Finally, the global economic policy ship begins to turn. We are now seeing fiscal stimulus package announcements every week, if not every day. And packages that we previously knew about are re-announced for emphasis and with an expanded mandate. In all likelihood, we are looking at a fiscal stimulus in the order of 1-2 percent of world GDP, which is exactly what the IMF has been calling for. Is this a modern miracle of international policy coordination?
The problem is – the IMF started calling for this in January 2008 when, with the benefit of hindsight, it would really have made a difference. Fiscal policy is slow. Even when everyone wants to move fast, when you can get the legislation through right away, and when there are “ready to go” projects, infrastructure spending will take at least 6-9 months to have perceptible effects in most economies.
In the US we have some additional ways to boost spending, most notably as support to local and state governments, extending food stamps and the like (see my recent testimony to the Senate Budget Committee for further illustrations), and in most other countries that kind of government activity comes by way of “automatic stabilizers,” i.e., it happens without discretionary packages of the kinds that make headlines. Still, the general point holds – the big fiscal stimulus package you put in place today is a bet on how the economy will be doing in a year or so. And a year ago would have been a good time to start – remember that the NBER has just determined that the US recession actually started in December 2007 (but they were able to make the call only now, demonstrating how hard it is to forecast the present, let alone the future.)
My concern today, however, is not about the appropriateness of the overall package in the US, China or other emerging markets – in a crisis, erring on the side of “too much, too late” is better than “too little, too little.” The problem is that in Europe we need not just a general fiscal stimulus (and more interest rate cuts), but also specific targeted measures that will provide appropriate, largely unconditional support to governments with weaker balance sheets (read: Greece, Ireland, Italy, but don’t exclude others from consideration).
Monetary policy was consolidated in Europe (i.e., there is one currency for the eurozone) but fiscal policy substantially was not. This imbalance is going to be addressed, one way or another, and perhaps under great stress. Much progress has been made towards sensible policies in the US and some parts of Europe over the past two months, and calamity can still be avoided. Let us not fall at the final hurdle.
Update: I talked with Madeleine Brand of NPR about some of these issues earlier today; audio recording and transcript are here.