Princeton’s Mody: ‘Time to Learn How to Live with Less’

Friday, 08 Feb 2013 08:22 AM

By Michael Kling

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Get used to life in a post-growth world. Don’t expect a return of strong economic growth.

That’s the advice Ashoka Mody, a Princeton University economics professor, offers in an article for Project Syndicate.

“Faith in renewed growth is an ill-advised policy strategy,” writes Mody, a former mission chief for Germany and Ireland at the International Monetary Fund (IMF). “At its core, the global economic crisis is a growth crisis.”

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We continue to act as if the bubbly growth seen from 2000 to 2007 will return. The real story for most countries, he says, has been lower growth than expected and more inflation than expected.

For instance, in April 2010, the IMF predicted that world gross domestic product (GDP) would grow about 4.5 percent annually through 2015, with inflation averaging less than 3 percent. Last October, the IMF revised world GDP growth for 2012 down to 3.3 percent and predicted inflation would reach 4 percent.

Slow growth has been blamed on temporary disruptions: the Greek bailout, the Japanese tsunami and the U.S. credit rating downgrading. Forecasters merely keep pushing back the estimated return of high growth.

“Continuing to assume the resumption of pre-crisis growth was necessary to justify postponing hard decisions,” Mody states.

For instance, high growth in Europe means peripheral eurozone countries will not have to restructure or “inflate away” sovereign debts. Increasing growth in Germany is needed for confidence in Europe’s financial safety net. A return of strong growth is the basis for delaying the Basel III bank rules.

The solution, he argues, is to tackle financial excesses. “That means more debt restructuring and more bank closures now, rather than watering down proposals to rein in freewheeling markets.”

Mody points to a paper by Robert Gordon of Northwestern University that says technological progress has slowed, which, in turn, is slowing productivity growth and the rate of improving living standards in developed countries.

“There is no magical path to higher productivity growth. It may be time to learn how to live with less.”

The IMF again revised downward its growth projects in its latest forecasts released last month. The global economy is expected to grow 3.5 percent in 2013, slightly less than the 3.6 percent predicted last October.

Growth remains sluggish in developed countries and is not decreasing unemployment, said IMF chief economist Olivier Blanchard at a news conference last month, according to The Washington Post.

Still, Blanchard said he sees reasons for cautious optimism because “acute risks have decreased,” especially the prospect of a eurozone break-up have decreased, according to The Post.

Editor's Note: How to Pay Zero Taxes . . . Legally

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