Keys to faster global growth

Global economist David Malpass devotes his latest Forbes magazine column to outlining five policy changes that would lead to faster global growth.

Interest rates have been held near zero for so long they have begun to seem normal. But that’s a delusion. It’s no more possible to run a market economy on free credit than it would be to run one on free gasoline or free labor. It works for the government and the well-connected but not for the rest, especially small businesses and new workers. The result is a heavily distorted global economy, a devastating “new normal” for growth rates and a multiyear collapse in real median income, which worsens income inequality.

– Let interest rates rise. The most important growth policy in 2014 would be for the Federal Reserve to lay the groundwork for raising interest rates, as it did for reducing bond purchases in 2013. It’s high time the Fed moved past zero rates—even a 0.5% interest rate would allow credit markets to work better.

– New debt limit. Washington also needs to rewrite the debt limit so it restrains spending growth and puts a stop to the most ineffective spending. The current debt limit is a harmful masquerade—written by government for the purpose of expanding spending and debt. …

– Downsize governments. European countries need to refocus their austerity programs on downsizing government instead of targeting their private sectors. European programs have concentrated on higher taxes, sweetheart deals for state-owned companies and government control of the labor markets and health care. This has left the euro zone’s average unemployment rate at 12.1%, with some countries’ rates as high as 25%. Economists call these programs “internal devaluations,” which translates to lower wages and pensions for the private sector. They are designed by government bureaucracies to keep government big. …

– Liberalize trade. This is critical to global growth, but progress has stalled. A core reason for this is that governments evaluate one another based on their average tariffs, ignoring many of the most harmful trade barriers. Over time government institutions have turned trade liberalization into endless negotiations among government lawyers, generating thousands of pages of complex regulations. This ends up hurting workers and growth. It’s like evaluating teachers based on the average among them, downplaying the damage caused by the weakest few. The world would benefit from identifying and fixing the most restrictive trade quotas and tariffs.

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