Comprehensive, coherent and collective action urgently needed

I am writing a paper on the disastrous turn in economic theory in which I explain that what is needed is a proper introduction of supply-side economic theory, which is really just classical economics with its modern name. Normally when I do this, I focus on John Stuart Mill since he finally brought it all together in his Principles, published 1848. Of late, I have also taken to using Henry Clay’s Economics: an Introduction for the General Reader which was published in 1916. There is such clarity there that I cannot believe how few of us there are anywhere who are even tuned into this stuff. But this time, partly just for a change, but also because he has more street creds even now, I have based my paper on Adam Smith and his Wealth of Nations. And what has amazed me is that it is all there, every last bit of it. The language is archaic, and being words without equations and numbers, few modern economists would make heads or tails of it. Too bad for us all, since this is what needs to be understood if we are ever to emerge from the mess our economies are in.

The reason I mention this is because of this news item at The Australian: OECD cuts forecasts, warns on growth. They are utterly bewildered, not just by how dead our economies are but by the refusal of governments to apply more of the same kinds of stimulus that created these problems in the first place.

The world’s economy is ensnared in weak growth and vulnerable to falling into another deep downturn unless governments take urgent action, the Organisation for Economic Cooperation and Development said on Wednesday.

Releasing its semiannual economic outlook, the Paris-based organisation amplified its call for governments to stimulate their economies by expanding investment and implementing policies that fuel competition, increase labour mobility and strengthen financial stability.

“The need is urgent,” OECD chief economist Catherine Mann said. “The longer the global economy remains in the low-growth trap, the more difficult it will be to break the negative feedback loops,” she added.

But there are signs of hope. Bad as our growth rates are – forecast 1.8% across the OECD! – no one any longer wants to take the same kinds of suicidal actions that created the problems in the first place.

The OECD called on governments in February to head off risks to the global economy by ramping up investment spending. The starker warning in the May economic outlook indicates little effective action has been taken and highlights the further dwindling of prospects for more sturdy growth.

In the most recent sign of reluctance among major economies to embark on fiscal stimulus, the Group of Seven leading industrialised nations stopped short of announcing coordinated action at a meeting last week. . . .

To lift the world’s gloomy economic prospects, the OECD laid the burden on governments rather than central banks because the room for expansionary monetary policies is reaching a limit.

They’re still Keynesians at the OECD in spite of everything. Such innocence, unfortunately combined with a deadly reluctance to investigate any other approach. I however completely agree with her about this:

“Policy-making is at an important juncture. Without comprehensive, coherent and collective action, disappointing and sluggish growth will persist,” Ms Mann said.

The dangerous part is that she has not a clue what the comprehensive, coherent and collective action needs to be.

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