The Unassuming Economist

From the New York Times:

THIS has not been a good recovery for the wealthy countries. Growth has lagged, in part, because government spending has been far more restrained than in past recoveries from major recessions.

But developing economies have been free to increase government spending, and their economies are generally growing more rapidly than they did after past recessions.

The accompanying charts, based on data released this week by the International Monetary Fund in the semiannual World Economic Outlook, show the stark differences in performance.

At the top are charts comparing changes in real gross domestic product per capita in developing countries and advanced economies since 2008, including the fund’s forecasts for 2013 and 2014. In every year, the developed countries have lower growth. The monetary fund forecasts that this year the increase in the United States will be a paltry 1 percent, which at least is better than the forecast for the euro zone and Britain, where declines are expected.

A major reason for the slow recoveries is the absence of fiscal stimulus in much of the developed world. The middle charts show trends in government spending in advanced economies and in developing ones, comparing the trend during the current recovery to an average of the recoveries after three previous world downturns — in 1975, 1982 and 1991. In each case, the figures treat the year before the downturn as zero, and show how earlier and later years differed from that year.

In emerging markets, spending this time has been much stronger than in previous recoveries. But the opposite is true for developed countries, both as a group and for each of the four major regions — the United States, the euro zone, Britain and Japan — that are shown in separate charts.

Those changes reflect the determination to follow a path of austerity in much of the developed world. Many developing countries, having built up foreign exchange reserves in the years before the recession, do not need to follow that course.

The Great Recession brought a drop in world trade volumes that exceeded any decline since the Depression. But as the charts show, the percentage declines were a little less in developing countries than they were in developed countries. And since then, the recoveries have been far more impressive in the less developed countries.

In the euro zone, the total level of imports has still not recovered to 2007 levels, although the International Monetary Fund says it thinks that will happen in 2014. The same is true of exports from Japan, a country whose export prowess once seemed unmatched but lately has been running trade deficits.

Among the four developed regions shown, only the United States has experienced an export revival that is comparable to that of the average emerging market.

Krugman uses a graph from Box 1.1 of the WEO. Read the full box here.

From the Washington Post:

The International Monetary Fund has a reputation, hard earned over the decades, of being the annoying friend who is always telling you to be more responsible. Eat more vegetables! Put in more hours at the office! Do you really need that second glass of wine?

Similarly, it has historically been the IMF’s role to tell countries to behave themselves economically: Cut those deficits! Let’s see some tighter monetary policy! Do you really need such a generous public welfare system?

But something strange has changed in the world economy, which is evident in the Fund’s latest edition of the World Economic Outlook. The IMF is now among the strongest voices against excessive fiscal austerity and tight money.

The Fund is most direct in its prescriptions for Britain, which has had a stagnant economy for the past three years as deficit-reduction has gone into effect. Sure, the language is that ofinternational bureaucratese (“In the United Kingdom, where recovery is weak owing to lackluster demand, consideration should be given to greater near-term flexibility in the fiscal adjustment.”). But there is no mistaking the message: Hey, David Cameron! Slow down with the deficit reduction! 

The Great Recession has been followed by the Not-So-Great Recovery. The IMF’s World Economic Outlook (WEO) shows that average incomes in advanced economies are rising, and are projected to rise, at a much slower rate than in past global recoveries. In contrast, incomes in emerging markets are growing at a much faster pace than during past recoveries—see chart 1. The WEO discusses several reasons for this divergence in fortunes. 

Caution about fiscal stimulus in advanced countries likely reflects the fact that they entered the Great Recession with much higher levels of debt than in the past—see Chart 3.

Box 1.1 does not get into an “an assessment of whether the different policy mix in this recession and recovery was appropriate. The response of policies may have been reasonable given the respective room available for fiscal and monetary policies in advanced economies. But there are also concerns. Even though monetary policy has been effective, policymakers had to resort to unconventional measures. Even with these measures, the zero bound on interest rates and the extent of financial disruption during the crisis have lowered the traction of monetary policy. This, together with the extent of slack in these economies, may have amplified the impact of contractionary fiscal policies. Four years into a weak recovery, policymakers may therefore need to worry about the risk of overburdening monetary policy because it is being relied on to deliver more than it has traditionally.”

Read Box 1.1 from the WEO here for the full analysis.

A new paper investigates the relation between growth forecast errors and planned fiscal consolidation during the crisis. The authors find that, in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis. A natural interpretation is that fiscal multipliers were substantially higher than implicitly assumed by forecasters. The weaker relation in more recent years may reflect in part learning by forecasters and in part smaller multipliers than in the early years of the crisis.