(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Lawrence Summers
April 6 The world's finance ministers and
central bank governors will gather in Washington this week for
the twice yearly meetings of the International Monetary Fund.
Though there will not be the sense of alarm that dominated these
meetings after the financial crisis, the unfortunate reality is
that the global economy's medium-term prospects have not been so
cloudy for a long time.
The IMF in its current World Economic Outlook essentially
endorses the secular stagnation hypothesis - noting that the
real interest rate necessary to bring about enough demand for
full employment has declined significantly and is likely to
remain depressed for a substantial period. This is evident
because inflation is well below target throughout the industrial
world and is likely to decline further this year.
Without robust growth in industrial world markets, growth in
emerging markets is likely to subside - even without considering
the political challenges facing countries as diverse as Brazil,
China, South Africa, Russia and Turkey.
Facing this inadequate demand, the world's key strategy is
easy money. Base interest rates remain essentially at floor
levels across the industrial world and central banks signal that
they are unlikely to increase anytime soon. Though the United
States is tapering quantitative easing, Japan continues to ease
on a large scale and Europe seems to be moving closer to
This all is better than the tight money policy of the 1930s
that made the Great Depression great. But it is highly
problematic as a dominant growth strategy.
We do not have a strong basis for assuming that reductions
in interest rates nominal or real from very low levels will have
a major impact on spending decisions. We do know that they
strongly encourage leverage, that they place pressure on
return-seeking investors to take increased risk, that they
inflate asset values and reward financial activity.
The spending they induce tends to come at the expense of
future demand. We cannot confidently predict the ultimate
results of the unwinding of massive central bank balance sheets
on markets - or on the confidence of investors. A strategy of
indefinitely sustained easy money leaves central banks
dangerously short of response capacity when and if the next
A proper growth strategy would recognize that an era of low
real interest rates offers opportunities as well as risks. It
should focus on the promotion of high-return investments, rather
than seeking to encourage investments that businesses find
unworthy at current rock bottom rates.
This strategy would have a number of elements. In the United
States, the case for substantial investment promotion is
overwhelming. Increased infrastructure spending would likely
reduce burdens on future generations. Not just by spurring
growth, but by expanding the economy's capacity and reducing
deferred maintenance obligations. As just one example: Can it
possibly be rational for the 21st-century U.S. air traffic
control system to rely on vacuum tubes and paper tracking of
flight paths? Equally important, government could do much at no
cost to promote private investment - including authorizing oil
and natural gas exports, bringing clarity to the future of
corporate taxes and moving forward on trade agreements that open
up foreign markets.
With Tokyo's introduction of the value-added tax on April 1,
Japan is now engaged in a major fiscal contraction. Yet it is
far from clear whether last year's progress in reversing
deflation is durable or a reflection of one-off exchange rate
movements. A return to stagnation and deflation could rapidly
call its solvency into question. Japan takes a dangerous risk if
it waits to observe the consequences before enacting new fiscal
and structural reform measures to promote spending.
Europe has moved back from the brink. Defaults or
devaluations now look like remote possibilities. But no strategy
for durable growth is yet in place and the slide toward
deflation continues. Strong actions are imperative to restore
the banking system to the point where it can be a conduit for a
robust flow of credit as well as measures to promote demand in
the periphery nations where competitiveness challenges remain.
If emerging markets capital inflows fall off substantially,
and they move further toward being net exporters, it is hard to
see where the industrial world can take up the slack. So reform
measures to bolster capital flows and exports to emerging
markets are essential. These include, most importantly,
political steps to reassure against populist threats in a number
of countries and provide investor protection and backstop
In this regard, the U.S. Congress's passage of IMF
authorization is crucial. Creative consideration should also be
applied in mobilizing the trillions of dollars in public assets
held by central banks and sovereign wealth funds, largely as
safe liquid assets, to promote growth.
In an interdependent global economy, the collective impact
of all these measures is likely to be substantially greater than
the sum of their individual effects. In similar fashion, the
consequences of national policy failures are likely to cascade.
That is why a global growth strategy framed to resist
secular stagnation rather than simply muddle through with the
palliative of easy money should be this week's agenda.