MILAN – A remarkable pattern has emerged since the 2008 global financial crisis: Governments, central banks, and international financial institutions have consistently had to revise their growth forecasts downward. With very few exceptions, this has been true of projections for the global economy and individual countries alike.
It is a pattern that has caused real damage, because overoptimistic forecasts delay measures that are needed to boost growth, and thus impede full economic recovery. Forecasters need to come to terms with what has gone wrong; fortunately, as the post-crisis experience lengthens, some of the missing pieces are coming into clear focus. I have identified five.
First, the capacity for fiscal intervention – at least among developed economies – has been underutilized. As former United States Deputy Secretary of the Treasury Frank Newman argued in a recent book, Freedom from National Debt, a country’s capacity for fiscal intervention is better assessed by examining its aggregate balance sheet than by the traditional method of comparing its debt (a liability) to its GDP (a flow).
Reliance on the traditional method has resulted in missed opportunities, particularly given that productive public-sector investment can more than pay for itself. Investments in infrastructure, education, and technology help drive long-term growth. They increase competitiveness, facilitate innovation, and boost private-sector returns, generating growth and employment. It does not take a lot of growth to offset even substantial investment – especially given current low borrowing costs.