- - Thursday, August 6, 2015

Facing economic slowdowns, the world’s biggest economies are buying time, not growth. The European Union, China and Japan are pursuing stimulus policies, and the United States still retains historically low interest rates. They are doing so in the mistaken belief that with a little more time, their fundamental economic problems will simply disappear.

In July, the International Monetary Fund (IMF) again lowered its economic growth projections. Global growth estimates fell from 3.5 percent to 3.3 percent, and the advanced countries’ projection went from 2.4 percent to 2.1 percent. These are far cries from the 1997-2006 average when world growth was 4 percent and advanced countries recorded 2.8 percent.

Pinpointing the source of this slower growth is not hard. The world’s four largest economies (EU, U.S., China and Japan), accounting for almost two-thirds of world gross domestic product (GDP), were all projected laggards. The IMF downgraded 2015 U.S. growth from 3.1 percent to just 2.5 percent, while Japan’s fell to 0.8 percent. The EU is projected at 1.5 percent and China at 6.8 percent (its 1997-2006 average was 9.4 percent).

Interestingly, all four have pursued stimulative efforts.

At the financial crisis epicenter, the United States immediately responded with an accommodative monetary policy. Federal spending then spiked under President Obama, reaching 24 percent of GDP, and then remained around its heightened nominal levels.



The result? Much higher federal spending and debt, but much slower economic growth.

Now the world’s other three major economies are pursuing stimulus policies and getting similar results.

According to the IMF, U.S. net debt averaged 41.3 percent of GDP from 1997-2006, and is projected to reach 80.4 percent this year. For the EU, it has gone from 48.9 percent to 69.8 percent. And for Japan, it has risen from 65.3 percent to 129.6 percent.

Investment has gone in the other direction. U.S. investment averaged 22.6 percent of GDP from 1997-2006, but is projected at 20.4 percent this year. The EU’s has fallen from 22.4 percent to 18.8 percent in 2015, and Japan’s has fallen from 24.4 percent to 21.1 percent.

Despite the lack of results, it is likely other countries would take the same path, too, if they had the resources. But even if the remaining one-third of the world’s economy were to follow, there is no reason to expect an appreciably different outcome.

The world’s four largest economies have, at considerable cost, bought themselves time, not real growth.

It is always possible to manufacture enhanced GDP figures for a time, at least until the money runs out. It is not so easy to create real growth — as evidence continues to demonstrate. Real growth requires real reform, which is seemingly the only policy the leading economies’ governments have not tried.

Some would say we are now expecting too much for today’s growth to match yesterday’s performance by economies overheated by financial speculation. However, that would mean disregarding the fact that recent growth is well below the preceding decade’s average — despite debt and spending levels well above it.

More importantly, that argument proves two larger points. First, growth has actually been slower, and for longer, because it earlier was buoyed by financial-sector stimulus. Second, artificial stimulation, whether by the public or the private sector, is no replacement for an economy functioning as it should — on its own.

Artificial stimulation is deceptively easy. It seemingly gives us what we want and when we want it. Governments increase spending and borrowing, and central banks ease monetary policy. But it is just a sugar high — a quick infusion, but not real nutrition.

Far harder is the real reform now called for. Cutting spending and taxes creates political losers. Reducing borrowing means living within our means, not someone else’s. Rebalancing regulations to the economy — contradicting liberal belief that more is better — goes against the prevailing refusal to weigh costs against benefits.

The “stimulative cure” has come to resemble the disease it was supposed to heal. The world’s economic problem is — and has been — not a lack of artificial stimulation, but a surfeit of it. Regardless of whether it is well-meaning — or from the public or private sector — it has not been well-received where it matters: in the economy. After all these years, and with all this evidence, it is time to now try real economic reform.

J.T. Young served in the Treasury Department and the Office of Management and Budget from 2001 to 2004 and as a congressional staff member from 1987 to 2000.

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