Gloomsters killing world economy

In: Uncategorized

28 Nov 2014

The biggest challenge facing the world economy is not the difficult economic conditions but what could be called gloomsters. These are the fatalists who think nothing much can be done about economic problems besides tinkering with monetary policy or public spending.

Gloomsters are not what Margaret Thatcher long ago called “moaning minnies” . On the contrary, they can appear on the face of it to be relatively upbeat about economic prospects. But underlying their policy prescriptions is a deep pessimism about the prospects for creating a more dynamic economy.

Gloomsters can take Labour and Conservative forms. Labour politicians tend to argue that a little less austerity is in order until the economic cycle turns. Conservatives, on the other hand, say a tighter squeeze on public spending is necessary. But neither has much of a clue about how best to promote economic restructuring. Raising investment levels and bolstering productivity plays little part in their discussions.

Take the prime minister’s recent claim that the “red lights are flashing on the global economy”. The thrust of David Cameron’s argument was that the British economy is doing well but the coalition government has to stay on course with spending cuts because of global economic weakness. Essentially it was an exercise in complacency. Britain may be forecast to growth more strongly than other developed economies this year but its medium and longer-term record is poor. The prime minister prefers not to put Britain’s record into its proper context as he is a gloomster: he believes that little can be done to tackle it.

Mark Carney, the governor of the Bank of England, takes a similar view to Cameron. In a recent speech  he echoed Karl Marx and Friedrich Engels when he noted that “a spectre is haunting Europe”. Only Carney was not talking about a communist revolution but economic stagnation. He then went on to argue that Britain is doing better than continental Europe. After that he talked narrowly about inflation and monetary policy.

Of course monetary policy is the Bank of England’s remit. It should be up to elected politicians rather than central bankers to devise a broader economic strategy. Unfortunately there is little sign of this broader debate anywhere.

The trend towards gloomsterism is even stronger in Japan. From late 2012 onwards the Japanese prime minister, Shinzo Abe, pursued an approach that became known as Abenomics . This consisted of three “arrows”: monetary policy, fiscal policy and structural reform.

In the event the Japanese government promoted an expansionary monetary policy and a looser fiscal policy, at least in the short term, but only limited structural reform. The basic weaknesses of the productive economy were left intact. It should not therefore have come as a surprise that the economy contracted in the third quarter to fall into its third recession in four years. Japan is facing yet another election as a result.

It is time that gloomsters of all stripes were challenged. There is a desperate need for a focus on promoting dynamic growth rather than tinkering with monetary policy and fiscal deficits.

This is my latest blog post for Fundweb.

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