Confronting the Fiscal Bogeyman: “The world economy is visibly sinking, and the policymakers who are supposed to be its stewards are tying themselves in knots…:
…Or so suggest the results of the G-20 summit held in Shanghai…. All that emerged… was an anodyne statement… structural reforms… avoiding beggar-thy-neighbor policies. Once again, monetary policy was left… the only game in town…. Someone needs to do something to keep the world economy afloat, and central banks are the only agents capable of acting. The problem is that monetary policy is approaching exhaustion….
The solution is straightforward. It is to fix the problem of deficient demand… by boosting public spending. Governments should borrow to invest in research, education, and infrastructure…. Such investments cost little given low interest rates… [and] enhance the returns on private investment [as well]…. Thus it is disturbing to see… particularly… the US and Germany [refusing] to even contemplate such action, despite available fiscal space….
Barry blames Germany’s derangement on the ideology of Ordliberalism:
In Germany, ideological aversion to budget deficits… is rooted in the post-World War II doctrine of ‘ordoliberalism,’ which counseled that government should enforce contracts and ensure adequate competition but otherwise avoid interfering in the economy…. The ordoliberal emphasis on personal responsibility fostered an unreasoning hostility to the idea that actions that are individually responsible do not automatically produce desirable aggregate outcomes…. It rendered Germans allergic to macroeconomics….
Barry blames the U.S. derangement on a somewhat analogous ideological formation—call it Ordovolkism:
[In] the US… citizens have been suspicious of federal government power, including the power to run deficits, which is fundamentally a federal prerogative.… That suspicion was strongest in the American South… rooted in the fear that the federal government might abolish slavery…. During the civil rights movement, it was again the Southern political elite that opposed the muscular use of federal power…. The South [became] a solid Republican bloc and leave its leaders antagonistic to all exercise of federal power except for the enforcement of contracts and competition—a hostility that notably included countercyclical macroeconomic policy. Welcome to ordoliberalism, Dixie-style. Wolfgang Schäuble, meet Ted Cruz.
And Barry concludes by asking:
Ideological and political prejudices deeply rooted in history will have to be overcome to end the current stagnation. If an extended period of depressed growth following a crisis isn’t the right moment to challenge them, then when is?
Vir: Brad DeLong