What are the prospects for the US and global economies over the next 6-18 months? originally appeared on Quora - the knowledge sharing network where compelling questions are answered by people with unique insights.
The prospects for both the US and the global economy are good, but there is a lot of hard work to be done.
The US recovery is well entrenched, and has been resilient to a number of shocks over the last few years--the Eurozone crisis, the "fiscal cliff", a slowdown in China. The unemployment rate is at 5% -- the only times it's been significantly lower have been during the "dot-com" bubble in the 1990s and in the credit bubble before the financial crisis.
Growth is lower than it used to be, though - by about 0.5-1 percentage points. Some of it is because of demographics. The population is aging, and labor force growth has slowed. Some of it is because productivity growth has slowed - I think this will change as investment picks up and new technologies are deployed across industry.
Faster growth in the US is within reach, but cannot be taken for granted. I am worried by the seemingly incurable pessimism that holds back investment and fuels temptations for populist and protectionist moves. I think we need to focus more on the fundamentals: infrastructure, investment, education. We need to focus especially on education and skills to make sure everyone has access to opportunity. We can go back to 3.5% growth and more--but we need to roll up our sleeves and focus on the factors that always drive growth.
As for the rest of the world: Europe and Japan are weak; their problems are long standing and well-known (including inflexible labor markets and assorted structural rigidities). They have started to address them, but in my view they need to move faster.
Emerging markets are a mixed bag. Some are suffering from the lower commodity prices and past policy mistakes (Brazil, Russia are two examples). But others have moved policies in the right direction, and performance is improving (India, now the fastest-growing large economy). I think that commodity prices will stabilize, setting the stage for better performance by emerging markets. There will be a lot more differentiation across countries than we have seen in the immediate rebound from the global recession. But overall, the emerging markets growth story will remain in place.
China of course is a big piece of the puzzle. They are carrying out an unprecedented economic transformation, and the uncertainty is therefore high. They are entering the more difficult phase of this transformation--as they liberalize more and more, they can no longer control the economy as well as they used to, and the risk of accidents increases. But they have the right strategy, and so far they have executed it very well.
To sum up, I think the prospects for the US and the global economy are good. I am optimistic. But we need to stem the tide of populist and protectionist pressures that threaten to damage growth, hurting the very same people they claim to protect. Technology and globalization have been the primary drivers of prosperity, and will remain so. We need to do better at managing the transitions, though, at helping and protecting those who are negatively affected by the disruptions that these forces inevitably bring. We need to be smarter to leverage the potential of innovation and globalization to keep raising living standards across the globe.
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