the world economy in the long run

Princeton University economist Avinash Dixit (born 1944, India) offers us provocative scenarios of how the world economy might evolve over the next hundred years. A key scenario, which is intended to frighten, envisions a world in which the United States and Europe stagnate while new, dynamic economies take the lead:

Dysfunctional politics and continued adverse demographic trends will trap these former economic giants into relative mediocrity in the world. …. International Monetary Fund officials from its sparkling new headquarters in Singapore will send missions to Washington and Brussels, to discuss the terms and conditions for renewing loans. The American and European public will resent these heavy burdens. …. The governments, whose primary objective is reelection, will not defy the voters and therefore will not fulfill the conditions they pledge to the IMF. But after long and difficult negotiations the IMF will roll over the loans anyway.

Dixit goes on to describe a “dream scenario” that could follow one or more “nightmare scenarios”. Here is a small part of his dream scenario:

In my dream world of 2111, there will be opportunities for individuals to take risks, exercise initiative, and innovate, getting rich if they succeed. But these opportunities will be equally available to all. Although the outcomes will be unequal, the bottom of the distribution will be cushioned by a sturdy social safety net. This will consist of a simple, comprehensible, and relatively non-­-manipulable set of policies, for example a negative income tax that replaces all the complex set of welfare payments, plus health care coverage that, at a minimum, protects everyone against ruinous expenditures. Many in the U.S. will reflexively denounce this as socialism, but they should be reminded that something very similar was first and most persuasively advocated by that hero of the libertarian right, Milton Friedman. My ideal safety net will be quite lean, and not so generous as to people allow people to idle in comfort for ever. Most importantly, it will offer only a modest flat backstop income for everyone. It will not protect bankers any better than it does bakers. …. My ideal health care system will refuse coverage to people who have demonstrably chosen lifestyles that are known to lead to health risks like cancer and diabetes for the treatment of which the rest of us would have to pay huge amounts. Herbert Spencer’s motto, “The ultimate result of shielding men from the effects of folly is to fill the world with fools,” will be written in large letters on the walls of all government departments that offer bailouts, subsidies, insurance, and all kinds of handouts.

Avinash Dixit, “The Cone of Uncertainty of the 21st Century’s Economic Hurricane“, written as a chapter for In 100 Years, edited by Ignacio Palacios-Huerta, to be published by MIT Press, 2013.

HT Mark Thoma.

The Herbert Spencer quote is from “State tamperings with money and banks”, in Essays: Scientific, Political, and Speculative (D. Appleton & Co., New York, 1891, vol. 3, ch. IX p. 354.

 

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