Nearly a decade after the global financial crisis, the recovery remains disappointing and nothing — neither massive fiscal stimulus, nor record-low rates, nor generous injections of liquidity by central banks — seems to be helping. Policymakers from Washington to London to Tokyo all seem to agree there’s only one answer left: structural reform. Everywhere there’s talk of amending tax codes, rolling back regulations, reviving industrial policy.
None of it is likely to work.
A wave of impressive reforms in the 1980s did rejuvenate the U.S., U.K., Australia and New Zealand, transforming them from mixed economies to more market-driven ones. And economists agree something similar is needed now: reforms to make it easier to hire and fire in India, increase the number of women in the workforce in Japan, slash regulations in the U.S. and U.K., reduce support for state-owned enterprises in China, invest in infrastructure almost everywhere.
Simply repeating the successes of Ronald Reagan and Margaret Thatcher, however, won’t be possible. For one thing, the backdrop is vastly different today. Governments back then enjoyed more propitious macroeconomic conditions, including higher growth and lower debt. They also had much higher levels of regulation and government ownership to scale back. All that low-hanging fruit has largely been plucked.
At the same time, implementing true structural reform has gotten no easier. Bureaucrats remain as resistant as ever to simplifying rules and regulations. Industries remain leery of being exposed to competition. Any attempt to shrink social safety nets or reduce consumer and environmental protections elicits howls of protest.
The benefits of such measures are uncertain and have to be measured over long periods, usually beyond the time frame of the next election. By contrast, the costs are frequently immediate and tangible. Wages and working conditions in industries exposed to competition can swiftly decline. The costs of restructuring often fall on lower-skilled workers and other vulnerable groups, while gains accrue to a smaller cohort of skilled workers and managers. The current political environment is hardly conducive to such tradeoffs.
Many of the reforms being discussed also have conflicting and incompatible objectives. Efforts to promote free trade and labor mobility clash with concerns about nationalism and border security. Import restrictions and subsidies to industry will lessen efficiency and increase costs. Deeply ideological debates over the role and size of government and the effectiveness of markets, rather than pragmatic considerations, generally dominate the debate. That’s a problem when implementation requires coordination across national, regional and local governments — all of whom are separately elected.
And this is just within one’s own frontiers. To be effective, reforms also have to be coordinated globally. Opening up to foreign goods may adversely affect the balance of trade if trading partners don’t reciprocate. Lifting investment controls can subject smaller economies to destabilizing short-term capital flows. Floating one’s currency, when larger competitors can influence foreign exchange rates, will result in a deterioration of competitiveness. Lowering corporate tax rates may spark a damaging race to the bottom among rivals.
Given the current turn toward protectionism and currency wars, any kind of cooperation will likely prove elusive. And the fact is, in a relative world, it’s simply not possible for everyone to gain a decisive advantage from structural changes. Not every nation can shift to higher-value products, become a dominant force in service industries or become a leader in technologically advanced output.
Finally, even if policymakers could somehow surmount all these obstacles, they’d still be aiming at the wrong target. Structural reforms are designed to improve the supply side of the economy by increasing efficiency and productivity. But in a world plagued by overcapacity in many sectors, supply isn’t the problem: Weak demand is. That’s a function of several factors –sluggish wages for many, debt, demographics and uncertainty about the future — all of which are difficult to solve.
The most courageous experiment in structural reform may have been New Zealand’s under its center-left government in 1984. “Rogeronomics” (named after then-Finance Minister Roger Douglas) led to large spending and tax cuts, the sale of state-owned assets, cuts in subsidies and tariffs, and deregulation of industries. There were plans for a flat, low tax rate. After a wave of business collapses and bank failures, however, the program was aborted. The government was rejected at the ballot box and took more than a decade to return to power. Today’s reformers aren’t likely to fare much better.