Global Economy Is Booming, but Beware ‘Excessively Pro-Cyclical’ Policies

Global Economy Is Booming, but Beware ‘Excessively Pro-Cyclical’ Policies


The Organization for Economic Cooperation and Development is feeling pretty optimistic these days, saying Tuesday that global growth continues to strengthen this year and next, with investment and trade rising and fiscal stimulus in the U.S. and Germany providing an extra tailwind. But, like Business Roundtable, the OECD is concerned about potential trade disputes that could damage “the rules-based international trading system” and drag on growth.

In an initial assessment of the U.S. tax overhaul, the OECD said it expects changes in fiscal policy to increase GDP growth by between ½ and ¾ percent in 2018 and 2019. More broadly, the OECD said that “supportive fiscal measures” enacted in the last few years in many of its 35 member nations have boosted growth rates around the world. At the same time, the OECD warned against “excessively pro-cyclical” fiscal policies and called upon policymakers to “ensure that increases in incomes and living standards are shared more widely.”

The OECD report included a chart illustrating the “fiscal stance” of the G7 nations (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) since 2000, which indicates that fiscal conditions have eased in the developed nations over the last seven years. But as Adam Tooze, a historian at Columbia University, noted, the chart makes it clear that the G7 nations tightened fiscal conditions in 2011 as the global economy was still recovering, a textbook example of “excessively pro-cyclical” policies that likely contributed to the sluggish recovery in the ensuing years. Tooze’s takeaway – “Peak global austerity was 2011 - spectacularly ill-timed” – may serve as a warning about just how much damage excessively pro-cyclical fiscal policies can do.