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The Silent Revolution in Economic Policy

With Western economies battered by COVID-19 and central banks running out of ammunition, fiscal policy is the only game in town. This should be openly acknowledged, and fiscal rules should be rewritten to allow for more active counter-cyclical policy and a much larger government role in allocating capital.

LONDON – Something extraordinary has happened to macroeconomic policymaking. Partly owing to the impact of COVID-19, the old orthodoxy has morphed into a new one – but without anyone acknowledging the implications of the shift, or indeed that there were any problems with previous convention.

In a recent interview, for example, former Bank of England (BOE) Deputy Governor Paul Tucker said that “monetary policy should now take a back seat to fiscal policy.” Other central bankers, finance ministry mandarins, and OECD and International Monetary Fund officials are saying much the same.

What our financial paladins never or only rarely acknowledge is how wrong they were in the past. The Financial Times came closest with its recent limping admission that the spending cuts it advocated in 2010 “may have had a bigger negative impact than expected.” That is about the nearest thing to a mea culpa as we can expect from this citadel of the financial establishment, and it does not come close to capturing the magnitude of the rupture with the theory of macroeconomic policy that prevailed only a few years ago.

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