The core issue is taxes. If public-sector investment were to be increased with no rise in taxation, the budget cuts required elsewhere to avoid unsustainable debt growth would bein implausibly large

Hard Truths About Global Growth

Michael Spence

NEW YORK – The world’s high-income countries are in economic trouble, mostly related to growth and employment, and now their distress is spilling over to developing economies. What factors underlie today’s problems, and how appropriate are the likely policy responses?

The first key factor is deleveraging and the resulting shortfall in aggregate demand. Since the financial crisis began in 2008, several developed countries, having sustained demand with excessive leverage and consumption, have had to repair both private and public balance sheets, which takes time – and has left them impaired in terms of growth and employment.

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The second factor underlying today’s problems relates to investment. Longer-term growth requires investment by individuals (in education and skills), governments, and the private sector. Shortfalls in investment eventually diminish growth and employment opportunities. The hard truth is that the flip side of the consumption-led growth model that prevailed prior to the crisis has been deficient investment, particularly on the public-sector side.

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Michael Spence, a Nobel laureate in economics, is currently Chairman of the Commission on Growth and Development, an international body charged with charting opportunities for global economic growth…

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