Tired of lacklustre economic growth, the finance ministers of the Group of 20 nations earlier this year tried to recapture some of the old magic of their epic struggle against the Great Recession.
In an echo of the co-ordinated fiscal stimulus the G20 deployed to avoid a global depression, the members of the 2014 roster said they would implement new policies that would raise the current trajectory of the group's combined gross domestic product by 2 per cent over five years. They said they would review progress in September, when ministers and central bankers are scheduled to meet in Cairns, Australia. The International Monetary Fund and the Organization for Economic Cooperation and Development were charged with delivering the report card.
On Tuesday, Christine Lagarde, the managing director of the IMF, gathered a couple of dozen reporters around an oval table to take questions before fund's managers take their summer break. A gentleman from the Australian Financial Review asked the managing director how the G20's 2-per-cent pledge was going. Ms. Lagarde let slip a rueful chuckle. "It has been slow in the making," she said. Diplomatically, she added that there still are a couple of months left before the Cairns meeting.
There was little attention paid to the G20 pledge, perhaps because few believed politicians would follow through. The response of the fiscal authorities to the immediate existential danger presented by the Great Recession was strong. Their work since only can be described as disappointing. The U.S. recovery was impeded by budget cutting and government shutdowns in Washington. The GDP of Britain, where the government adopted an aggressive austerity plan, only just surpassed its pre-crisis peak. Germany's massive current-account surplus shows the government is doing little to stimulate domestic demand.
The more common response of politicians, especially in advanced countries, has been to rely on central banks to drop borrowing costs to nothing and pump hundreds of billions of dollars into the economy. Too many of those do-nothing politicians then had the audacity to criticize the central banks for doing too much.
It would be naïve to predict the G20 finance ministers will make good on their growth pledge, but it sure would be great if they did. Companies are profitable, and business confidence is buoyant, but the economic outlook still isn't strong enough to inspire big investments in people or capital. Caterpillar Inc. reported this month that it employed 7,100 fewer people in the second quarter than it did a year earlier, although it plans to repurchase $2.5-billion (U.S.) in stock in the third quarter. One of the arguments against government spending is that it crowds out private investment. That shouldn't be a barrier to action by the G20. The site of successful companies choosing to buy their own shares rather than hire and expand shows there's lots of space for public investment.
The problem, of course, is the policies that fiscal authorities could enact to boost their economies are difficult and controversial. It's easy to get everyone to agree on what to do when the house is on fire. Rebuilding is another matter. Everyone has an opinion, and some are willing to sleep in a tent until if they don't get their way.
William White, the former Bank of Canada official who foresaw the financial crisis when he was an economist at the Bank of International Settlements, says problems facing the global economy are beyond the ability of central banks to resolve. Mr. White says governments should restructure debt, loosen restrictions on service industries, lift the retirement age, and make "major" increases in investment in infrastructure. If the reason for avoiding the latter is a fear of how financial markets will respond, "financial markets must be made to understand that an increase in government liabilities, matched by productive assets, is very different from an increase in liabilities alone," Mr. White said in a speech in Malaysia in May.
Canada doesn't get a pass in this discussion. With the economy growing smartly after the recession, it was reasonable to set a course to balance the budget. That strength was exaggerated by a dangerous surge in mortgages. The fact that ultra-low interest rates have failed to revive the animal spirits of Canadian business suggests the country is suffering from competitive disadvantages that only policy can correct. The argument that it's the stronger dollar that is holding back business investment is exaggerated. The IMF said in a report released Tuesday that the Canadian currency is slightly overvalued, and that a weaker currency will help exports. More import, the analysis concluded, will be "addressing the productivity gap with trading partners and energy export constraints."
William Scarth, an economics professor at McMaster University, argues in a paper he wrote for the C.D. Howe Institute that Prime Minister Stephen Harper should delay his plan to balance the budget by three years. Doing so would have little impact on the country's debt load and could lower the unemployment rate by four-tenths of a percentage point, Prof. Scarth reckons.
"This opportunity to help working Canadians should not be passed up," Prof. Scarth wrote. Ms. Lagarde would agree. We'll see in September whether Mr. Harper is persuaded.