Wednesday, 23 September 2020

Keep up the stimulus

Last week I was making the point that one of the key things to look for in the Pre-Election Economic and Fiscal Update or PREFU was whether fiscal policy was going to be supportive or contractionary over the next wee while, and to what extent, and whether the proposed fiscal stance matched up with the likely state of the economy. 

You might have thought that Ministers of Finance need no special advice on aligning fiscal policy with the cyclical needs of the economy. Surely (you might have thought) they let it rip when times are bad, and wind it back when times are good: obvs, to use the technical macroeconomic term.

And if so you'd be in for an unpleasant surprise, at least if you were a citizen of the US or the EU. Overnight we had this presentation from the OECD on their latest economic outlook. It included this graph, where the blue bars are the same measure of the stance of fiscal policy I used in looking at least week's PREFU, except that the OECD shows bars above the line as fiscal tightening and bars below as loosening (our Treasury does the opposite, it's arbitrary, either works). The yellow triangles are a measure of how poorly each regional economy is faring. The grey shaded area is the GFC.

In both the US and the EU you'll see the local fiscal response was bang on: decent sized fiscal stimulus. And in both regions you'll see that it was taken away much too soon. There are all sorts of reasons why the GFC was a doozy, but premature fiscal braking was one of the larger moving parts. Inevitably politics played a large part, including a Republican Congress wanting to unwind anything President Obama initiated.

The OECD says, rightly, that eventually everybody's fiscal house will have to be put back in order, and done the right way, but as of today "Undertaking fiscal consolidation measures now would be premature". I suspect in our case the eventual retrenchment won't be able to get started  before 2023.

The other big messages are that the world economic outlook, on the OECD's latest base scenario, is a bit better than it was when the OECD took its last stab at a guess back in June ...

... but before rushing out into the street to celebrate, bear in  mind that the range of uncertainty around the base scenario is still very wide, as it is here at home.

Finally, the OECD points out (on p10 of the Outlook) that
With long-term interest rates close to zero in many advanced economies, the social rate of return on public investment is likely to exceed the financing costs for many projects. Investment is particularly needed in areas that have large positive externalities for the rest of the economy and where under-investment might otherwise occur due to market failures, including in health care, education, and digital and environmental infrastructure.

Here in Auckland the Bridge has been out, aggravating the already inadequate transport infrastructure, the water supply is iffy, and housing land remains stratospherically expensive: I passed a sub-division the other day, admittedly with largish sections in a nice rural area, where section prices are "from $985,000". When are we going to start fixing it, if not now?

1 comment:

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