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Growing Out of Populism?

CAMBRIDGE – After nine dreary years of downgrading their GDP forecasts, macroeconomic policymakers around the world are shaking their heads in disbelief: Despite a populist-propelled wave of political tumult, global growth is actually set to outperform expectations in 2017.

It’s not just American exceptionalism. Although US growth is very strong, Europe has been outperforming expectations by more. There is even happy news for emerging markets, which are still bracing for US Federal Reserve interest-rate hikes but have gained a better backdrop against which to adjust.

The broad story behind the global reflation is easy enough to understand. Deep, systemic financial crises lead to deep, prolonged recessions. As Carmen Reinhart and I predicted a decade ago (and as numerous other scholars have since corroborated using our data), periods of 6-8 years of very slow growth are not at all unusual in such circumstances. True, many problems remain, including weak banks in Europe, over-leveraged local governments in China, and needlessly complicated financial regulation in the United States. Nonetheless, the seeds of a sustained period of more solid growth have been planted.

But will the populist tide surging across the advanced economies drown the accelerating recovery? Or will the recovery stifle leaders who confidently espouse seductively simple solutions to genuinely complex problems?