Must-Read: Laura Tyson and Eric Labaye: Jumpstarting Europe’s Economy

Must-Read: Laura Tyson and Eric Labaye: Jumpstarting Europe’s Economy: “Not so long ago… ‘helicopter money’… seemed outlandish…

…But today a surprising number of mainstream economists and centrist politicians are endorsing the idea of monetary financing of stimulus measures in different forms…. After years of stagnant growth and debilitating unemployment, all options, no matter how unconventional, should be on the table…. The United Kingdom’s referendum decision to leave the European Union only strengthens the case for more stimulus and unconventional measures in Europe. If a large majority of EU citizens is to support continued political integration, strong economic growth is critical…. The wave of corporate investment that was supposed to be unleashed by a combination of fiscal restraint (to rein in government debt) and monetary easing (to generate ultra-low interest rates) has never materialized. Instead, European companies slashed annual investment by more than €100 billion ($113 billion) a year from 2008 to 2015, and have stockpiled some €700 billion of cash on their balance sheets.
This is not surprising–businesses invest when they are confident about future demand and output growth….

Proponents of helicopter money… rightly argue that it has the advantage of putting money directly into the hands of those who will spend it…. The boost to demand might give central banks the opening they need to move interest rates back toward historical norms. This could take the air out of incipient asset bubbles that might be forming…. A less risky and time-tested route for stimulating demand would be a significant increase in public infrastructure investment funded by government debt…. Yet governments across Europe have clamped down on infrastructure spending for years, giving precedence to fiscal austerity and debt reduction in the misguided belief that government borrowing crowds out private investment and reduces growth. But the crowding-out logic applies only to conditions of full employment, conditions that clearly do not exist in most of Europe today…

June 27, 2016


Brad DeLong
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