LONDON – As world business leaders gather in Davos, a long-overdue paradigm shift in monetary policy – subordinating the targeting of inflation to the targeting of growth – is slowly taking shape.
In what some call a “reverse Volcker moment,” US Federal Reserve Chairman Ben Bernanke has specified a target of 6.5% unemployment alongside his inflation target; Japan’s new government has proposed a minimum inflation target; and Mark Carney, the next governor of the Bank of England, has argued that “there could not be a more favorable case for nominal GDP targeting.” Meanwhile, China has pledged to double average domestic per capita income by 2020.
Sadly, it has taken four years of gross underestimation of the impact of fiscal austerity and a chronic shortage of demand (with the economy’s supply potential beginning to decline accordingly) for us to agree to target growth – which the G-20 called for in 2009.
So why, with change materializing, is there so little optimism about growth as we enter 2013, and why is there so much talk of a “lost decade”? The answer is that the problem of low growth requires more than a shift in national monetary policies: it also requires an agreement to coordinate global growth – a solution that has not been forthcoming.