The end of fiscal obstruction
In an ailing global economy, every penny from the government counts
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RECENT developments point to an intriguing change in the global economic policy mix. For the first time in a long while, monetary policy will no longer be the only game in town when it comes to battling the depressing impact on aggregate demand and prices of the global excess of desired saving over desired investment (the "global savings glut"). The new ally? Fiscal policy! After a wave of austerity in the major advanced economies added to the global savings glut and subtracted from demand growth for several years, public spending and tax policies in the United States, the eurozone and Japan look set to become (mildly) growth-friendly in the coming years.
To see why the prospective change from obstructive to constructive fiscal policy in the G-3 economies is so important, it is instructive to recap briefly what went wrong with the economic policy mix in recent years, and why:
To summarise, in each of the G-3 developed economies (and others such as the United Kingdom), fiscal policy has been a major headwind for growth and inflation in recent years, forcing central banks to go ever further out on a limb to try to stimulate their struggling economies.
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