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A Global 'Growth Map' for 2014

By A. Michael Spence

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This is far from a full resolution of "global imbalances." But the specter of a global economy crippled because of a massive shortage of aggregate demand is receding.

THE UNITED STATES. The US is in what might be termed a partial recovery: growth at 1.5 to 2%, well below potential but a lot better than zero. This is being driven largely by the private sector, a flexible and dynamic economy and one that is shifting its resources at the margin toward the tradable sector where demand is not (or is less of) a constraining factor. Fiscal drag is significant and uncertain because the resolution of an ongoing sequence of budget standoffs is not known.

The largest missing piece in the evolving US growth pattern is investment, especially public sector investment, and that is likely to continue in this political environment. The alternative -- shifting the portfolio of domestic aggregate demand for some period from consumption to investment paid for by taxes on income or large pools of wealth -- won't fly politically. That means growth will remain below potential for an extended period.

EUROPE. Thanks to the European Central Bank and its unused (but lurking in the background) Outright Monetary Transaction policy to bail out states on the verge of bankruptcy -- and the German Chancellor's backing of this important measure -- the sovereign debt markets have stabilized for now.

Read full article as published in The Huffington Post

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A. Michael Spence is the William R. Berkley Professor in Economics & Business.