Empty rhetoric on growth

This is my latest comment from Fund Strategy.

The idea that there is a big global debate about economic policy is misleading. Any disagreements are much narrower than generally assumed.

From the media it is easy to get the impression that the world is divided between deficit hawks and Keynesian growth enthusiasts. The former are often presented as free market ideologues while the latter are seen as hopeless idealists by their critics.

In the international debate the Americans are viewed as the arch Keynesians and the Germans the arch hawks. The Obama administration is pushing for a continuation of fiscal stimulus while Angela Merkel’s government advocates a rapid exit towards austerity.

In Britain the government is portraying itself as fiscally hawkish while the opposition is accusing it of being driven by free market ideology. Labour in turn is presenting itself as the party of growth.

Despite the popularity of these labels they bear little relationship to reality. Any differences are more rhetorical than real; and more about the timing of a fiscal squeeze than promoting economic dynamism.

Although there is much talk of austerity the large European countries are being slow to implement it. Germany, the most aggressive of the hawks, is still implementing a stimulus this year. It is talking German but acting American.

The situation in Britain is not as extreme but the coalition is talking tougher than it is acting. There will only be a small squeeze this year although it will get harsher in the years ahead.

Both sides also seem to be assuming the economic cycle is continuing to work as it did in the past. Their disagreement is essentially about the timing.

They are neglecting the evidence that the economic cycle has become more muted in recent years – and the present downturn is consumption-led rather than following a typical cyclical pattern. Just as it took a long time before economies started to decline the impetus for an upturn in growth is likely to be weak.

Most fundamentally, neither side is discussing the promotion of growth through regenerating the real economy. At most there is talk of limited structural reforms.

Neither side has much conception of promoting growth by encouraging innovation or economic restructuring to take place. And both sides favour the limits on growth embodied in such ideas as sustainability and green approaches to economics.

Just because there is a lot of noise it does not mean that a principled debate is taking place.