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Growing the global economy<br />
Negative<br />
or low real<br />
interest rates<br />
have done all<br />
they can<br />
Robert Fauver<br />
Former G7 sherpa for the United States<br />
is not taking advantage of its fiscal space.<br />
Monetary policy has probably gone as far as<br />
it can and structural measures take too long.<br />
RF The United States shows the problems<br />
of trying to change monetary policy. The<br />
Federal Reserve was too slow to move away<br />
from its zero interest rate policy. It is now<br />
caught continually announcing that it<br />
wants to raise interest rates, but the<br />
global economy looks weak and it<br />
has to back away.<br />
Changing the quantitative<br />
easing policies in the United<br />
States, Japan and Europe is<br />
more difficult than people<br />
think. Negative or low real<br />
interest rates have done all<br />
they can. Once you have<br />
monetary and fiscal policies<br />
supporting economies for close<br />
to a decade, confidence in their<br />
effectiveness is weakened.<br />
The $1 trillion stimulus at the beginning<br />
of the Obama administration was<br />
ineffective in promoting growth in the<br />
United States. It may have helped set the<br />
bottom of the trough of the recession, but<br />
did little to stimulate long-term growth.<br />
Structural rigidities are a long-term problem<br />
recognised by the OECD, the IMF and the<br />
<strong>G20</strong>. Yes, the direct effects of structural<br />
reform are medium term, but if we could<br />
find the political will to implement serious<br />
structural reforms, we could get short-term<br />
effects through business confidence.<br />
The regulatory approaches used by the<br />
current US administration have constrained<br />
the desire to invest and weakened domestic<br />
investment policies. Changing or removing<br />
$1TN<br />
Stimulus at the<br />
beginning of<br />
the Obama<br />
administration<br />
regulations will have an immediate effect.<br />
The United States has virtually doubled its<br />
federal debt in the past eight years. There<br />
has been little real long-term growth effect<br />
above two per cent growth. It is hard to see<br />
any scope for further fiscal stimulus.<br />
Q Is China doing the right thing regarding<br />
its fiscal situation?<br />
TB The actual level of China’s debt is<br />
opaque. Its federal debt burden remains<br />
relatively low and offers some room for<br />
additional fiscal stimulus. There is<br />
concern about state and city debt<br />
levels. You do not have to have<br />
a balanced budget. You can<br />
still run deficits and lower<br />
the debt burden as a share<br />
of gross domestic product,<br />
if you have growth.<br />
In some countries, as in<br />
the United States, increased<br />
budgetary expenditures in the future<br />
are a concern because of demographics.<br />
An aging society has implications for<br />
healthcare costs and income support, so<br />
countries need a plan to manage mediumterm<br />
debt. That is a much bigger challenge<br />
for most <strong>G20</strong> members.<br />
RF I agree. It is the growth of welfare state<br />
entitlements. Long-term projections for<br />
the United States show them taking a large<br />
uncontrollable share of total government<br />
spending. The opaqueness of the Chinese<br />
system at state, local and federal levels<br />
adds confusion. China’s bidding and<br />
procurement approaches are also opaque,<br />
so the effectiveness of fiscal stimulus on<br />
infrastructure spending can be diffuse →<br />
ILLUSTRATION: STUDIO NIPPOLDT<br />
G7<strong>G20</strong>.com September 2016 • <strong>G20</strong> China: The Hangzhou Summit 97
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