Aug 29 (Reuters) - The good news is that there is a handy tool, better than negative interest rates or asset buying, to jump-start the economy when the inevitable recession comes.
The bad news is that the tool is fiscal policy and its use involves the (broken) political process.
At a time when the U.S. government is manifestly unable even to staff itself properly, saying that government spending will help to mitigate a downturn is a sad echo of the old joke in which an economist stranded on a desert island with only tinned food says First, assume a can opener.
Central bankers assembled over the weekend for the Kansas City Federal Reserves Jackson Hole economic conference heard that, contrary to much-received economic policy wisdom, deficit spending in a downturn will work well even for highly indebted countries.
"The Great Recession and the Global Financial Crisis have left many developed countries with low interest rates and high levels of public debt, thus limiting the ability of policymakers to fight the next recession," Alan J. Auerbach and Yuriy Gorodnichenko of the University of California Berkeley wrote in a paper presented at Jackson Hole. https://www.kansascityfed.org/ 7/8/media/files/publicat/sympos/2017/auerbach-gorodnichenko-paper.pdf?la=en
"Whether new fiscal stimulus programs would be jeopardized by these already heavy public debt burdens is a central question. For a sample of developed countries, we find that government spending shocks do not lead to persistent increases in debt-to-GDP ratios or costs of borrowing, especially during periods of economic weakness. Indeed, fiscal stimulus in a weak economy can improve fiscal sustainability along the metrics we study.
Though cautioning that Greece and other weak euro zone states serve as a grave warning about the limit of this policy, the paper comes at a particularly important time given the state of play in the United States, where debt-to-GDP is 77 percent and interest rates are highly unlikely to climb anywhere near their typical 4 to 5 percent by the time a recession comes along.
"With tight constraints on central banks, one may expect - or maybe hope for - a more active response of fiscal policy when the next recession arrives. This expectation, however, may be too optimistic since governments in developed countries have amassed high levels of debt over the past decade, the authors write.
CANT ANYBODY HERE PLAY THIS GAME?
Some observers, by which I mean your correspondent, have become convinced that the Federal Reserves insistence on raising interest rates and claiming it will continue to hike in the face of low inflation is in part due to a desire to have some arrows in its quiver if growth stalls.
This is probably counterproductive, but also completely understandable. Remember, the United States did an insufficient fiscal stimulus during the worst downturn since the Great Depression, and against a political backdrop that featured far more effective and reasonable administrations.
Janet Yellen, in making a Jackson Hole speech that was implicitly critical of Trump administration calls for banking deregulation, may well have assured that she will not be in charge when the next recession comes.
Good for her, and who could blame her?
I am not skeptical about the effectiveness of stimulative spending in a downturn. I am very dubious that should the United States face a recession in the next year or so, we will get much of this effective medicine. First off, the Trump administration and its legislative partners, or whipping boys, are highly unlikely to be either sympathetic to this line of reasoning or able to advance it if they were.
As this is being written, much of south Texas is under water and there is no sitting head of the National Oceanographic and Atmospheric Administration; the Federal Emergency Management Agency lacks two deputy directors and there is no head of the Department of Homeland Security. Its director, John Kelly, has moved on to trying to ride herd on the president as White House chief of staff.
Forget about stimulative spending in a downturn - Washington may not even get the debt ceiling lifted, an act that might tip the economy into the very recession that would call for more debt-funded spending.
This is not the group to expect to do its part and reach across the aisle to lift the United States out of any coming recession.
The executive branch may, however, help the Fed out with one of its vexing problems: the failure of inflation to rise despite unemployment going down and down.
I want tariffs. And I want someone to bring me some tariffs, Trump is reported to have told Kelly in a recent meeting on trade policy. (https://www.axios.com/exclusive-trump-vents-in-oval-office-i-want-tariffs-bring - m e - s o m e - t a r i f f s - 2 4 7 8 1 2 1 2 7 3 . h t m l )
A trade war with China would certainly be inflationary. (Editing by Dan Grebler) )