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The Post-Inflation Economy That Could Be

Looking ahead to the period after the pandemic and today's bout of inflation, most economies face strong headwinds that threaten to return them to the secular stagnation of the 2010s. But with policies to boost trade in services and increase green investments, the outlook would brighten substantially.

CHICAGO – Economic commentaries nowadays are typically about inflation or recession, so let’s instead consider the growth prospects once central banks get those challenges under control.

As matters stand, there appear to be worrisome headwinds to growth. As most advanced-economy populations age, their labor-force growth is slowing, so there will need to be greater productivity per worker to compensate. But with investment in physical capital muted, labor productivity is unlikely to grow rapidly without significant innovation, either in work processes or products. While it initially appeared that increased telecommuting during the pandemic would enhance productivity (by saving time and avoiding the duplication of capital at home and in the office), many firms are rediscovering the value of having workers in the office at least for some of the time.

Another headwind comes from poorer countries, where lower-middle-class households have suffered tremendously through the pandemic and now from food- and fuel-price inflation. Many children have missed more than two years of school and are likely to drop out, permanently impairing their earning potential and the skill-base of the labor force more broadly. Meanwhile, deglobalization – through reshoring, near-shoring, and friend-shoring – threatens to make it even more difficult for them to get good jobs. In the longer run, the weakness of demand in these countries will spill over to the developed world.