The financial crisis that started in 2007 may well prove to be main reason behind new economic thinking aimed at putting some life back in western economies. Many analysts would agree that neoliberalism that has been so influential in the economic strategies of major economies is now failing to bring about the turnaround that is so badly needed to restore growth.
The world may have been spared an economic depression similar to that of the 1930s thanks to loose monetary tactics but sluggish economic growth and high unemployment persist in most western economies, news outlets reported.
Our political leaders were able to save banks from collapsing and bringing down the whole economy with them, but they have been less successful in instilling hope in a generation of young people who are struggling to find their first steady job. This is worrying for our society.
We are now seeing new trends in economic thinking aimed at reversing the dangerous trend of slow growth and high unemployment. This thinking cannot be labeled as a product of left or right leaning ideologies.
The traditional parties of the left and the right of the political spectrum are rapidly losing their grip on the electorate and new parties are evolving.
The strategy most likely to succeed can be described as do-what-works economic strategy. It is not inspired by ideology even if it is based on certain universal values that many political leaders seem to share. Of course, past economic theories do influence the way that new economic thinking is evolving.
I follow closely the pragmatic approach that economists like the US Nobel Prize economist Paul Krugman takes in the debate on current issues. Krugman is a Keynesian. This is not a characteristic that he embraces because of his open support to the Democratic Party in the US. It is rather the result of his analysis of what works and what doesn’t in today’s troubled economic environment.
Krugman, for instances, does not promote the return to ‘bigger government’ economic strategies. He does however promote ‘temporary fiscal expansion’ when the armory of monetary tools has run out of weapons to stimulate economic growth and tackle high unemployment.
Loose Monetary Policy Ineffective
With interest rate down to zero while growth remains obstinately sluggish and unemployment high, there is surely a valid argument to resort to fiscal expansion. Austerity has not produced the desired results at least of the type that most ordinary people would need, even if it may please bureaucrats in Brussels.
Before people start to spend more because they look at the future with optimism rather than fear for their jobs, economic growth will continue to be disappointing. The question is how to encourage spending that gives the best economic results. Investment in crumbling infrastructures, healthcare systems that benefit the majority of people, and more judicious spending on education should ensure that public expenditure gives the best results in the long-term.
Loose monetary policy described popularly as ‘printing money’ by central banks to stimulate investment especially in depressed economies is a useful tool that has given positive results. The problem most countries are facing today is that this tool is not proving effective in creating more demand for goods and services that will convince entrepreneurs to invest in job creating ventures.
Fiscal austerity may have been necessary to convince most people that money does not grow on trees and that massive national debts are as lethal to a nation as private huge debts are for an individual. A shot of Keynesian economic belief in strategy formulation would benefit most western struggling economies.
One important caveat is that deficit spending should not be modeled on irresponsible tactics as adopted in the past by some countries like Greece and Italy. It needs to be restrictive and disciplined. Creating unproductive jobs in the public sector, financing white elephant projects, closing an eye to tax evasion and the black economy are the seed to future pain for the majority of people in any society.