Hamish McRae: Policy-makers' kick towards growth goal
Sunday 09 September 2012
They are stepping on the gas. Over the next few weeks the world's economic policy-makers will take action to try to speed up global growth. This will not be a coordinated, organised action but a series of rather different measures with the same broad intention: to prevent what is at best a most uneven recovery from sliding into something much worse.
We have just had the first significant policy change in Europe, the "outright monetary transactions" plan of the European Central Bank. Quite why it should be called that I cannot think; I just hope it sounds better in the German, for their taxpayers will in effect have to underwrite it, and against the wishes of the Bundesbank too.
Experience teaches us to be cautious about making hurried assessments of big policy initiatives and there are so many uncertainties with this one that we should wait and see before dismissing or applauding it. But the plain truth is that the ECB will be taking on an explicit liability for the debts of the weak eurozone members.
So if, in two years' time, there were a radical change of power in, say, Spain, and the new government defaulted on its debt or left the euro (or both) other European countries that have put up the capital of the ECB will lose money. Guarantees are only guarantees until they are called in, so you might say the costs are hypothetical. But as we have seen recently, sometimes people put up bail for someone and then suddenly find themselves on the hook when unforeseen circumstances intervene.
Still the ECB will buy some time. It ought to cut the interest rate that Italy and Spain have to pay for their longer-term debt (see main graph), even though the ECB is pledged only to buy debt of up to three years' maturity. We will have to see what terms are attached to any help, with the general expectation being that Spain will have to accept some formal control of its economic policy, but Italy may scramble by without that. But the obvious question is: how much time will this plan buy? Past experience would suggest only a few months.
The reason, if you strip away all the detail, is that the weak countries have to persuade willing savers that they will not default on their debts. The reputational damage to a money manager for lending to a country that defaults is huge. Look at the way in which investors have been pilloried for lending to Greece – bondholders have been reviled for their stupidity and greed. You hear people saying they deserve the "haircut" imposed on them. Individual, brave, investors can take a chance lending to Italy or Spain and benefit from the high rates on offer. But if you are a custodian of someone else's pension you have to play safe. That applies particularly if you are a foreign investor, and as you can see from the right-hand chart, it is the foreign money that has bunked out. One of the dangers of this ECB plan is that it will simply make it easier for other investors to get their money out on better terms.
That points to another harsh truth: if the ECB has to buy bonds it is because independent investors are not prepared to do so.
Still, the plan will steady things for a while. Europe will have less economic disruption through the autumn than would otherwise be the case. So the most sensible way to see this plan is as one of several efforts to get the global recovery back on track and in those terms it deserves a welcome.
We will see two more initiatives in the next few days. One will come from the US Federal Reserve, which has its monthly meeting on Thursday. It is generally expected that the Fed will either start another bout of quantitative easing, or at the least will indicate directly that it is prepared to so do. The difficulty US policy-maker face is that at the year end, a large number of tax cuts initiated in the Bush era expire. So there would, if nothing is done, be a sharp tightening of US fiscal policy.
But any political decision to do anything about this is stymied by the electoral calendar. Result: huge uncertainty, that may already be leading to firms delaying investment and hiring plans. Whatever you believe about the appropriate policies, and whatever you think about the merits of a change in presidency, uncertainty is bad for confidence.
So there is certainly a good practical case for trying to offset this uncertainty with the one bit of policy that is available, a further monetary boost. So that is what's widely expected; how effective it will be is another matter, but it must have some positive impact in the short-run .
But it is not just Europe and America: China is expected to take action too. It has just announced another huge set of investments in infrastructure: 25 underground lines, 13 road projects, several new airports and so on. (Interesting contrast between their approach to building airports and ours – but let that pass.)
These plans are big even in relation to Chinese GDP – equivalent to something like 0.5 per cent of GDP a year – and that is on top of existing investment plans. Further monetary measures are expected soon. The information coming out of the country is so difficult to assess that it is hard to make much of a judgement as to how long China can keep its great growth run continuing. But I think we can be very sure about its determination in the immediate future to keep growth going. The leadership of world's second largest economy is again using the measures it employed to maintain growth when the West slumped in 2008.
If you take a long view, what seems to be happening is that the initial bounce out of recession (or slowdown, for there was no recession in much of the emerging world) is over. Things are in danger of sliding back. So now the world's policy-makers are swinging back into action. That action may not be effective or even appropriate, but it is a fact. So, we go into autumn with a bit of a kick to the global economy and we'll see how it responds.
Loosening UK planning controls must be worth a shot
So what are we in the UK doing to boost growth? Last week, we had a no-change announcement from the Bank of England's monetary policy committee, as expected, plus some modest changes to planning regulations designed to encourage house-building and home extensions.
The link is that we have already a very loose monetary policy but it does not seem to have had the impact it has had in the past in boosting demand. In the 1930s cheap money fueled a house-building boom that helped pull the economy out of recession. This time it hasn't. Could planning controls be the culprit?
It is not a simple as that, for in the Thirties the housing market was not coping with the aftermath of a runaway housing boom. We are still adjusting to that, for though house prices relative to income are overall back to the level of the late 1990s, they may have further to fall.
If prices were rising you would expect more schemes to look profitable and more homes to be built. What does seem to be holding back building is a regional issue: the jobs and hence the demand for homes are both in the South-east, where planning concerns and congestion are greatest.
The 1930s building boom resulted in ribbon development, the legacy of which we live with today. So push-back is understandable – the question is whether we are being coherent in our planning legislation. The answer is probably not.
There is, surely, a wider point here. We always talk about economic policy in macro-economic terms. The popular charge against the coalition is that it is tightening fiscal policy too quickly and that its monetary policy is ineffective.
Some of us think the former does not fit the facts and the latter is the inevitable result of people wanting to keep down their debts. But this whole debate ignores the third leg of policy: structural policy.
If other policies, including planning controls, are holding down activity, surely loosening them is worth a shot.
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