Governments in the U.S., Europe and elsewhere should take "urgent" and "collective" steps to raise their investment spending and deliver a fresh boost to flagging economic growth, the Organization for Economic Growth and Development said on Thursday.
...Releasing its first economic forecasts of 2016, it urged governments that can borrow at very low interest rates to boost their spending on infrastructure. The OECD said that if governments work together, fresh borrowing could have such a positive impact on growth that it would reduce rather than increase their debts relative to economic output.
Speaking to The Wall Street Journal, OECD Chief Economist Catherine Mann said that without such action, governments will be unable to honor their pledges to deliver a "better life" for young people, adequate pensions and health care for old people, and the returns anticipated by investors.
"The economic performance generated by today's set of policies is insufficient to make good on these commitments," said Ms. Mann, who has worked at the U.S. Federal Reserve and the Council of Economic Advisers. "Those commitments will not be met unless there is a change in policy stance."...
Governments in many countries are currently able to borrow for long periods at very low interest rates, increasing fiscal space," the OECD said. "Many countries have room for fiscal expansion to strengthen demand. This should focus on policies with strong short-run benefits and that also contribute to long-term growth. A commitment to raising public investment collectively would boost demand while remaining on a fiscally sustainable path."
The adoption of negative interest rates — initially launched in Europe in 2014 and now embraced in Japan — represents a major turning point for central banking. Previously, emphasis had been placed on boosting aggregate demand — primarily by lowering the cost of borrowing, but also by spurring wealth effects from appreciating financial assets.
But now, by imposing penalties on excess reserves left on deposit with central banks, negative interest rates drive stimulus through the supply side of the credit equation — in effect, urging banks to make new loans regardless of the demand for such funds.
This misses the essence of what is ailing a post-crisis world. As Nomura economist Richard Koo has argued about Japan, the focus should be on the demand side of crisis-battered economies, where growth is impaired by a debt-rejection syndrome that invariably takes hold in the aftermath of a “balance sheet recession.”...
It’s also the U.S., where consumer demand — the epicenter of America’s Great Recession — remains stuck in an eight-year quagmire of just 1.5% average real growth. Even worse is the eurozone, where real GDP growth has averaged just 0.1% over the 2008-2015 period....
The shift to negative interest rates is all the more problematic. Given persistent sluggish aggregate demand worldwide, a new set of risks is introduced by penalizing banks for not making new loans. This is the functional equivalent of promoting another surge of “zombie lending” — the uneconomic loans made to insolvent Japanese borrowers in the 1990s.
Central banking, having lost its way, is in crisis. Can the world economy be far behind?
Despite all Prime Minister Shinzo Abe has done, Japan’s economy contracted an annualized 1.4 percent in the final three months of 2015, the government announced on Feb. 15. Consumer prices rose just 0.2 percent year to year, perilously close to deflation. Japanese consumers, hurt by tepid growth in wages and bonuses and a 3 percentage point rise in the consumption tax in 2014, are holding on to their wallets, with private consumption dropping 0.8 percent in the quarter.
The yen has gained 5.6 percent against the dollar since the start of the year, eroding profits for exporters such as Toyota Motor and Panasonic. These companies have benefited from the yen’s weakness since the prime minister came to office in late 2012 and began the policy changes known as Abenomics.
“There’s no clear driver to support Japan’s economy,” says Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance in Tokyo. Yet on the same day the government announced the economy’s contraction, the benchmark Nikkei stock index rose more than 7 percent.
Washington-based reporters tell us that one potent force in Syria, al-Nusra, is made up of “rebels” or “moderates,” not that it is the local al-Qaeda franchise. Saudi Arabia is portrayed as aiding freedom fighters when in fact it is a prime sponsor of ISIS. Turkey has for years been running a “rat line” for foreign fighters wanting to join terror groups in Syria, but because the United States wants to stay on Turkey’s good side, we hear little about it. Nor are we often reminded that although we want to support the secular and battle-hardened Kurds, Turkey wants to kill them. Everything Russia and Iran do in Syria is described as negative and destabilizing, simply because it is they who are doing it — and because that is the official line in Washington.
Inevitably, this kind of disinformation has bled into the American presidential campaign. At the recent debate in Milwaukee, Hillary Clinton claimed that United Nations peace efforts in Syria were based on “an agreement I negotiated in June of 2012 in Geneva.” The precise opposite is true. In 2012 Secretary of State Clinton joined Turkey, Saudi Arabia, and Israel in a successful effort to kill Kofi Annan’s UN peace plan because it would have accommodated Iran and kept Assad in power, at least temporarily. No one on the Milwaukee stage knew enough to challenge her.