Long-Term Fundamentals of the 2008 Economic Crisis

The current economic crisis has long-term causes that are rooted in the economic dynamics of globalization. I argue that globalization (a) increases the world economic growth rate; (b) is consistent with development, underdevelopment and miracle growth; (c) increases inequality in leading countries; and (d) generates a transition path along which the interest rate diminishes if capital accumulates at a faster rate than technological change. This condition is generated by cheap-factor-seeking foreign direct investment (FDI), which by combining advanced technologies with low costs yields extraordinary profits and experiences lower incentives for innovation. Over the period 1980-2007, liberalization unleashed a wave of globalization, and the international sector experienced miracle growth. Profits rose to all time highs and global saving exceeded global investment. This savings glut or investment shortfall fueled a global housing appreciation, after which excessive risk in a deregulated financial market led to a financial meltdown. While restoring financial markets and reducing the housing market fallout have been immediate priorities for the U.S., economic growth can only be recovered by restoring global investment. Lowering interest rates cannot generate very much investment, nor will consumption flows from fiscal spending. To stimulate the global economy, whole new economic sectors and technologies must be developed in advanced countries, and economic development deepened in underdeveloped countries. At the same time, a global harmonization of corporate taxes, ending the corporate tax haven loophole, would raise funds for publicly provided goods that complement private investment and balance incentives between local and international production. It would also reduce the polarization between developed and underdeveloped countries, balance global markets with global governance, and strengthen global cooperation.