Lessons from the backyard on fiscal policy
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Lessons from the backyard on fiscal policy

Getting the balance correct between short-term relief checks and long-term infrastructure spending is critical.

Last summer, at the height of the Covid-19 crisis, I bought and built a swing set for my grandchildren. Construction was reasonably straightforward and – remarkably for a kit – all the holes and bolts etc lined up easily. Savvy readers will see my setup here: swing set as a metaphor for the economy, recovery and the subsequent expansion of economic activity through additional stimulus introduced by the Biden administration. But let me explain further.

Swinging into equilibrium

A swing is a pendulum with an obvious resting point. This is convenient as it allows my grandchildren ease of access. Initially, the children were content to gently swing back and forth, but quite quickly this was followed by a demand to go higher. I was happy to concur – what is the point in going slowly? – so I pushed with greater energy. As I watched the children’s reactions, I made three observations:

  • Howling children
  • Scowling grandma
  • The frame of the swing was moving slightly. The system was not in equilibrium.

For this post, I will focus on item three because stopping to fix that issue addressed the first two, as well.

A pendulum, in this case a swing set, has a natural range of motion known as oscillation, mostly determined by the length of the line (ie, the chains holding the seat from the anchor points on the crossbeam). By giving in to the kids’ request to go higher, I added additional energy to extend the natural range of motion by pushing harder. Because this wasn’t gauged precisely, and without making the swing chain longer, the system became a little unstable. I was able to counteract the mild instability by reinforcing the anchor points of the supporting A-frames. However, this does not solve the problem; it simply masks it.

The swing system was trying to shake off the excess energy I introduced by a process known as “dampening”. By limiting the ability to dampen itself, I was transferring stress to another part of the frame. Unfortunately, the consequences of doing so might not be immediately visible.

Inflation risk

Similarly, the economy has a natural range of activity and growth rate. The equilibrium growth rate is a function of the amount of labour available and the useful capital that labour can use to gain efficiency. Labour productivity relies on effective transportation, reliable energy, well-equipped offices/factories and high-quality education and healthcare. As we emerge from Covid-19, the emphasis must be on investments that have the ability to make economic output larger, otherwise we risk instability. Like the swing set, the stress may not be immediately visible but it is most likely to materialise as inflation.

There is already a high level of personal savings in the economy, although it is not evenly distributed, and the excess savings has led to excess demand. The resulting short-term imbalances should abate provided we don’t keep pushing additional stimulus. But the long-term solution is to make a bigger swing set. Encouraging those savings to be directed toward investment in infrastructure rather than consumption may ease the short-term pressure and help expand the size of the economy – allowing for an expansion of aggregate demand with less inflation risk.

Making the hard choices

For the swing set, I am the dampener: by either momentarily holding the swing or pushing, I can keep the swing in equilibrium. Monetary policy is one of the primary dampeners for the economy, and if we overstimulate, the US Federal Reserve will have to increase interest rates to offset the excess stimulus. Getting the balance correct between short-term relief checks and long-term infrastructure spending is critical. Many people worry about the total amount of spending, but the balance in spending is more important. Long-term infrastructure spending should be employed instead of short-term stimulus, not in addition to it.

As for me, the swing set equilibrium will either be resolved by building a larger frame or telling the grandchildren “no” when they want to go higher – a very unpopular choice! For the economy, the larger swing set also comes with interesting choices. But governance is about hard choices, and we must make them.

10 May 2021
Colin Moore
Colin Moore
Global Chief Investment Officer
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Lessons from the backyard on fiscal policy

Important Information

For use by Professional and/or Qualified Investors only (not to be used with or passed on to retail clients). This is an advertising document.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisment has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In the UK: Issued by Threadneedle Asset Management Limited, registered in England and Wales, No. 573204. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Sociétés (Luxembourg), Registered No. B 110242 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA).

For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution.

For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other Person should act upon it.

In Switzerland: Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

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Important Information

For use by Professional and/or Qualified Investors only (not to be used with or passed on to retail clients). This is an advertising document.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisment has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In the UK: Issued by Threadneedle Asset Management Limited, registered in England and Wales, No. 573204. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Sociétés (Luxembourg), Registered No. B 110242 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA).

For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution.

For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other Person should act upon it.

In Switzerland: Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

columbiathreadneedle.com

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