Princeton Economist: 'Fundamental Slowdown' Requires New Thinking

Sunday, 10 Aug 2014 08:36 PM

By Michael Kling

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Economists keep predicting global economic growth will strengthen, notes Ashoka Mody, a visiting economics professor at Princeton University. Then oops, it does not perform as well as expected. Then the economists come up with excuses: an earthquake, bad weather, or a "one-time" repricing of risk.

Economic forecasting has the same sense of déjà vu as Bill Murray's character who lives the same day over and over again in the movie "Groundhog Day," Mody writes in an article for Project Syndicate.

"Yet policymakers remain convinced that the economic-growth model that prevailed during the pre-crisis years is still their best guide, at least in the near future."

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

"This serial misjudgment highlights the need to think differently," Mody writes. "Just as Bill Murray’s character could not escape Groundhog Day without radically changing his life, we cannot expect different economic outcomes without fundamentally different growth models."

Increased global competition, slower growth, low inflation may be here to stay, says Mody, a visiting fellow at Bruegel, a Brussels-based economic think tank.

"Failure to recognize the fundamental slowdown that is occurring," he warns, "is reinforcing the expectation that old models can revive growth – an approach that will only create new fragilities."

The United States seems ready for an economic lift-off, he says, pointing to lower unemployment and household debt, a robust stock market, and a recovered financial sector. Yet the lift-off has continually failed to arrive.

Household spending is still weak and business investment has yet to climb.

"The prevailing explanation – a brutally cold winter – is wearing so thin that everyone should be able to see through it."

Mody urges a globally coordinated stimulus to increase investment.

Saying the European Central Bank is unable to revive eurozone growth on its own, Mody also calls for a globally a coordinated effort to depreciate the euro.

"The two tectonic shifts in the global economy – slower GDP growth and increased emerging-market competition – have created a fault line that runs through Europe," he writes.

Analysts at Moody's warn that an aging population in many nations may depress global economic growth. The number of "super-aged" societies will quadruple by 2020, leading to shrinking workforces and less household savings, Moody's analysts state in a report, according to CNBC.

"The demographic dividend that drove economic growth in the past will turn into a demographic tax that will ultimately slow this growth for most countries worldwide," they state.

"All countries, except a handful in Africa," they add, "will face either a slower-growing or declining working-age population, and corresponding pressures on labor supply."

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

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