Time to Save the World, Mr. Trump
Narayana Kocherlakota/Bloomberg/November 17/16
The planet’s wealthiest and most powerful countries face a slow-moving but potentially devastating political and economic crisis. It now falls to Donald Trump to find a way to combat it.
Over the past few years, voters in much of the developed world have rebelled against the establishment. In the U.S., millions of voters supported an avowed socialist in the Democratic primary. And this week, Americans elected a new president who has essentially no support from mainstream politicians or media.
Across countries, these dissatisfied voters vary wildly in terms of their preferences for (or opposition to) societal change. What they have in common is anger at the existing economic order.
The well-off often treat this anger as something of a mystery. Actually, it can be traced directly to what Christine Lagarde, managing director of the International Monetary Fund, has termed a global low-growth trap. Over the last nine years, economic growth has been slow throughout the world, and particularly in developed nations. The U.S. is a prime example: Output is about 12 percent to 15 percent lower than was expected nine years ago.
The primary culprit, in my view and in Lagarde’s, is a shortage of consumer demand for goods and services, which has left businesses with little motivation to invest, hire or innovate. As a result, there aren’t enough jobs to go around, and the people who are working aren’t very productive.
The demand shortage creates some perverse incentives for economic policy makers. To stimulate the economy, they want to convince consumers that prices are heading upward, so that buying something today will be more attractive than waiting. In such an environment, policies that increase the cost of doing business — such as raising minimum wages or increasing the regulatory burden — can reap larger-than-usual benefits.
More alarmingly, the cost reductions associated with globalization appear much less desirable in a low-demand world. Restrictions on trade, immigration and all kinds of international economic interactions become more attractive. The unwinding of economic linkages, in turn, can increase the incentives for transnational armed conflict — a danger that came to such disastrous fruition in the 1930s.
Guiding the world out of this quagmire will require determined leadership, which the U.S. is uniquely well placed to provide. It is by far the world’s largest economy, with a government that still has plenty of capacity to borrow — as the low interest rates on its debt indicate. It could employ its vast resources in many ways.
For example, the president-elect has spoken of his desire to undertake a complete overhaul of American infrastructure and to cut taxes. Such a program, combined with appropriate support from the Federal Reserve, would both generate much-needed jobs for Americans and be a great first step toward leading the world out of its low-growth trap. I look forward to seeing this plan implemented in his first hundred days in office, and I hope that he is able to persuade other nations to join the U.S. in this vital effort.