Publications

Copyright 2003 The Financial Times Limited (London, England)
Friday, August 29, 2003; Financial Times; USA Edition; Letters to the Editor

Sir, Martin Feldstein (“Fiscal activism would speed a recovery,” August 26) is clearly correct to argue that fiscal activism should be used under current economic circumstances. He is, though, incorrect to suggest that monetary policy will be more effective as an economic stabiliser in the near future.

Fiscal policy, used prudently to manipulate aggregate demand to achieve high levels of employment, is very much in order. Monetary policy, on the other hand, is impotent when interest rates are rapidly approaching their floor of zero and inflation is practically non-existent.

The Americans, the Japanese and the eurozone economies are the primary examples of the ineffectiveness of central bank actions. Only fiscal policy can rescue economies that are either in recession, or growth recession, as the case may be.

The eurozone countries are experiencing unacceptable unemployment rates of 8.9 per cent, growth recession and inflation generally above the 2 per cent target of the European Central Bank. The European Commission now warns of further stagnation in the third quarter of 2003. This unenviable performance is the result of the stability and growth pact and its nature—along with that of monetary policy—of “one-size-fits-all,” an argument that has been well rehearsed in the Financial Times.

Fiscal policy has been severely constrained by the pact and it has not been allowed to support monetary policy, itself having become destabilising and contributing to the current eurozone recession.

France and Germany must be right when they justify their violation of the fiscal rules by saying the pact has brought “too much stability and not enough growth.”

Japan is emerging with some growth because of government commitment to fiscal deficit (currently at 7.5 per cent of gross domestic product—much higher than the pact’s 3 per cent). The US’s budget deficit will increase in the order of 6–7 per cent of GDP well into the future; it will not stabilise at the 2 per cent level as Mr. Feldstein argues. Indeed, the world is looking to the US with its changed fiscal stance, and not to the actions of the Federal Reserve, to become the motor of the global economy