Must-read: Barry Eichengreen: “Confronting the Fiscal Bogeyman”

Must-Read: Barry Eichengreen: Confronting the Fiscal Bogeyman: “The International Monetary Fund… warned the assembled G-20 attendees…

…[Yet] all that emerged from the meeting was an anodyne statement about pursuing structural reforms and avoiding beggar-thy-neighbor policies…. Once again, monetary policy was left… as the only game in town…. Someone needs to do something to keep the world economy afloat, and central banks are the only agents capable of acting. The problem is that monetary policy is approaching exhaustion…. The solution is straightforward. It is to fix the problem of deficient demand not by attempting to further loosen monetary conditions, but by boosting public spending… in research, education, and infrastructure…. Such investments cost little, given low interest rates. Productive public investment would also enhance the returns on private investment….

Thus, it is disturbing to see the refusal of policymakers, particularly in the US and Germany, to even contemplate such action, despite available fiscal space (as record-low treasury-bond yields and virtually every other economic indicator show). In Germany, ideological aversion to budget deficits runs deep… rooted in the post-World War II doctrine of ‘ordoliberalism’…. The ordoliberal emphasis on personal responsibility… rendered Germans allergic to macroeconomics….

The US did not experience hyperinflation…. But for the better part of two centuries, its citizens have been suspicious of federal government power, including the power to run deficits…. That suspicion was strongest in the American South, where it was rooted in the fear that the federal government might abolish slavery. In the mid-twentieth century, during the civil rights movement, it was again the Southern political elite that opposed the muscular use of federal power…. Lyndon Baines Johnson’s ‘Great Society’… render[ed] the South a solid Republican bloc and leave its leaders antagonistic to all exercise of federal power except for the enforcement of contracts and competition–a hostility that notably included countercyclical macroeconomic policy. Welcome to ordoliberalism, Dixie-style. Wolfgang Schäuble, meet Ted Cruz.

Ideological and political prejudices deeply rooted in history will have to be overcome to end the current stagnation. If an extended period of depressed growth following a crisis isn’t the right moment to challenge them, then when is?