Five years into the global financial crisis, the U.S. and global economies remain mired in a weak-growth, low-inflation, high-unemployment environment. Debt busts such as 2008-09 are hard to exit from, and recoveries are long and painful. However, three complicating factors make the current environment even more challenging.
First, economic growth models lie broken across developed and emerging economies alike, with the United States deleveraging from its debt-fueled consumption excesses, the European Union locked in a fiscal and currency straitjacket and China (and emerging economies more broadly) transitioning from export-led to domestic-demand-led growth. Second, globalization is in retreat as financial institutions retrench. And third, debt levels remain highly elevated in the developed economies, leading policymakers to rely almost exclusively on monetary policy to buffer the necessary deleveraging process.
The current policy mix of easy money and tight fiscal conditions, however, produces the worst of both worlds: stagnant global growth and increased risk of financial asset bubbles alongside rising prospects for beggar-thy-neighbor tendencies (already somewhat evident in global currency markets).
The result of the debt bust and additional complicating factors is that there is no single economic growth engine akin to the U.S. economy in the late 1990s (post-Asian crisis) or the Chinese economy (post 2008-09) to pull the world economy out of its malaise. We are stuck in a low-demand, low-growth world.
Given such an environment, U.S. policymakers face two main challenges: first, how to put the U.S. economy on a robust and sustained growth path of 3 percent to 4 percent per year and second, how to stabilize the globalization process. The answer to the first challenge lies in the transition to an investment- and production-led economic growth strategy that leverages U.S. access to excess global capital to rebuild America. The answer to the second lies in a U.S. international economic strategy that contributes to global demand and deepens integration with our trade partners in the Americas. Such solutions would provide both global leadership and a model for the EU and Asia to adopt.