The IMF’s return to Keynes comes too late for world economy

About five years ago at the nadir of the global financial crisis and Great Recession I was at a dinner with leading academic economists and fellow journalists.

A consensus soon emerged that with interest rates at close to zero in the UK and most western economies this was an ideal time to take on long-term debt to fund productive investment in infrastructure and the like.

While it might have seemed obvious at the time, after five years of austerity the idea of borrowing to invest is only even beginning to emerge in the global economic and political debate.

Christine Lagarde, head of the International Monetary Fund, the multilateral lender that is hardly known for its support of public sector largesse, has been putting the case for more government spending.

She has used her last three speeches on the economy to call for a three-pronged strategy: using structural, fiscal, and monetary policies in a country-specific way to make them mutually reinforcing.

The IMF hammered home the point in its submission to the leaders of the Group of 20 countries meeting in China and in a staff discussion note co-written by its chief economist and published just ahead the annual meetings of the Fund that take place in Washington DC this week.

The IMF acknowledges that the $1trn of money pumped into the world economy (via the IMF) at the 2009 G20 London summit “helped pull the international economy back from a cliff edge”.

While there will a joy shall be in heaven over one sinner that repents, it may come too late. The world economy has been bumping along at anaemic growth levels for eight years now.

While we will never get the last five years low back, there are signs that the climate is changing.

Both the candidates for leadership of the UK’s Labour Party called for an injection - £200bn by Owen Smith and £500bn by the ultimate winner Jeremy Corbyn - of money into infrastructure. Prime Minister Theresa May is expected to shift spending towards infrastructure while at the same time abandoning the former Chancellor George Osborne’s talismanic commitment to balance the UK budget by 2020.

In the US Hillary Clinton has proposed a $275bn five-year plan while her opponent Donald Trump has gone big - calling for $800bn-$1trn of spending on roads, bridges, energy grid and water systems.

It would be nice think that this week could see even a small-scale repeat of the 2009 G20 summit

Critics of these forms of Keynesian systems believe that debt is debt however it is categorised. In the UK the Labour government in the previous decade even devised a fiscal rule that excluded investment spending from how it calculated the budget balance - an analysis that looked irrelevant once the crisis struck.

In the US, the non-partisan Committee for a Responsible Federal Budget (CRFB) estimates Trump’s plans will see federal debt rise to 127% of GDP by 2026 from 74% last year. It estimates the net effect of Clinton’s proposals will raise the federal budget deficit to 87% of GDP by 2026.

While not wanting to side with Trump in any way, it is highly likely that financial markets will treat long-term debt taken on to fund productive investment in a more benign way than borrowing to fund day-to-day spending.

In fact, borrowers such as pension and insurance funds and other long-term investors have been crying out for bonds that last for 30 to 50 years as they are ideal to match the ever-increasing longevity of their customers.

Of course, there has been some investment in the UK and other countries. The £8bn Crossrail project, which was signed off by the Blair government, has been supporting employment for some time (albeit almost wholly in London).

Yet potential opportunities such as High Speed 2, an extra runway for Heathrow or Gatwick, and a set of new nuclear power plants have all been subject to political delay and the need to secure private capital.

Sadly the private sector is unwilling to invest outside these state-backed projects. Companies on both sides of the Atlantic are hoarding cash or using it to buy back their shares rather than pump it into their business. When Larry Fink, CEO of Blackrock with $4.4trn of investments, says he is worried that companies are too focused on short-term share prices, things have come to a pretty pass.

It would be nice think that this week could see even a small-scale repeat of the 2009 G20 summit. But it is unlikely as European countries, by which I mean Germany, will not allow policymakers to sanction debt-funded fiscal stimulus just five years after the Green debt crisis.

There will be individual fiscal stimuli such as in the US after the election, and in the UK’s Autumn Statement while France, Spain and Italy will be quietly allowed to break the rules capping the amount of debts they can take on.

But it is unlikely that the IMF is the cause of this Damascene conversion. We will have a modest fiscal stimulus in many countries but none of that has to be with international coordination or with any advice from the IMF. But one can dream.

More about the author

About the author

Phil has run Clarity Economics, a London-based consultancy, since 2007 and, before that, was Economics Correspondent at The Independent.

Phil won feature writer of the year Work Foundation Work World media awards in 2009, and was commended by the Royal Statistical Society in 2007.

He is the author of Brilliant Economics and The Great Economists.

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