Fretting over the world economy

David Ignatius

By David Ignatius

Published Jan. 26, 2015

Fretting over the world economy
DAVOS, Switzerland

A sign of the concern among business and political leaders here about sluggish economic growth is that one of the World Economic Forumsessions this week was titled "Avoiding a Centennial Slump" — meaning a downturn that lasts a hundred years.

Few are quite that gloomy. But " secular stagnation," as Lawrence Summers, a Harvard economist and former treasury secretary, terms it, is a pervasive worry. Among the warning signs was this week's downgrade by the International Monetary Fund of its global growth forecasts to 3.5 percent for this year and 3.7 percent in 2016. The European Union is forecasting anemic growth of just 1.2 to 1.4 percent this year and 1.7 percent next.

The European Central Bank did the equivalent of pushing the panic button Thursday, announcing a bond-buying program of 1.1 trillion euros meant to lower interest rates and encourage investment. That's larger than many analysts had predicted. But rates are already rock-bottom, and although the ECB's "quantitative easing," as it's known, will flood Europe with cash, there's no guarantee that it will be used to cure the region's structural impediments to growth. Indeed, persistent low rates are one of the attributes of a deflationary economy, rather than a cure.

"Structural reforms must be carried forward. . . . It must be carried through, no matter how difficult, to generate new momentum for global development," Chinese Prime Minister Li Keqiang warned. China is part of the slowdown story, too, with its growth slipping last year to 7.4 percent, the lowest level in 24 years. Li talked like a Chamber of Commerce booster, trying to reassure the audience in Davos that the Chinese engine was still strong. He promised less regulation, better market access, more competition, less corruption, more tolerance for failure — in short, structural reforms.

Against this background of global growth anxiety, the program of "middle-class economics" announced by President Obama in his State of the Union address Tuesday looks pretty solid. Politically, it's probably a nonstarter with a GOP-run Congress whose main ambition seems to be making the president's life difficult for the next two years. But Obama's program includes details that many economists argue would be needed to overcome the structural impediments to faster growth in the United States.

The tax-the-rich aspects of Obama's plan have attracted the most attention. But most of his proposals deal with the trickier problem of encouraging lower-income Americans to get the skills and jobs that would make a middle-class life possible. These include tax credits for families with young children; more government support for preschool education; lower mortgage premiums for first-time home buyers; and paid sick leave for the 43 million workers who don't have it.

Economists argue that a real structural change in the U.S. economy requires higher levels of education and job training. Obama's plan focused on this aspect of transition, proposing two free years of community college for students who have good grades, on-the-job training and transition programs for workers who want to move to higher-paying jobs.

There was old-fashioned Keynesian pump-priming in the president's program, too, with its proposal for a "Grow America Act" to spend money on the country's decaying infrastructure, financed by reform of corporate taxes to cut loopholes and prevent companies from hiding money offshore. There's a misconceived notion that Keynesian ideas about fiscal policy are outdated. The path of the global economy since the 2008 crash shows the opposite: Nations that provided fiscal stimuli for their economies are doing far better than the ones that opted for austerity.

Americans should take some confidence from the fact that the U.S. economy is seen here as having rebounded from its near-death experience of 2008. It is growing much faster than Europe's or Japan's, its currency is strong, its financial markets are solid and well-regulated. U.S. political leaders bicker incessantly, but both parties agree on the need for policies that expand trade and reduce barriers to economic growth. Europe and Japan are far behind on such issues.

"Uncertainty" overhangs the global economy, warns Swiss President Simonetta Sommaruga. Business leaders can't forecast oil prices, currency movements or political trends. With the future so cloudy, trillions of dollars in cash is sitting on the sidelines, waiting for clarity.

The specter haunting Davos this year was deflation — the prospect that Europe and Japan will suck the rest of the world into a period of declining prices in which nobody wants to spend or invest today because it will be cheaper tomorrow. "It's an annihilation," one American investment manager said of the deflation threat. "It's Darth Vader, [the] Death Star, outside of the atmosphere of the Earth, shooting lasers to blow up the world's economy."

01/21/15: Foreign policy's post-Obama pivot
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