The Global Economy’s Marshmallow Test

The global economy is experiencing a turbulent start to 2016, as plunging stock markets, declining commodity prices, and political paralysis send ripples of instability throughout the world. Only long-term investment, both public and private, offers a path out of the current malaise.

NEW YORK – The world economy is experiencing a turbulent start to 2016. Stock markets are plummeting; emerging economies are reeling in response to the sharp decline in commodities prices; refugee inflows are further destabilizing Europe; China’s growth has slowed markedly in response to a capital-flow reversal and an overvalued currency; and the US is in political paralysis. A few central bankers struggle to keep the world economy upright.

To escape this mess, four principles should guide the way. First, global economic progress depends on high global saving and investment. Second, saving and investment flows should be viewed as global, not national. Third, full employment depends on high investment rates that match high saving rates. Fourth, high private investments by business depend on high public investments in infrastructure and human capital. Let’s consider each.

First, our global goal should be economic progress, meaning better living conditions worldwide. Indeed, that goal has been enshrined in the new Sustainable Development Goals adopted last September by all 193 members of the United Nations. Progress depends on a high rate of global investment: building the skills, technology, and physical capital stock to propel standards of living higher. In economic development, as in life, there’s no free lunch: Without high rates of investment in know-how, skills, machinery, and sustainable infrastructure, productivity tends to decline (mainly through depreciation), dragging down living standards.

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