The International Monetary Fund projects 6% global growth in 2021. America is driving the globe’s economic bus. The recently adopted $1.9 trillion American Rescue Plan has shifted the U.S. economy into high gear. The IMF now projects our economy will expand by 6.4% in 2021 and 3.5% in 2022. Historically, American annual GDP growth has been 2% less.
Gita Gopinath, chief economist at the IMF, praised the financial stimulus from governments for propelling growth. She said, “The -3.3% contraction in 2020 would have been three times worse if there had not been swift policy action and financial support.”
The IMF warns policy makers to avoid the Depression-era mistake of ratcheting back budget deficits. Instead, the IMF encourages them to ramp up fiscal stimulus when the coronavirus contagion starts to abate. Gopinath told reporters “This (stimulus) would be even more effective if it were coordinated across all the advanced economies.”
Former U.S. Treasury Secretary Lawrence Summers has been surprised by the IMF’s strong advocacy of deficit spending. He dubbed the IMF, “it’s mostly fiscal for its obsession with budget austerity.”
Economists project the global economy will make a stunning comeback from its deepest contraction since the Great Depression. Geoffrey Okamoto, the IMF’s first deputy managing director said, “Here in Washington D.C. people are literally talking about the Roaring 20s, and you know, letting the doors fly off the U.S. economy.”
Worldwide GNP growth remains uneven. The IMF forecasts that “low-income developing countries will grow at 4.3% in 2021.” Gopinath warned that “recoveries are also diverging dangerously across and within countries as economies with slower vaccine rollout, more limited policy support and more reliant on tourism are doing less well. Stated differently, developing countries current growth will not overcome the damage caused by the pandemic in 2020.
The gap between developing nations and emerging markets in regard to vaccinating against Covid remains wide. Emerging markets are expected to vaccinate only 28% of their populations by the end of the year whereas advanced economies are on track to vaccinate 72% of their populations.
The disparity in the increase in government spending between developing and advanced economies remains high. Advanced economies increased government spending by more than 13% of their GDP in 2020. Low-income counties only increased spending by 2% of their GDP.
Gopinath highlighted the pain inflicted by the pandemic. She estimated that an additional 95 million people entered the ranks of “extreme poor”— defined as those making less than $1.90 per day.
For several reasons I do not think equating the current situation to the era of the Great Depression is applicable.
First, America’s current unemployment rate stands at about 6% in comparison to the 1930’s when it averaged in the high teens. Secondly, politicians during the Great Depression did not embrace Keynesian economics, rather the political consensus then favored a balanced budget. As a consequence, the Revenue Act of 1935 raised the federal income tax, causing a “Second Depression” in 1937. By contrast, in Fiscal 2020 our deficit exceeded $4 trillion. We expect multi-trillion-dollar deficits for the foreseeable future. Thirdly, we experienced deflation during the 1930’s. The central bank now sees inflation running at 2.4% this year which is above its previous estimates of 1.8%. Our unprecedented deficits could trigger a massive boom in consumer spending. This surge in demand could cause much higher prices.
I worry that similar to the battle plan of mediocre generals, we are fighting the last war. To initiate policies that would have been effective during the Great Depression seems inappropriate given our robust economic growth. Instead of urging further deficit-ridden stimulus programs, I subscribe to Coca Cola’s advertisement of my youth, “It is the Pause that Refreshes.”
Originally published in the Sarasota Herald-Tribune
