Economic Policy Worldwide Must Focus on Growth

Article excerpt

The main economic task at present for the policy authorities around the industrialized world is to encourage economic growth. Of course, the issue is not so clear-cut for all countries.

Inflation remains a problem in some countries - such as Germany - even while growth is lagging. But in Japan and the United States it has been contained and is more a potential problem than a present danger.

Current political and social turmoil makes a greater tilt toward pro-growth policies in the Group of Seven countries more urgent. The traumas of Eastern Europe cannot be constructively resolved without the underpinning and example of economic dynamism in Western Europe, as well as in the U.S. and Japan.

And the social unrest in Western Europe itself - not to mention the U.S. - is at least partly intensified by a shortage of jobs and economic resources that would be alleviated by pro-growth policies.

Europe's Policies

Yield curves in credit markets very clearly suggest the degree to which leading industrialized countries are or are not encouraging growth. In Europe, yield curves remain downward sloping (short-term interest rates higher than longer-term rates). This indicates tight monetary policies and market expectations of economic weakness.

In Japan, the recent easing of monetary policy has finally produced an upward-sloping yield curve. But the slope is by no means steep enough to make one feel sure that an acceleration of growth is on the horizon.

Of the major industrial nations, only in the U.S. has a yield curve so steep that one can conclude that the monetary authorities have definitively tilted toward encouraging growth. The aggressiveness of U.S. monetary policy is confirmed by the very rapid growth over the past six months in the money supply narrowly defined (M1), which is the aggregate most closely related to the provision of bank reserves by the Fed.

Lending Sluggish

Nonetheless, there is still a question of whether U.S. policy is aggressive enough. The Fed's fabored monetary target (the broad money measure M2) has been growing relatively slowly in the bottom half of its targeted range.

This suggests some combination of sluggish loan demand and conservative lending policies is still afflicting the economy. …