This story appears in the February 9, 2014 issue of Forbes. Subscribe
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. A starting point when debt exceeds the ceiling would be to prohibit new entitlements and limit the escalation of existing ones. Congress should reduce the future pay and health insurance subsidies of senior congressional and executive branch officials when debt goes over the limit.
-- Yen ceiling. Japan should put a ceiling on the yen the way Switzerland did on its franc. As long as there's the risk of another big upswing in the yen, growth and investment in the world's third-largest economy will underperform. Over the last year Japan has softened the yen, but its tools lack credibility. Wall Street traders will complain as loudly about a yen ceiling as they did about the Fed's reduction in bond purchases, as they prefer currency instability. But businesses and jobs do best when countries adopt strong and stable currencies. Japan has mechanisms already in place to implement a Swiss-style ceiling that could jump its growth rate to 4% overnight.
-- 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. May elections for the European parliament will be contentious. Europe's outlook would improve if new growth plans focused on downsizing government rather than perpetuating it.
-- 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. Currently big teams of government negotiators and lobbyists work toward mega-agreements that seek only marginal improvements in average tariffs, which would do little to liberalize trade or increase global growth.
Most governments plan to stay the course in 2014, hoping growth in other countries picks up enough to keep them in power. That's possible, but each decision to maintain the status quo means slower job growth than that needed to meet the coming increase in the elderly population. Any of these five steps could be accomplished in 2014, which would materially improve the global growth outlook.
