David Malpass‘ latest column for Forbes magazine takes aim at conventional wisdom in economic thought.
ESTABLISHMENT ECONOMICS should be having a complete nervous breakdown. It claimed that growth and fairness could be created through government spending, zero or negative interest rates and central bank bond-buying. Applied massively, those policies are working in reverse, causing repeated downward revisions to growth expectations and channeling gains to the wealthy but keeping average wages down.
The result in the U.S. since 2009 has been average real GDP growth of only 2.3% and average underemployment of 23 million. The establishment rationalized this as the “new normal” caused by the 2008 financial crisis, an untenable claim after six long years of slow growth.
Rather than undoing the policies, governments have doubled down. They like to expand and have low expectations for the private sector. Even though U.S. median income crashed during the big-government programs of 2009-10 and stayed at rock bottom from 2011 to 2014, the Obama Administration maintained spending at elevated levels, paid two years of unemployment benefits, advocated repeated tax hikes and allowed the zero-rate, low-growth Federal Reserve to launch Operation Twist, QE and then unlimited QE3. …
… The path to growth and higher median income goes in the opposite direction. Governments need to practice austerity rather than dispense it, but government negotiators won’t move in that direction. Germany’s powerful chancellor, Angela Merkel, could guide the issue; instead she’s been agnostic regarding government size, letting government experts negotiate the reform programs, despite the bad political and economic results.
The force driving the establishment in developed countries since 2008 has been to use the post-Lehman Bros. financial crisis to make governments more powerful. Governments won’t give up their own grandeur, decrease tax rates or sell their favorite assets. Instead, establishment economics wants to spend more, buy bonds and increase taxation and government control. This has caused a misallocation of capital and a decline in private sector investment and hiring. It’s reversible, but for now the system is rigged to defend the status quo.
