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The Big Wage Squeeze

NEW YORK  In the ongoing economic debate about what policy to pursue in the face of economic slack and prolonged unemployment, economists can roughly be divided into two groups. Keynesian economists argue for government spending as a temporary substitute for private spending, while supply-side economists call for austerity and structural reforms. But what if the main impediment to economic growth is indeed a shortfall of demand, only one that is structural rather than cyclical?

In 2005 then Fed governor Ben Bernanke, reflecting on the puzzlingly low long-term interest rates at the time, raised the specter of a global savings glut. He singled out emerging economies for their high national savings rates, suggesting that Americans acted as the world’s consumers of last resort. While American consumerism has since dwindled along with home values, the global savings rate is projected to reach a fresh high at 25% of world GDP this year.