People — bankers, households, regulators — tolerated more risk and more debt, believing they were insulated from deep slumps.
But now a cycle of overconfidence has given way to a cycle of under-confidence. The trust in macroeconomic magic has shattered. This saps optimism and promotes spending restraint. Scholarly disagreements multiply. Last week, a feud erupted over a paper on government debt by economists Kenneth Rogoff and Carmen Reinhart. The larger lesson is: We have moved into an era of less economic understanding and control.
Tags: Allan Meltzer, Fed, financial markets, George Akerlof, government debt, IMF forecast, International Monetary Fund, macro policies, Obamacare, Robert J. Samuelson, Troubled Assets Relief Program (TARP), US, Western Europe