DURING the financial crisis, when the global economy faced its gravest threat since the 1930s, policymakers sprang into action. To stimulate the economy, central banks slashed interest rates and politicians spent lavishly. As a result, the recession, though bad, was far less severe than the Depression.
Unfortunately, however, that quick response nearly exhausted governments’ economic arsenals. Seven years later they remain depleted. Central banks’ benchmark interest rates hover above zero; government debt and deficits have ballooned. Should recession strike again, as inevitably it will, rich countries in particular will be ill-equipped to fend it off.
Just how much wriggle room do they have? For comparison, The Economist has devised a composite measure of debt, deficits and interest rates—the weapons policymakers typically wield to dispel threatening conditions. Though crude, the analysis yields a clear and troubling conclusion. A few economies could mount a robust defence against a new shock, but most are sitting ducks.
Read More: A tight squeeze | The Economist