OECD Chief Economist and Head of the Economics Department
Welcome to the OECD Economics Department’s new ECOSCOPE blog !
Our Interim Economic Outlook launched today shows a troubling picture—world growth stuck at 3% in 2016, and only 3.3% in 2017, with substantial volatility in financial markets raising new risks. The OECD’s mantra is “better policies for better lives” and that is central to our assessment that a stronger policy response is urgently needed to get global growth out of this low-growth equilibrium. Monetary stimulus alone cannot reverse many of the worrying trends seen in the Interim including weak trade, low investment and an apparent slowing of trend productivity. Given very low interest rates, now is an opportune time for collective fiscal action, focusing on investment spending that will raise growth in the near term and underpin long-term output potential. Greater ambition on structural reforms to provide an environment conducive to private investment goes hand-in-hand. ( On 26 February, we will launch our annual Going for Growth assessment of structural policy needs and the progress countries are making towards achieving more productive economies with better quality jobs (details to be posted on this site)). Monetary, fiscal, and structural policy tools are synergistic and all need to be deployed at this time.
Does the call for more fiscal action by the OECD represent a change of view ?
In a well-known phrase, Keynes wrote “When my information changes, I alter my conclusions. What do you do, sir?”. So, what is new?
First, OECD governments have more fiscal space than they did in the immediate post-crisis period. The sovereign debt crisis has faded and the most severe banking problems have been addressed. Budget deficits have fallen in many countries following budgetary consolidation and falling interest costs. The long-term interest rate is far lower than it was 3-years ago with negative interest rates on government borrowing of a few years and the ability to raise money at longer horizons at a minimal cost.
Second, the persistent downgrade of forecasts across the economics profession in recent years raises deep questions about how the economy is operating. Some key mechanisms that drive economic recoveries seem to be not working: wage pressures are exceptionally weak even in countries where unemployment has fallen; inequality is rising; business investment is not responding to the extraordinarily low cost of capital; currency depreciations are not leading to robust exports; inflation pressures seem non-existent across many economies despite exceptional monetary policy action; productivity growth and diffusion innovation appear to have slowed. The thread that runs through these disconnects is weak demand, hence the need to use all policy tools to full effect.
A scenario exercise in the Interim shows the potential growth gains, and fiscal sustainability benefits of a collective action on fiscal spending.
1st year effects of a 1/2 percent of GDP public investment stimulus by all OECD countries
Change from baseline
There are many open questions about what are the key issues facing policymakers, and how they should balance both immediate and longer-term objectives. This blog is an opportunity to debate these topics!
We hope that windows into research by OECD economists posted on this blog will share new insights about the evidence and the ‘’better policies” we need to ensure the ‘’better lives’’. Please join the conversation!
Achieving prudent debt targets using fiscal rules
We need an EU stimulus package focussed on building renewable energy infrastructures. This would tackle multiple problems currently hitting the EU: high unemployment (a trillion euro stimulus could put millions of young people to work across the Union), climate change (allowing us to reach the COP21 targets quickly) and EU defense (it would reduce EU dependence on energy from the Middle East and gas from Russia).
The problem we have right now is that EU member states cannot borrow from the ECB, which is a recipe for disaster. The way the euro is currently set up acts like a 21st century gold standard, with all the debt-deflationary consequences we should by now be familiar with. This may be a beneficial policy for creditors, but as Mario Draghi said to the Guardian, it is redistributing wealth from the young to the old and decimating economically an entire generation.
What does the OECD think of this EU stimulus plan?
As part of our ”call to action” on policy to improve prospects for global growth, we include fiscal spending on high quality infrastructure projects. Certainly there are environmental infrastructure projects that satisfy this requirement. Projects that are characterized by both environmental and network externalities are particularly logical for countries in the EU to do. Very heterogeneous regulations among EU countries already hold back cross-border investment. Harmonization of regulation, including with respect to environmental issues, would go a long way to improving the environment for green infrastructure investment, with greater returns to be had by both public and private investors.