Has Global Economy Entered Dangerous And Unexplored Territory?

Larry Summers explains why the global economy is in dangerous and unexplored territory.  He rejects the idea that we are experiencing the lingering effects of the financial crisis.  Rather, the financial crisis and slow economic growth are the result of lingering structural changes in the global economy.  In other words, this is not a low spot in a typical business cycle.  Ordinarily, central banks can lower interest rates and reverse a bad business cycle. This has not worked.  Interest rates are close to zero and global growth is still stalled.  The central banks are out of fuel and something else is required to address the structural changes in the global economy.

Summers argues that there are excess savings in the global economy and not enough investment to absorb the savings.  He believes that we have to reject austerity economics in favor of investment economics.  Governments should invest in infrastructure and other activities to absorb the excess savings. If governments fail to act we will continue to see a rise in dangerous forms of populism and a loss of confidence in democratic leadership.  Bad economic performance breeds bad politics.

Slow economic growth is a dangerous problem and it is worsened by rising income inequality.  Most of the gains from the growth that has taken place have gone to a sliver of the population.  That only fuels populism and it contributes to slow economic growth.  Summers concludes by arguing that we have to move from a global economy based upon opportunities for the movement of capital to a global economy that expands opportunities for labor.

If Summers is correct,  we are entering into an unexplored period in which traditional ideas no longer work and in which traditional leadership will continue to be questioned. Global economic and political disintegration will not be far behind.