The Group of 20 meeting of high-level policy makers in Rome this weekend provides a timely opportunity to assess progress on the four broad policy responses that I have argued repeatedly are vital for the global economy. They hold the key to maintaining a strong and durable recovery that is also more inclusive and sustainable. They reduce the risk that financial market instability will undermine economic and social well-being. And the longer they are delayed, the greater the risk of a self-reinforcing cycle of widespread damage that also undermines the battle against crippling climate change.
Starting off, I have argued for a good six months that central banks, and the Federal Reserve in particular, should use the window of a strong economic recovery and buoyant financial markets to slowly and carefully ease a pedal-to-the-metal approach to stimulus policy that is still in emergency intervention mode. And for most of the last six months, these central banks have felt little inclination to do so, repeatedly stressing that the primary reasons for acting — mounting inflationary pressure and financial instability threats — are either “transitory” or manageable.
With economic data and underlying drivers of inflation eroding their case, and with markets starting to question the credibility of their forecasts and policy guidance, central banks must now confront two policy requirements that would have been much easier to handle with better sequencing over a longer period: easing off the accelerator by reducing large-scale asset purchases (a QE taper) and tapping on the brakes through interest rate increases. The Bank of England has been the best at recognizing the underlying inflation dynamics and the urgent need to adjust its forward policy guidance. The Fed continues to notably lag behind, while the European Central Bank’s own sluggishness has a better economic rationale.
The second urgent policy area centers on enhancing productivity and labor force participation. Its importance is being highlighted daily by widening supply disruptions and worker shortages. It involves a significant step up in the scale and scope of key infrastructure programs and employment initiatives. Here the US is well advanced in design, but political divisions in Congress are blocking timely execution. The UK is also on the move, but the Eurozone is lagging behind.
The third policy area seeks to minimize the risk that excessive financial risk-taking will harm economic and social well-being. It involves better supervision and regulation, particularly of nonbanks. It will not be successful without better coordination — especially among national regulatory bodies but also across borders — and a significant gain in their understanding of how financial risk has morphed and migrated since the global financial crisis.
Finally, vaccine availability is critical. Despite many encouraging announcements, the flow of Covid-19 vaccines remains highly uneven across countries, with many developing economies trailing badly. The way the more infectious delta variant emerged and spread earlier this year reinforced the truism that, in a global pandemic, no one is safe until everyone is safe. And it’s not just about minimizing the impact of Covid on lives and livelihoods. It is also about containing dangerous and disorderly migrant flows, preventing fragile states from collapsing and limiting the spread of geopolitical disruptions.
For maximum effectiveness, these four policy areas are best pursued simultaneously with better international coordination. This should be an urgent across-the-board priority, and not only for the significant upside they offer.
Imagine the economic, financial and sociopolitical risks should delays persist on all four. By the middle of next year, the advanced economies — and, therefore, the global economy — would face the danger of four strong and simultaneous headwinds to growth and prosperity, also risking policies to fight climate change:
Unacceptably high and persistent inflation forcing central banks to slam on the monetary policy brakes.
Persistent supply shortages and labor market malfunctions curtailing actual and potential growth from the supply side.
Financial instability fueling a tightening of global liquidity conditions, including higher borrowing costs and less easy access to funding.
New Covid variants adding to the economic and social malaise.
Such a world would also have mounting debt concerns and weak appetite for fiscal stimulus when green investments are crucial.
G-20 policy makers have a good opportunity to come to better grips with these priorities. The hope is for a repeat of the October 2008 “Sputnik moment,” when policy makers who gathered in Washington for the International Monetary Fund and World Bank annual meetings realized that the global financial crisis threatened to turn into a worldwide depression. This led to the successful London G-20 summit in April 2009, where members committed to coordinated policy actions to save the global economy.
While today’s global political conditions appear less conducive to the type of 2008-09 policy coordination, the stakes are just as high for billions of people around the world.
Bloomberg
