Just when the notion that western economies are settling into a “new normal” of low growth gained mainstream acceptance, doubts about its continued relevance have begun to emerge.
Instead, the world may be headed toward an economic and financial crossroads, with the direction taken depending on key policy decisions.
In the early days of 2009, the “new normal” was on virtually no one’s radar. Of course, the global financial crisis that had erupted a few months earlier threw the world economy into turmoil, causing output to contract, unemployment to surge, and trade to collapse. Dysfunction was evident in even the most stable and sophisticated segments of financial markets.
Yet most people’s instinct was to characterise the shock as temporary and reversible – a V-shape disruption, featuring a sharp downturn and a rapid recovery. After all, the crisis had originated in the advanced economies, which are accustomed to managing business cycles, rather than in the emerging-market countries, where structural and secular forces dominate.
But some observers already saw signs that this shock would prove more consequential, with the advanced economies finding themselves locked into a frustrating and unusual long-term low-growth trajectory. In May 2009, my Pimco colleagues and I went public with this hypothesis, calling it the “new normal.”
The concept received a rather frosty reception in academic and policy circles – an understandable response, given strong conditioning to think and act cyclically.
The concept received a rather frosty reception in academic and policy circles – an understandable response, given strong conditioning to think and act cyclically.
Few were ready to admit that the advanced economies had bet the farm on the wrong growth model, much less that they should look to the emerging economies for insight into structural impediments to growth, including debt overhangs and excessive inequalities.
But the economy was not bouncing back. On the contrary, not only did slow growth and high unemployment persist for years, but the inequality trifecta (income, wealth, and opportunity) worsened as well. The consequences extended beyond economics and finance, straining regional political arrangements, amplifying national political dysfunction, and fueling the rise of anti-establishment parties and movements.
Full > http://tinyurl.com/zfg2ts9
