Stimulus – Between Orthodoxy and the Unthinkable
The ever deepening global and national economic crisis has produced highly divergent views among mainstream economists on how radical a change is needed to orthodox fiscal and monetary policies withÂ their focus on balanced budgets and low inflation.
At one extreme, the recent Economic and Fiscal Statement indicates that the prevailing Department of Finance view is still that only very limited and temporary fiscal stimulus is needed. Indeed, that documentÂ said that “the government is planning on balanced budgets or better for the current and the next five years” and claimed that tax cuts dating back two years should be counted as Canada’s contribution to G-20 efforts.
The call for an immediate significant stimulus by the opposition parties has a lot of support among mainstream economists, such as Glen Hodgson of the Conference Board and Don Drummond, Chief Economist of TD Bank.
Yesterday, DrummondÂ – whose economic groupÂ is now forecasting a fairly serious recession – called for a carefully targeted two year stimulus package focused on infrastructure, income supports for the working poor, and even improvements to Employment Insurance – precisely the areas highlighted in the opposition accord.
The question arises as to how much is to be spent, and over what period. I have argued before that what we need is not just immediate stimulus, but a period of public investment led growth. Given the free fall of the US and global economy and very high levels of household debt, I find it very difficult to concieve that we can return to the previous growth model by late 2009.Â It can be argued that the economic situation in Canada is currently not as serious as in the US, but it is highly unlikely we will be able to escape a very serious downturn if the US remains mired in a slump.
I note that some of the most impeccably orthodox economists are now saying that the US and globalÂ economic crisis demands measures going far beyond low interest rates and debt financed fiscal stimulus.
In today’s Globe and Mail, none other than former IMF Chief Economist Ken Rogoff calls for higher inflation as the way out and notes that: “Fortunately, creating inflation is not rocket science. All central banks need to do is to keep printing money to buy up government debt.”
And Clive Crook – the Washington correspondent and columnist for the Financial Times of London advises the Obama Administration as follows:
“In a speech in 2002, Mr Bernanke pointed out that â€œthe effectiveness of anti-deflation policy could be significantly enhanced by co-operation between the monetary and fiscal authoritiesâ€. A big fiscal stimulus, financed by Fed purchases of government debt, would be â€œessentially equivalent to Milton Friedmanâ€™s famous â€˜helicopter dropâ€™ of moneyâ€, he said.
For a prudent central banker, unalloyed monetising of the deficit is the last taboo â€“ this, after all, is Zimbabweâ€™s idea of monetary policy. But in this remarkably perilous situation, the prohibition must be set aside, and better that this should happen before deflation has set in and entrenched itself. Do it now, and make it plain you are doing it. If it makes analysts and commentators complain about the inflationary consequences, so much the better: the aim is partly to buoy expectations of inflation.”