Two world growth outlooks – Stagnation vs high growth..

Jena Pisane Ferry of Bruegel points to these two orthogonal outlooks on world economy.

the view that advanced economies are gradually healing is challenged from both sides. Starting with demand, Larry Summers, the Harvard economist and senior US official under Presidents Bill Clinton and Barack Obama, recently proposed that advanced economies have found themselves in the grip of secular stagnation.

Summers’s view is that pre-crisis indebtedness was not an exogenous anomaly; it was the consequence of insufficient global demand. The global distribution of income had shifted away from the advanced countries’ middle class toward the rich and the emerging economies, resulting in excess worldwide savings. The only way to avoid stagnation was to push the middle class deeper into debt, helped by low interest rates and lenient lending rules.

In other words, the savings glut (as former US Federal Reserve Chairman Ben Bernanke called it) predated the crisis and could continue to affect global demand, unless the emerging countries’ middle class provides the global economy with a new consumer of last resort. This is likely to happen eventually; but, despite efforts by the US and the International Monetary Fund in the context of the G-20, this rebalancing process has not yet been completed.

The challenge on the supply side stems from a new dispute among economists and technology experts about the pace of technological progress. For Robert Gordon of Northwestern University, information and communication technologies have already delivered most of the productivity boost that can be expected from them; there is no major innovation wave in sight that could offset the slowdown in potential growth. Laggards can look forward to reaping catch-up dividends; but countries at the technology frontier should accept that very slow annual per capita growth – little more than 1% – is the new normal.

By contrast, the MIT scholars Erik Brynjolfsson and Andrew McAfee argue that the Second Machine Age is yet to come. They claim that ever-increasing computing power, worldwide connectivity, and the almost unlimited potential for generating new innovations through recombining existing processes will trigger major transformations in both production and consumption, in the same way that the steam engine transformed the world in the nineteenth century. Growth should accelerate as a consequence, at least if properly measured.

The first suggests high growth is a thing of past and second suggests best is yet to come:

Combining the challenges cited by Gordon and Summers to the view that advanced economies are gradually healing leads to some depressing conclusions. If Gordon is right about slow productivity growth, the debt overhang inherited from the crisis and public-finance woes will persist for much longer than anticipated. If, in addition, Summers is right that demand is bound to remain deficient, the combination of financial troubles and persistent mass unemployment is likely to push governments toward radical solutions – debt default, inflation, or financial protectionism.

If, on the contrary, Brynjolfsson and McAfee are right, growth will be much more robust, and debt issues will be forgotten sooner than expected. The challenge, instead, will be to cope with the labor-reducing and income-inequality effects of emerging technologies.

Will have to wait and see which outlook does pan out..


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