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Questions and Answers:
Economic stagnation in the rich countries

This page gives a summary of the main issues related to resolving the economic stagnation in the rich countries, in the form of a series of questions and answers. For a more in-depth analysis, links are given to pages on which these issues are discussed in more detail. A comparable set-up is used for discussing issues related to ending global poverty and for discussing the financing of sustainable development.

Question: What are the causes of current economic stagnation in the rich countries?
Answer: A shortage of money with the parties who generate the type of demand that is the major drive of economies: lower and middle class consumers, and governments.
For more click on: The structural gap between productive capacity and purchasing power

Question: Will standard economic recipes, that is, tax cuts and liberalizing trade and capital flows, reboot economies into sustained economic growth?
Answer: No, they will not, because they do not address the fundamental problem in the global economy: the lack of purchasing power. Indeed, freeing trade will contribute to increasing the gap between productive capacity and purchasing power – and hence, demand.
For more click on: The effects of free trade and tax cuts on economic growth

Question: So freeing trade contributes to the loss of jobs and downward pressure on wages. So what’s to do: should we resurrect and heighten trade barriers, and make them permanent?
Answer: No, we should not. Free trade has its advantages, notably for consumers: increased (international) competition will lead to lower prices and better quality. However, trade should be liberalized gradually, to allow producers to adapt to international competition. Most important, a "bottom line", in the form of a minimum of social and environmental standards all producers should adhere to, should be agreed upon and effected worldwide, to avoid competition at the cost of workers and the environment. At the same time foreign investment should be promoted and facilitated, to help countries that have fallen behind economically in catching up with their competitors by making use of external capital and know-how.
For more click on: From free trade to free and fair trade

Question: So free trade should be promoted – under conditions. But will that help us to get out of the current economic downturn soon?
Answer: No, it will not, because freeing trade does not address the fundamental problem of lack of purchasing capacity or buying power. Worse, as discussed, the problem is aggravated by currently popular policies such as tax cuts, which continue to be promoted by mainstream politicians, economists and other opinion leaders.

Question: But aren’t tax cuts supposed to increased buying power and thus, increased demand?
Answer: Yes, and to some extent, it works, if the money ends up with middle and especially lower incomes. On the other hand tax cuts lead, sooner or later, to a decrease in government consumption and investment, which reduces demand. Worse, tax cuts that largely benefit the rich are unlikely to lead to increased demand, because the people who benefit are few and already consume a lot.

Question: But aren’t tax cuts or the rich supposed to lead to increased investment, which creates jobs and profits, and thus, demand?
Answer: In economic theory, yes. In practice, to some extent. Problem is, especially in a bullish economy the rich are likely to use much of the additional income from tax cuts for speculation rather than productive investment. On the other hand, in a stagnant economy the rich are likely to put their additional wealth in financial safe heavens such as gold or real estate. Overall, the loss in government demand is unlikely to be compensated by the extra demand created by the rich.
For more click on: How inequality leads to lack of demand and speculation instead of investment.

Question: So what can we expect in the short run, say, the coming one or two years? Will we get out of the current economic downturn?
Answer: For the time being, the purchasing power of governments and lower and middle income groups will continue to fall behind. That means that overall purchasing power and – with a stock market in the docks and consumers and governments heavily indebted - demand will progressively fall behind productive capacity. And that, in turn, means that chances of a rapid economic recovery are slim: indeed, the economy may remain in a slump for years.

Question: So what is the outlook for the medium and longer term, i.e., the coming ten to twenty years?
Answer: With current economic policy, the economies of the rich nations are likely to remain stagnant for a long time to come, and may well enter a recession that will last for years. In the longer run, graying populations in Europe and Japan, and the indebtedness of the United States to the rest of the world, can lead to major economic and financial crises.
For more click on: The longer term risks: bad debts, indebtedness, and graying populations.

Question: So what must be done to reboot the economies of the rich nations, and avoid the economic crises that may be in store in the coming twenty years?
Answer: the key is to bring demand for goods and services back in line with the productive capacity of the rich nations’ economies. That can be achieved by providing governments with sufficient funds for public investment in such areas as public education, health care, research and development, safety, and environmental improvement. Also, where economically feasible, funding should be made available for providing all citizens with a basic income.

Question: That would cost a bundle. Where would the money come from?
Answer: Part of the money can be generated through conventional means: savings on other types of government expenditure, and (progressive) taxation. The remainder should be financed by money creation. The money involved should be created by the IMF and made available to countries under strict conditions, in such quantities that the extra demand generated would not exceed the productive capacity of the global economy.
For more, click on:
Financing sustainable development - the conventional way
Money creation for sustainable development

 

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