For example, a growth rebound underpins the expectation that the European periphery will not restructure or inflate away its sovereign debt. The assumption that the German economy will accelerate out of its current crawl is essential to confidence in Europe’s financial safety net, and to a banking union that credibly shares risks across the eurozone. Resumption of robust world economic growth is the basis for delaying the implementation of the Basel III bank rules. And, if the BRICs slow down, they may be more prone to debt and currency crises.
What is to be done? Because the elixir of growth in policymakers’ forecasts cannot be counted on to solve the problems, dealing with financial excesses becomes even more urgent. That means more debt restructuring and more bank closures now, rather than watering down proposals to rein in freewheeling markets. Looking ahead, as Robert Shiller of Yale University has repeatedly emphasized, public policy must help to forge futures markets that hedge risks better and more reliably align incentives.
There is no magical path to higher productivity growth. Even if Gordon’s pessimism is excessive, the timing of the next breakthrough in technology is impossible to predict. So-called “structural” reforms may help, but the likely gains are small and uncertain. It may simply be time to learn how to live with less.
Ashoka Mody is a visiting professor of international economic policy at the Woodrow Wilson School of Public and International Affairs at Princeton University.
Copyright: Project Syndicate