Issue of the week: Can the world economy be fixed?

last updated 8 January 2015

This week’s stock-market meltdown is “more than just a one-time crash,” said Derek Thompson in The Atlantic. We’re experiencing the dangerous confluence of a U.S. growth crisis and a European debt crisis, and “there isn’t a single government that knows how to solve either.” The U.S. economy has all but stalled, and companies, despite their record-high profits, are doing “anything but hiring Americans.” The value of the typical U.S. home has nearly halved in the past five years, causing families to “close their wallets.” Europe, meanwhile, could be forced to spend hundreds of billions of dollars to bail out Greece, Portugal, Italy, Spain, and Ireland. No wonder we’ve moved from referring to a “recovery-less recovery” to talk of a double-dip recession.

What’s particularly depressing is that “the bloodletting could be a lot more painful” in coming years than it has been already, said Catherine Rampell in The New York Times. The U.S. economy is much weaker now than it was in 2007, when there was still “lots of fat to cut.” If we fall into recession again, the bite on jobs, incomes, and output will be even worse, forcing families to “cut from the bone.” Policymakers seeking to trigger recovery have “run out of rabbits” to pull from their hats, said Nouriel Roubini in the Financial Times. Interest rates can’t go lower, bailouts are politically unpalatable, and more stimulus is unlikely. Preventing another recession in the U.S. and other major economies may “simply be mission impossible.”

That’s true as long as we persist in a “dangerous misdiagnosis” of the financial crisis, said Kenneth Rogoff in CNN.com. The term “recession” suggests a decline followed by “a reasonably brisk return to normalcy.” That’s not what we have experienced, and labels matter: If you think you have a bad cold when you really have pneumonia, you’ll take the wrong medicine. What we’re in the midst of is a “Great Contraction,” where “problem No. 1 is too much debt.” You can address recessions with fiscal stimulus, but a contraction like this requires the longer and more painful task of reducing debt. The best way to do that is with “a sustained burst of moderate inflation, say, 4 to 6 percent for several years.” That may be a “form of heresy” for those who have “jumped on the Great Recession bandwagon.” But if we dump that label and deal with the real problem at hand, it’s “not too late to do better.”