The Looming Lost Decade

The GDP numbers for the third quarter of 2013 are in, and it looks like the world economy will end the year with a whimper. Indeed, the global economy remains stuck in low gear, because the fiscal-policy coordination that prevented economic collapse in 2009 waned too quickly, as governments shifted their focus to domestic politics.

PRINCETON – As 2013 comes to an end, it looks like the world economy will remain stuck in low gear. For those reading the tea leaves of global recovery, the third-quarter GDP numbers offered no solace. While the United States is ahead of the pack, some of its gains could soon be lost, as accumulating inventories begin eroding profits. Despite glimmers of hope, the eurozone and Japan are struggling to cross the 1% threshold for annual economic growth. And the major emerging economies are all slowing, with Russia practically at a standstill.

Not surprisingly, a catchphrase in economic-policy debates nowadays is “secular stagnation,” the idea that excess savings chronically dampen demand. The economist Robert Gordon has also argued that the world is low on economically productive ideas.

But before we despair, there is work to be done. The coordinated fiscal stimulus that saved the world from economic collapse in 2009 disappeared too quickly, with governments shifting their focus to domestic politics and priorities. As domestic policy options have been exhausted, economic prospects have dimmed. A renewed emphasis on stimulus must be augmented by global coordination on the timing and content of stimulus measures.

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