Yesterday, I gave my diagnosis of the most pressing economic problem facing the United States. Specifically, I argued that it’s impossible to think of issues like jump-starting growth, reducing unemployment, and controlling debt without also thinking about how to deal with trade deficits, currency issues, and competitiveness. In short, the world is facing an oversupply of labor, productive capacity, and capital.
Can the United States and Europe can out of this mess? (And what about Japan, which has seemingly been unable to do so for decades and has now embarked on a quixotic quest to will its way out of persistent deflation?) I believe they can, and the book I have written offers a road map for avoiding a future of economic stagnation and new crises.
We must begin by acknowledging how much everything has changed. Economic troubleshooters—from presidents to central bankers to lawmakers to economists—need a fresh playbook in the age of oversupply. In particular, monetary policy—historically a critical tool for fighting economic downturns—-simply doesn’t have, in a world of easy money, the bite it once had. And while fiscal stimulus can help restart growth, developed nations need to try this approach on a much larger scale than ever before if we are to put the advanced nations’ huge surplus of workers back to work. In The Age of Oversupply I suggest major new investments that deal strategically with infrastructure and I detail how such investment would not only help restart growth but also lay the foundation for future prosperity. At the same time, The Age of Oversupply proposes an aggressive effort to clear away the crushing burden of unresolved debt that is a legacy of the credit bubble.
This is a daunting political challenge, because it means taking on creditors who hold trillions in bad debt. But until our advanced economies can emerge from under debt overhang, strong growth will be impossible. The United States, the world’s largest economy, must also confront two major obstacles to its global competitiveness: runaway costs for higher education and health care.
The U.S. and European nations all need further reforms to their banking sectors to reduce risky behaviors and foster more stability. These efforts need to involve leaders and institutions from across the developed world if they are to succeed, given the interconnected nature of today’s global financial system. Likewise, new multilateral cooperation is needed to create a global currency system that will ensure stability and a level economic playing field.
Today, seven years after home prices in the United States hit peak bubble values in the summer of 2006 and five years after the financial system of the entire developed world nearly ground to a halt, the economies of the United States, Western Europe—and yes, still Japan—remain mired in severe economic dislocation.
The demand for goods and services in the developed world remains muted, relative to potential. Amid this flat demand, even the most profitable companies see little reason to invest in new equipment or hire new workers. And never has there been such bitter disagreement and deep confusion, among politicians and economists alike, about what ails the economies of the developed world and how to fix them.
To combat the ongoing slump, for half a decade despairing policy makers have employed almost every conventional, and many far more heterodox, economic countermeasures—measures that arose from a century of modern economic scholarship and experience. As a result, they have succeeded in avoiding an outright collapse of key institutions and enterprises, while kicking down the road a growing list of unresolved problems.
At this writing, an alarming percentage of the political leadership in the developed countries have flirted with or have outright implemented fiscal austerity policies. Nothing could be more damaging to the interests of the 800 million or so people of the advanced nations. Commenting in March 2013 on the dominance of austerity policies in Europe, Gideon Rachman of the Financial Times of London wrote,
There are many who argue that this prescription is dangerous. But the anti-austerians have failed to come up with a set of alternative policies that is coherent enough to turn the intellectual tide.
The Age of Oversupply is intended to answer precisely that type of criticism: to provide a coherent intellectual rationale for why we are where we are, to deliver policy initiatives that focus on the ongoing challenges to the global economy, and, particularly, to chart a way forward toward the renewal of developed-world growth and prosperity.
This piece is a modified excerpt from Dan Alpert’s new book, The Age of Oversupply: Overcoming the Greatest Challenge to the Global Economy. The book will be released on September 26, from the Penguin Portfolio division of Penguin Random House. Special preview copies will be available on September 24 at The Century Foundation. RSVP today.