During his visit to CIGI, President of the Peterson Institute for International Economics Adam Posen drew a vivid picture of the “lucky” past and bumpy future ahead for the global economy. “There is a deep human need for normality,” Posen said in the opening of his lecture. “We don’t cope well in constant change.” For that reason, Posen said there is little surprise that the world economy is settling in to an “old normal” state.
In this unfolding economic environment, Posen clarified that not all things old will become new again. Instead, he outlined how two scenarios, the relative shrinking of the role of the US and the waning of technological acceleration, are sure to bring about some familiar circumstances. Many economists predicted that the US could not maintain the global dominance they enjoyed from the end of the Cold War to the mid-2000s. It was an unsustainable position for the US, noted Posen, a “temporary excess of power” or “fantasy.” The waning of technological acceleration was also unsustainable. Posen explained that periods of fast moving innovation at the frontier are relatively rare. When combined with the shrinking position of Canada’s Southern neighbours, a slowed technological era will undoubtedly contribute to a stagnant environment — similar to the one we grew accustomed to pre-1990s.
What will this new rendering of an old normal look like? Posen described several scenarios that are likely to resurface. First, he explained that we are likely to see the provision of global public goods become less certain and less universal. He cited the lack of polio vaccinations as one recent incarnation of this old reality.
Next, Posen spoke about the reduced enforcement of intellectual property (IP) rights around the world — a growing area of interest and concern for many in Waterloo, particularly those in CIGI’s International Law Research Program. In light of more permeable IP rights and slower rates of technological innovation and advancement, Posen also predicted that we are likely to encounter an era of “catch up,” or “conditional convergence.” In this environment, smaller, less developed countries will have an opportunity to catch up to the top countries (due to the porous IP regulation), while advanced countries at the frontier of innovation will fail to increase their technological lead.
The fourth characteristic of an old normal is a “bumpier” business cycle. Posen explained that we are coming out of an era of “luck” — we have grown accustomed to enjoying low inflation and stable growth rates. In the old normal, we can’t expect the same smoothness in business transactions. As countries grow and become less dependent on trade with the shrinking US, American efforts to stabilize their own economy will no longer have stabilizing effects on the global economy, resulting in a bumpier road for many countries.
In spite of these characteristics of the old normal and others he mentioned during his lecture, Posen suggests that we ought only to be mildly depressed by the bumps and bruises likely to come our way. For one, he said, seeing poor countries catching up to rich countries is a good thing (as long as it is not at the expense of the rich, he explained). Second, he stated, “it is not evil that the US does not have the completely dominant voice.” However, he did note that he would rather hear from the US than some of the other more vocal countries.
Lastly, Posen said that this new “old normal” is sustainable: “There is something to be said for a world that is not based on bubbles, fantasies or temporary excesses of power.” This steady, new “old normal” may be leading us down a bumpy road. But as Posen noted as he wrapped up his lecture, it is not expected to be bad, just boring.
Posen did an excellent job dissecting a macroeconomic shift for those of us in the audience less familiar with the world of economics. Although glimmers of American patriotism were evident at various moments throughout the lecture, he presented a balanced approach to the less-US dominated “old normal” that we are likely to experience in the coming years.