Rethinking Fiscal Policy for Global Recovery

Anis Chowdhury was Professor of Economics, University of Western Sydney, and held various senior United Nations positions in New York and Bangkok. Jomo Kwame Sundaram was UN Assistant Secretary- General for Economic Development.By Anis Chowdhury and Jomo Kwame SundaramKUALA LUMPUR, Malaysia, Jun 23 2016 (IPS)Global economic recovery is being held hostage by the ideological dogma of the last three and a half decades. After long contributing to neo-liberal conventional wisdom, in its October 2015 World Economic Outlook, the IMF identified the vicious circle undermining global recovery and growth. Low aggregate demand is discouraging investment; slower expected potential growth itself dampens aggregate demand, further limiting investment. Investment in Europe, especially in crisis-ridden economies, has collapsed sharply despite very low interest-rates. The IMF also noted that prolonged recessions may have a permanent negative effect, not only on trend productivity levels but also on trend productivity growth as well as wage growth that, in turn, sustains low aggregate demand.The rise of fiscal policyFrom the mid-1930s until about the mid-1960s, fiscal policy has played a major role, both in developed and developing countries. The fiscal deficit was the main policy instrument to address the Great Depression of the 1930s and later, to maintain full-employment in developed countries. Deficits and surpluses were adjusted counter-cyclically over business cycles. In his 1936 budget s...
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