There is a growing consensus that there needs to be a shift from extraordinary monetary policy to fiscal activism. Although quantitative easing (QE) will continue, there is a widespread recognition that its effects are diminishing.
The new consensus takes many forms and exists across most shades of opinion. Both Christian Lagarde, the new president of the European Central Bank (ECB) and Mario Draghi, her predecessor, have called on European governments to pursue a more active fiscal policy.
Even Germany, with its hawkish outlook, could be relaxing its fiscal stance. Olaf Scholz, the German finance minister, told Reuters that it would use all fiscal options in an economic crisis. There is also the possibility that it could use concerns over runaway climate change to justify supplementary spending.
In the UK election both the main political parties are promoting their spending plans. This is less surprising from Labour, which has a Keynesian outlook, but the Conservatives are also in an expansive mood. Today’s Tories are a long way from Margaret Thatcher’s strident rhetoric on the need for balanced books.
The problem with the discussion on the fiscal shift is that it underestimates the continuity with what has gone before. Both QE and the new fiscal activism involve spending money in a desperate attempt to maintain economic stability. Neither is designed to address the fundamental structural weaknesses that afflict all the developed economies.
Of course, economic textbooks emphasise that monetary and fiscal policy are by definition distinct. This is true in relation to language – they have different meanings – but in today’s circumstances both approaches share common ground. Neither provides a solution to the chronic problems of low investment and poor productivity growth.
This is not to argue the traditional Thatcherite case that government spending should always be minimal. On the contrary, there are circumstances when high public spending can be justified. But in the absence of a concerted drive to address structural economic weaknesses, such spending is likely to have a minimal effect at best and could well be counter-productive.
Additional spending needs to take place alongside economic restructuring. Weaker firms should be allowed to go bust and new ones emerge. In other words, a recession, the mechanism through which capitalism regenerates itself, should be allowed to take its toll. Under such circumstances public spending can be used to help promote new areas of economic activity and to soften the blow of dislocation.
The alternative is to store up trouble. It means prolonging economic malaise and raising the risk of a severe financial crisis.
Daniel Ben-Ami, Deputy Editor