Running on empty

G20's growth pledge is missing a demand booster

The G20's promise to add an extra two percentage points to global GDP is missing a crucial demand booster.

The growth target, adopted at a meeting of finance ministers and central bankers in Sydney over the weekend, was lifted from an International Monetary Fund paper which examined what might happen if the world's biggest economies agree on a shared agenda.

The IMF researchers recommend shuffling consumption and investment between China, Germany, Brazil, India, Indonesia and the United States. They also advocate carefully fixing fiscal deficits, while changing regulations to boost employment and make both labour and capital more productive. Put it all together, and the researchers reckon the policies should add $2.25 trillion to the IMF's recent estimate of real output in 2018.

Yet the G20's enthusiastic endorsement of a plan to boost output lacked any clues about who will buy all this extra stuff. There are at least three reasons why policymakers can't place their trust in the long-discredited Say's Law, which states that "supply will create its own demand." First, the share of wages in national incomes is stagnant or falling, discouraging workers from spending. Second, easier hire-and-fire policies and tighter fiscal deficits could end up worsening the present demand slump if private investment does not pick up. Finally, as long as disinflation keeps raising the real cost of capital for businesses, productivity may not see a big jump.

Disinflation would be an even bigger risk if global financial conditions tightened suddenly. To be fair, the G20 leaders did say that monetary policy needs to remain loose in many advanced economies. But the U.S. Federal Reserve is cutting back its bond-buying when inflation is still way below its two per cent goal, and the euro zone's current policy is potentially deflationary. Emerging markets are convulsing, and the threat of disorderly default in China is not trivial. Almost sidestepping the enormity of present-day challenges, the G20 said that "reduced reliance on easy monetary policy would be beneficial in the medium term". This impatient yearning for normalcy is the biggest reason why growth pledges are missing the badly needed strategy for boosting demand.