The pre-eminence of monetary policy, which was already at the limits of what it could achieve for the economy, will fade. Fiscal policy will be forced to come to the fore – but in an altered state.
Governments will not be able to afford endless fiscal accommodation; they will need to come up with some better ideas.
In Australian, the Reserve Bank continually argued before this crisis that more needed to be done on fiscal policy to get the economy growing at its full potential. This was recognition that it was nearing the lower limits for conventional policy of interest rate cuts, and was still unable to meet either its mandated inflation target, nor its desire to reach full employment.
It was not just cyclical weakness in the economy that was the problem, but structural issues, too.
Key among these challenges is a dearth of productivity growth. Reforms need to be undertaken. Stimulus from monetary or fiscal sources just patches over this issue, without solving it.
The problem is that productivity enhancing reforms are difficult to implement, hard to identify as individually impacting growth, and usually have long lead-times. These reforms also are not conducive to political cycles, particularly those as short as in Australia.
Fiscal policymakers have essentially outsourced economic management to monetary policy – and it has worked for them for decades.
However, this strategy has burdened the economy with high debt, exacerbated wealth inequality and, worst of all, made regulators and policymakers complacent. This is reflected in Australia’s relatively poor productivity performance.
As a nation, we have relied on population growth and commodity cycles to underpin growth in living standards. That is, we have relied more on good luck and less on good management.
It is not co-incidental that the last sustained period of productivity growth came in the 1990s – well before monetary policy achieved its pre-eminence – and was based on a hard-fought but ambitious raft of reforms in the years before.
Policymakers at the time had not relied on monetary policy because the adoption of inflation-targeting regimes was in its infancy and their confidence in managing the economy embryonic.
In a post-coronavirus world, we are likely to have to return to some version of this 1990s paradigm, as the effectiveness of monetary policy remains diminished.
The challenge for governments of the future will be how to be fiscally sustainable after budgets have been so heavily scarred by this economic crisis.
Modern Monetary Theory is one increasingly popular option, a world in which deficits do not matter.
However, such a framework is not yet well defined and may never be.
Another alternative that is more conventional would be for governments to encourage the use of more private capital. In Australia, that means working with the large pool of funds in the superannuation system.
It was true before this crisis and will be even more so after, that the long-term savings of Australians could be put to better use, particularly in the infrastructure space, to support economic activity, jobs and productivity. Future governments must find a way to access this capital while they work to re-invigorate economic growth in a post-coronavirus world.
It will be a critical facet of an agenda to underpin future fiscal sustainability, living standards growth and get out from under the burden of public and private debt.
Alex Joiner is chief economist of IFM Investors
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