A wind of change is howling through the world’s economic institutions. Last week it was the International Monetary Fund saying that austerity could do more harm than good and that neoliberalism was not all it was cracked up to be. This week it is the turn of the Organisation for Economic Cooperation and Development to challenge the orthodoxy.
The OECD says governments around the world should consider banding together to spend more on public works, something it deems necessary because lasting recovery from the deep recession of 2008-09 remains elusive.
There is, of course, a word to describe action by the state to boost demand when private-sector activity is weak, and that word is Keynesianism. It was not a word that was used much in the three decades when neoliberalism reigned triumphant.
But times change and after five years in which its forecasts have proved persistently overoptimistic, the OECD is becoming increasingly fretful. It is concerned that weak growth will feed on itself. It is worried that central banks are being asked to do too much with low interest and quantitative easing. It fears that any one of a number of risks – a hard landing in China, a financial crisis in emerging markets or, most pressingly, Brexit, could lead to activity stalling altogether. It wants something done to break the cycle of low productivity, low wage growth and low investment.
What the OECD wants is for the one-legged stool of hyperactive monetary policy to be replaced by a three-legged stool in which central banks get some support from fiscal policy and from structural reform.
In an analysis that would have been given the wholehearted support of Keynes, the thinktank says extra spending on infrastructure would pay off in terms of higher growth and lower debt. Governments, in other words, should stop obsessing about cutting their way back to financial health and consider growing their way out of the red instead.
Analysis by the OECD shows that the impact in the first year of a 0.5% of GDP increase in public investment by all rich OECD economies would be to boost world growth by 0.4 points. In the US, there would be a 0.7-point improvement; in the EU and the UK a 0.6 point pick-up. The public debt stock in the US would fall by 0.7 points, with smaller decreases of 0.4 points and 0.3 points in the eurozone and the UK respectively.
The OECD also notes that there is a significant dividend of about 0.2 percentage points of GDP for countries acting collectively rather than going it alone.
In recent years, the OECD adds, the pace of structural reform has slowed and it is not hard to see why. High unemployment, stagnant productivity and nugatory increases in real wages have led voters to be resistant to change – and in many countries openly hostile to their governments. Stronger, more inclusive growth would make it easier to reform economies and make them more productive.
Words, however, come cheap. Just as the IMF’s new thinking about the failings of neoliberalism is not always shared by the officials that give policy advice to countries in economic difficulties, so there is no obvious rush by OECD members to club together for a joint public investment programme. As Ángel Gurría, the OECD’s secretary general, put it: “They are talking about it but they are not doing it.”
Things may need to get worse before the penny drops. If the OECD’s gloomy analysis is right, that moment may not be far off.