Up to governments to do heavy lifting now


TODD HIRSCH / Guest Columnist

Troy Media

In almost every team sport, there comes a point at which the play is passed. The right-winger sets up the shot, but the centre scores the goal. The quarterback makes the pass, but it is the offensive tackle who stops the other team from blocking that pass. Whatever sports analogy you want to pick, functional teamwork is a beautiful thing.

So it is with the battle to save the global economy. Two major policy levers, monetary and fiscal, have been busy at work.

Globally, monetary policy — the terrain of central banks in setting interest rates and printing money — has been doing a lot of the heavy lifting over the past few years trying to keep the world economy from melting like Jello.

But as we enter the autumn of 2011, it seems that the monetarists are happy to pass the baton to their fiscal policy counterparts. Fiscal policy — the realm of government taxing, spending, subsidizing, and regulating — is now the star attraction.

Central banks around the developed world have essentially done all they can do. Interest rates have been slashed to zero (or near zero). In the case of the United States, the Federal Reserve has engaged in two phases of printing money (the famed “quantitative easing”). And most central banks have more or less declared borrowing costs are going to stay put for a long time. The Federal Reserve even followed Canada’s lead by explicitly stating that rates will remain at rock bottom until a specified date.

Yet at the same time, central banks have been sending nuanced signals to the governments of their respective countries that it is now up to government fiscal policy to take up the reins. And those governments have been responding.

U.S. President Barack Obama introduced a federal bill targeting employment. Through a combination of $250 billion in cuts to payroll taxes and $105 billion in targeted government infrastructure spending, the White House is trying to salvage the U.S. economy by putting Americans back to work. Obama knows that the single biggest threat to the U.S. tipping back into recession is an unemployment rate stuck stubbornly above nine per cent. As a result, consumer confidence is spiralling into the abyss — just at a time when American companies are hoping they’ll start spending.

Across the Atlantic, the European Central Bank has done its monetary stimulus part by purchasing bonds of countries in series trouble, such as Greece, Ireland and Portugal. It’s kept interest rates low, and has tried to coordinate the bailouts to the heavily indebted countries. But more so in the last few weeks, attention has turned to the fiscal plans of Italy, Spain and even France. Investors want to see credible austerity packages that will reduce spending and deficits in these countries.

Even here at home, the Bank of Canada made no change to its overnight lending rate, which was widely expected, so it’s a steady-as-she-goes stance on the monetary policy side. But on the fiscal side, federal Finance Minister Jim Flaherty left some room for Ottawa to do a bit more on the tax or spending side if (and that’s a big) the global economic situation worsens considerably.

Central banks — including the Bank of Canada — are not completely out of monetary arrows if they are needed. A third round of quantitative easing in the U.S. is still a possibility (although the Fed is not talking that up). And central banks could manipulate their holding of short-term bonds in favour of longer-term bonds, which effectively pushes interest rates lower for long-term borrowers. The Bank of Canada could even interest rates again, or simply signal to markets that rates will remain unchanged for another specified period of time.

But for the most part, it seems that all eyes are turning away from central banks and their monetary tricks, to governments and their fiscal hammers. The big and obvious problem with this, though, is that governments are running up against enormous deficits and debts. Cutting taxes and pouring more spending into infrastructure, for example, is great — unless you are the U.S. government and the total debt is already an astounding $14 trillion. Putting through another round of government spending in the U.S., and extending the debt ceiling yet again, will be almost impossible for President Obama at this point. The Tea Party Republicans went to Washington to stop exactly this.

None of this sounds too encouraging for the global economy and the weapons that governments and central banks have left at their disposal. Indeed, they’re both in a tight spot.

Nonetheless, the actions (or non-actions) of central banks this summer and fall make it pretty clear that they are turning to governments to do more. Monetary policy is bowing to fiscal policy.

Todd Hirsch is senior economist with ATB Financial and Alberta business columnist for Troy Media.