The party of nearly uninterrupted growth since the Reagan economic recovery of 1983 with the exception of two small recessions in 1990-1991 and 2002-2003 in the United States ended with a thud, culminating in the financial crisis of 2007-2008 and the Great Recession of 2007-2009. Unemployment had risen to double digits and inflation fell raising fears of deflation as in Japan. Therefore, interest rates were cut deeply by the Federal Reserve to the zero bound and money supply was further expanded through bond purchases and purchases of mortage-backed securities (MBSs) in three episodes of quantitative easing. Yet the economic recovery since 2009 has been sluggish. All that money supply perhaps achieved was to put a floor under inflation but not accelerate real investment through the credit channel of monetary policy transmission.
It has taken 7 years to nearly halve the unemployment rate with little to say about the quality of employment created. Rise in wages has been slow and people have not been able to find employment and incomes comparable to what they have been before the Great recession. Economists have cited technology and trade as two reasons for the plight of the average American as gains from both technical change and international trade have gone disproportionately to the top 10%, and more so to the top 1%. Innovation in all sectors, including in finance, was encouraged with little regulation. Technical change and trade have become dogmas whose critique was forbidden. As a result, populism and protectionism are now on the rise around the world as can be seen from Brexit in the United Kingdom and the election of Donald Trump for president in the United States.
The blame for the rising populism and protectionism must squarely be laid on the lack of substantive discussion among policymakers about how to safeguard jobs amidst technical change in manufacturing – a key employment sector of the economy – and how global trade must be structured for its benefits to be equitably distributed among the population. More importantly, under the grave threat of deflation after the onset of the Great Recession, monetary and fiscal policies have not been commensurately radical in a timely manner.
There was much deliberation whether to cut interest rates to zero during the initial period of the financial crisis, then it was followed by further deliberation whether quantitative easing should be adopted. Monetary easing occurred in an environment of fiscal tightening or austerity, a contradictory approach to macroeconomic policy making. While fiscal policy was constrained from acting through austerity measures, there has been no discussion on how monetary expansion can be conditioned on real investment rising to direct money to those sectors of the economy where it is most needed.
The extremely radical approach of the central banks in developed countries directly funding government budgets with the central banks forgiving all new government debt so that fiscal space can be increased to raise real investment to create jobs (“helicopter money”) has largely been left to opinion articles by former central bank policymakers and academics when the required global infrastructure spending alone is estimated to be USD 57 trillion by 2030. All of this has needlessly prolonged the economic recovery: money is being hoarded at central banks in the form of excess reserves and in cash by corporations instead of being invested in the real sector.
Predicating economic recovery on money from central banks trickling down into the economy and into sectors decided solely by market forces has made monetary policy less activist than it should have been for the recovery to be quicker. It is still not too late.