Despite this, the world continues to be stuck in a slow growth rut and policymakers are still searching for a way out.
It may be time, then, to return to a tried-and-true method that has fallen out of favour during this recovery, according to Jan Loeys at JPMorgan: Governments should start spending more.
“Growth remains at snail’s pace,” wrote Loeys in JPMorgan’s “House View” series. “It is not making voters happy; they are clamoring for better. Monetary policy has done a heroic job keeping the world economy afloat, but it does not have much left to give. It is probably time to pass on the baton to fiscal policy, as governments can borrow at historic low costs.”
The big key here, according to Loeys, is that interest rates are so low that the decrease in borrowing costs for the government would offset some of the negatives of fiscal stimulus.
In addition, government can take a longer view on investments that many private companies don’t have the stomach for given the slow growth economy.
“Economists generally accept the argument there is failure in the market for long-horizon projects (say 25-100 years out) that are easier for governments to finance as they ‘live’ much longer than the average private company,” wrote Loeys.
“Finally, companies are not investing much as they see weak demand. Fiscal spending can get the ball rolling, forcing the private sector to follow (the Keynesian accelerator force).”
While there is always concern for waste in government projects, Loeys said, the upsides may be worth the possibility of some misallocation.
Much of the resistance to fiscal stimulus has been political. Especially in the US, concerns over debt have led to a significant decrease in government investment since the original fiscal spending during the recession. In Europe, austerity has dominated recovery conversations as opposed to taking on debt.
The idea of increasing fiscal easing, however, has begun to gain traction in recent months. In addition to big names in the finance world — JPMorgan CEO Jamie Dimon, hedge fund investor Carl Icahn, and BlackRock CEO Larry Fink, to name a few — both presidential candidates have advocated for such policies.
The mix of private pressure and increasing political will, said Loeys, make the policy a bit more likely than in years past.
“With voters clamoring for better incomes and a view that fiscal easing would be a lot more effective to boost growth than populist alternatives such as protectionism, this analysts raises the odds of significant fiscal stimulus over the next 18 months from very low to not so low anymore,” he concluded.
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