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The Case for a Fiscal Fed

In the years since the 2008 global financial crisis, central banks have been the "only game in town," maintaining ultra-low interest rates in the absence of counter-cyclical fiscal policies. But with another global downturn looming, a new approach to macroeconomic management is needed.

SANTA BARBARA – Like storm clouds on the horizon, signs of a global economic slowdown are gathering ominously. In the United States, the sugar high generated by President Donald Trump’s massive 2017 tax cut has peaked and is now rapidly waning, without triggering the promised investment boom. In Europe, the ongoing Brexit farce threatens severe economic disruption, even chaos, if the United Kingdom cannot conclude a deal with the European Union before withdrawing from the bloc at the end of October. And in China, growth is unmistakably slowing.

Lurking behind all these problems is the “Tariff Man’s” trade war, which has led economists to worry about a recession as early as next year. Ordinarily, governments facing an economic downturn would look first to monetary policy, relying on central banks to force down interest rates in the hope of encouraging more borrowing and spending. Yet the tools that monetary policymakers have long deployed to stabilize markets no longer seem up to the task. The time has come to consider a new approach to macroeconomic management.

A decade ago, global interest rates were lowered dramatically to stave off the threat of Great Depression II. But, 11 years after the financial crisis, rates still have not bounced back. In all advanced economies, they remain at historically low levels – and in the case of Switzerland, the eurozone, and Japan, they are below zero. This means that the major central banks will have little to no room for new cuts when they would normally rely on them.

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