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Western economic policy still fighting wrong battle, says Prof. Norman Bailey

Western economic policy still fighting wrong battle
Labor is steadily becoming less valuable than capital, and boosting liquidity won’t help.

The US government recently lowered its estimate of economic growth for 2014 to slightly over two percent. During the first quarter of the year GDP growth was actually negative.

The European Central Bank unveiled a new basket of monetary measures to try to jumpstart the European economy. These measures were greeted with a universal yawn, since they amounted to increasing liquidity even further into an economy already drowning in liquidity. The “great” innovation was charging a tiny negative interest on balances commercial banks choose to hold at the ECB, which will supposedly provide them with the necessary incentive to lend to the productive sectors of the economy rather than hoarding reserves. The actual results are likely to be (a) the banks continue hoarding the cash anyhow, since the charge is so low, or (b) the banks trying to find risky borrowers to lend to which they have not considered credit-worthy before, and/or (c) the banks will lend outside the Eurozone, using ultra-cheap ECB credit. None of those reactions will help economic growth in Europe.

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