The Obama Administration's Fiscal Policy Scares Ryan Avent
National Product and National Income...

Martin Wolf Begs for More Expansionary Policy

Martin Wolf: / Comment / Op-Ed Columnists - The road to recovery gets steeper: [S]tructural policy is not enough. In the post-crisis predicament, demand matters, as well. Structural policies that raise the incentive to invest are twice-blessed, since these raise demand and potential supply at the same time. They need to be a priority in designing tax and spending plans. Yet also crucial is getting the withdrawal of fiscal and monetary policy right. It is far more likely, in current circumstances, that support will be withdrawn too soon than too late, undermining the recovery and generating a prolonged stagnation, with malign long-structural effects.

Three considerations need to be borne in mind. First, the yield on US and German government 10-year bonds fell below 3 per cent this week. The US position is striking given the hysteria. Second, despite the expansion of the monetary base, growth of broader aggregates is well-contained in the US and eurozone. Further quantitative easing would be perfectly manageable and, if the economy lost momentum, perfectly sensible. Finally, core measures of consumer price inflation are very low in both the US and eurozone. Targeting volatile and unpredictable headline inflation is quite sure to destabilise the economy. Since the object of inflation targeting is to stabilise it, instead, that is senseless.

In short, the case for combining structural measures to improve long-run potential output and fiscal positions with continued strong monetary and fiscal support for recovery seems to me, at least, overwhelming in countries with room for manoeuvre. The biggest danger remains prolonged semi-stagnation in the post-crisis era, not excessive growth and high inflation. That is, of course, a judgment. But judgment is what we have. Use it.