It’s a curious pattern being repeated around the industrialized world. Governments are trying frantically to tighten their belts even as the monetary authorities loosen their purse strings. This week in the United States is a perfect example: the Fed looks set to extend its bond purchase program even as Washington fails to reach an agreement to avoid the dreaded “fiscal cliff.”
It’s the sort of dissonant policy that is unlikely to yield very constructive results at a time when the U.S. economy is struggling to achieve a meager 2 percent growth rate.
Thomas Lam, group chief economist at OSK-DMG inSingapore:
The current one-sided policy mix of fiscal tightening and monetary easing is problematic (for example, the UK experimented with this approach – fiscal consolidation and monetary accommodation – and it clearly failed to generate a sustained recovery). In some cases, it’s borderline insanity – it’s like you’re trying the same or broadly similar approach but hoping for a different outcome every single time.
Lam says some countries have the room to stimulate growth in the short-term, and should not miss the opportunity to do so.
A one-size-fits-all fiscal policy approach (in the current context, fiscal tightening is the norm) is not only misguided but extremely dangerous for the global economy as it remains more-or-less stuck in the mud. Policymakers, especially in economies with subdued sovereign risk premiums (like in UK, US, Germany and Japan for instance), need to consider the notion of fiscal flexibility – a combination of near-term, though temporary, fiscal boost coupled with the commitment of longer-term fiscal tightening.