An Unconventional Truth by Nouriel Roubini – Project Syndicate

Nouriel Roubini argues for increased infrastructure investment to accompany monetary easing, else the benefits of the latter will not last:

Simply put, we live in a world in which there is too much supply and too little demand. The result is persistent disinflationary, if not deflationary, pressure, despite aggressive monetary easing.

The inability of unconventional monetary policies to prevent outright deflation partly reflects the fact that such policies seek to weaken the currency, thereby improving net exports and increasing inflation. This, however, is a zero-sum game that merely exports deflation and recession to other economies.

Perhaps more important has been a profound mismatch with fiscal policy. To be effective, monetary stimulus needs to be accompanied by temporary fiscal stimulus, which is now lacking in all major economies. Indeed, the eurozone, the UK, the US, and Japan are all pursuing varying degrees of fiscal austerity and consolidation.

Even the International Monetary Fund has correctly pointed out that part of the solution for a world with too much supply and too little demand needs to be public investment in infrastructure, which is lacking – or crumbling – in most advanced economies and emerging markets (with the exception of China). With long-term interest rates close to zero in most advanced economies (and in some cases even negative), the case for infrastructure spending is indeed compelling. But a variety of political constraints – particularly the fact that fiscally strapped economies slash capital spending before cutting public-sector wages, subsidies, and other current spending – are holding back the needed infrastructure boom.

All of this adds up to a recipe for continued slow growth, secular stagnation, disinflation, and even deflation. That is why, in the absence of appropriate fiscal policies to address insufficient aggregate demand, unconventional monetary policies will remain a central feature of the macroeconomic landscape.

Again, I add the warning that infrastructure investment must be in productive assets, that generate market related returns. Otherwise we are merely swapping one set of problems (a shortfall in aggregate demand) for another: high public debt without the revenue to service or repay it.

Read more at An Unconventional Truth by Nouriel Roubini – Project Syndicate.

8 thoughts on “An Unconventional Truth by Nouriel Roubini – Project Syndicate

  1. zzpat says:

    The problem is conservatives. It’s an infection that never heals (they never learn). President Obama tried to get infrasture spending and even what little he passed faced the opposition of Republican governors.

    Then when the US still had seven job seekers for every job opening the GOP wanted to cut unemployment benefits. They finally relented when they got tax cuts for the super rich – an extension of the Bush tax cuts, the same tax cuts that S&P says caused them to downgrade our debt.

    In Europe too we saw austerity instead of government spending. Why? Because the government in Gernman insisted on it. That austerity which was supposed to rein in the deficits and debt did the opposite as economies went into double and triple dip recessions.

    We’ve learned a lot of the economic crisis and the most important lesson is to ignore conservatives. They never seem to get it right.

    It wasn’t always this way. Spending soared under Reagan, the hero of the gop. GDP jumped 7% with all that spending. After 911, government spending soared again and the recession ended within months. Try saying any of this to conservatives and try getting them to do something about it. It won’t happen.

    They hate the other party so much they refused to do anything to help Bush or Obama, before, during and after the crisis, knowing that things were so bad that all they had to do was run against the party that did something.

    • ColinTwiggs says:

      Even a broken clock is right twice a day. Each school of economics — Keynesian, Austrian, Monetarist — is appropriate in certain conditions. Unfortunately they have formed factions, a very human failing, and attempt to apply their solution as a cure for all ills.

      The Austrians are right in that the more you interfere with price mechanisms such as interest rates, and run up government debt in order to stimulate economic growth, the more unstable the economy becomes — and prone to financial crises like the GFC.

      If you don’t listen to the Austrians and create a financial crisis, then their let-alone cure, austerity, will merely aggravate the contraction. The only viable cure is a combination of monetary and fiscal policy. Monetary easing to prevent a contraction of the money supply and consequent deflationary spiral. Increase public debt and spend big on infrastructure to restore aggregate demand and lift employment. Long-term unemployment and consequent loss of skills base damage the productive capacity of the economy. Without these measures there is grave risk of a 1930s-style Depression.

      But always remember: the Austrians were right in the first place. When the economy recovers it is critical that the central bank and government put their emergency measures back on the shelf. Continued tinkering is only likely to cause another financial crisis. The central bank should act largely as regulator, monitoring money supply (and debt) growth to curb excesses if banks and investors grow overconfident, and take on increased risk, after a long period after stable growth as Minsky described. The government should generate a small surplus which, together with economic growth and inflation, will help to relieve the debt burden. Monetary and fiscal stimulus, like chemotherapy and radiation therapy, are fine tools to have in an emergency, but should be used sparingly, and not prescribed every time the patient gets the ‘flu. Over-prescribing creates market imbalances that inevitably create far more severe problems down the track.

    • Vic Russo says:

      This sounds like it could have been written by Nancy Pelosi. Remember she said that unemployment benefits helped the economy although she didn’t recommend putting everybody on unemployment and causing the economy to overheat. She obviously was worried about inflation. There have just been several studies discussed in a recent Wall Street Journal article that showed that cutting unemployment benefits actually caused people to go out and accept jobs that were going unfilled. And those nasty conservatives caused the puny $1 trillion “shovel-ready” jobs bill to fail by allowing Governors to reject the projects that Obama proposed. Welcome back to earth from your inter-planetary travels. I look forward to further insightful comments.

      • ColinTwiggs says:

        Politicians don’t create jobs. Entrepreneurs do. What politicians can do to help is create an environment with low obstacles to growth. That means low taxes, simple (not minimal) regulation and small government. Using public debt to pay unemployment is unproductive — you end up with a large debt and no assets to show for it. Investment in productive infrastructure assets is a far better option because income from the assets can be used to service/repay the debt. Investment can be made in partnership with the private sector and can employ private corporations to build the assets to ensure reasonable efficiency (and job growth) while avoiding a bloated government payroll.

        The real problem is gridlock in the political system which prevents the promotion of sound long-term policies (i.e. fifty years rather than the next election) that enjoy bi-partisan support.

  2. PabloZed says:

    I agree with the caveat that Europe and Japan must also be attentive to their aging and shrinking populations. High speed trains linking towns full of seniors is an example of wasteful infrastructure. Germany and Japan should invest in Tanzania and Kenya, build infrastructure, teach governance, and create markets for their products and reap the benefits as those two countries’ populations soar.

    • ColinTwiggs says:

      ” Germany and Japan should invest in Tanzania and Kenya…”

      You may have missed the point. The purpose of infrastructure investment is to make up the shortfall in aggregate demand in the domestic economy (i.e. Germany or Japan).

      • Brent says:

        Missing the point ….. ?

        Good old, conventional ‘Keynesian Economics’ and related aggregate demand management via suitable [ = warranted by cost-benefit analyses ] public sector spending changes – also on economically justified infrastructure programs – to the rescue , rather than a reliance on Austrian School of thought ?

      • ColinTwiggs says:

        Not quite sure if I follow you. Are you advocating infrastructure investment in Tanzania or austerity in Europe and Japan?

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