How should George Osborne react to the changing balance of risks implicit in the IMF's recent pronouncements?
The Roman emperor Augustus is supposed to have come up with the phrase festina lente, which in English means make haste slowly. It is an apt summing up for what has been happening to the global economy these past four years: policymakers have certainly been hyperactive but progress has been painfully slow. Organisations from the Bank of England to the International Monetary Fund, and from the Office for Budget Responsibility to the Federal Reserve, accept they have been far too optimistic in their forecasts.
It has been less make haste slowly, more getting nowhere fast.
The weakening in activity this year has set off warning bells. The IMF says the risk of a serious global slowdown is "alarmingly high" and believes it may have been underestimating the multipliers used to calculate the impact of fiscal policy.
Changes to tax and spending affect the economy. If a pound of extra spending delivers a pound of extra growth, that means the multiplier is 1; if it delivers 50p of extra growth then the multiplier is 0.5. The same ratios apply in reverse when governments are imposing austerity programmes.
The IMF has been using a multiplier of 0.5, but its latest estimate is between 0.9 and 1.7. The implication is that raising taxes and cutting spending causes a much bigger loss of output than previously thought, helping to explain why growth has been so weak.
There are a few reasons to be cautious about the IMF's rethink. First, it might be an attempt to rewrite the past after inaccurate forecasts. Second, calculating the multiplier is a notoriously difficult business and there are many reputable economists who have made much lower estimates. Third, there are those, including George Osborne, who think the higher estimates fail fully to take into account the unprecedented loosening of monetary policy - cuts in interest rates and dollops of electronic money creation - that was designed to offset the fiscal tightening.
Even so, the IMF study deserves to be taken seriously. Why? Because the multiplier effect could well be stronger when many countries are imposing austerity programmes simultaneously, and if interest rates are already extremely low there may be a limit to what a further easing of monetary policy can do to stimulate activity.
Central banks have sought to help through bond-buying, which drives down long-term interest rates and sends cash to the banking system. But some say that these asset purchases, or quantitative easing (QE), are subject to the law of diminishing returns.
Let's assume, for the sake of argument, that the IMF is right and the multipliers are bigger than was thought. What thenis to be done? The obvious answer would be to relax fiscal policy, because if the multiplier is in the middle of the IMF's range, £1 of tax cuts or increased public spending would deliver £1.30 of growth.
Today's policymakers should, in other words, take a leaf out of Franklin Roosevelt's book and embark on a New Deal style programme of public works.
This certainly has its attractions for Britain, where the infrastructure is so poor and the cost of borrowing so cheap.
But the economic historian Nick Crafts warned this week against drawing parallels with the 1930s, mainly because US public finances were much healthier than the UK's are now. America's annual budget deficit – the gap between taxes and spending – averaged less than 3% of gross domestic product in the 1930s, compared with a figure that could be as high as 8% in Britain this year. The ratio of US national debt to GDP was below 40% at the end of the 1930s, while Britain's is on course to peak at well over double that level.
That's not to say that a different approach to fiscal policy would be impossible – but there is a balance of risks. Tightening or tightening too fast could send the economy on a downward spiral of cuts and weak growth and further cuts.. That's particularly the case when the private and public sectors try to cut their high debt levels simultaneously, as in the UK today. The chancellor is concerned that market interest rates would rise if he appeared to be abandoning deficit reduction. Other risks would be a run on the pound and the possibility that individuals and companies would save more in anticipation of today's fiscal easing resulting in higher taxes or higher inflation tomorrow.
These concerns are reflected in the government's stance. Instead of announcing a mass public housing programme to make up the country's shortfall of 3 million homes, Osborne is proposing changes to the planning laws in an attempt to prompt the private sector to take advantage of current low interest rates. Similarly, he prefers to use the state's balance sheet to guarantee private sector infrastructure projects rather than spend the money himself.
That approach will take time to work – if it works at all. As a result, we have to assume that monetary policy will continue to take most of the strain here, as it will in the US and the eurozone.
At the very least, the bank rate will stay at 0.5% for the foreseeable future and there will be no reining in of QE. If the expectation of an announcement this week that the economy grew in the third quarter proves another false dawn, the chancellor will be forced to look again at a fiscal stance that iin the next two years is set to take more demand out of the economy than in 2012-13.
And what if the economy remains permanently depressed and deflation starts to look a more likely threat than inflation? In those circumstances, as Lord Turner - the chairman of the Financial Services Authority and a candidate to be the next governor of the Bank of England - says, policy might need to get even more unconventional.
This is code for so-called "helicopter drops" of money, in which the Treasury would effectively write cheques to the public. If every adult received £500, that would add £20bn of spending power to the economy, and the Bank of England could ensure that the handouts did not add to public borrowing by printing £20bn in new money.
But if there is a risk that the markets would freak out at Osborne investing more in long-term infrastructure projects that would help improve the efficiency and productivity of the economy, isn't there also a risk that they would see this as Britain heading down the road to the Weimar Republic? Of course there is. That's why it would be a last resort.