The politics of economic stupidity

The Chinese economy's shift from quantity to quality is welcome - almost necessary. And, though President Xi Jinping's fight against corruption may cause economic growth to slow further as paralysis grips public contracting, there is no reason for Xi to let up. On the contrary, other factors - widespread environmental problems, high and rising levels of inequality, and private-sector fraud - need to be addressed with equal vigor.

In short, the world should not expect China to shore up global aggregate demand in 2015. If anything, there will be an even bigger hole to fill.

Meanwhile, in Russia, we can expect Western sanctions to slow growth, with adverse effects on an already weakened Europe.

For the past six years, the West has believed that monetary policy can save the day. The crisis led to huge budget deficits and rising debt, and the need for deleveraging, the thinking goes, means that fiscal policy must be shunted aside.

The problem is that low interest rates will not motivate firms to invest if there is no demand for their products. Nor will low rates inspire individuals to borrow to consume if they are anxious about their future (which they should be). What monetary policy can do is create asset-price bubbles. It might even prop up the price of government bonds in Europe, thereby forestalling a sovereign-debt crisis. But it is important to be clear: the likelihood that loose monetary policies will restore global prosperity is nil.

This brings us back to politics and policies. Demand is what the world needs most. The private sector - even with the generous support of monetary authorities - will not supply it. But fiscal policy can. We have an ample choice of public investments that would yield high returns - far higher than the real cost of capital - and that would strengthen the balance sheets of the countries undertaking them.

The big problem facing the world in 2015 is not economic. We know how to escape our current malaise. The problem is our stupid politics.

The author is a Nobel laureate in economics and also a professor at Columbia University. Project Syndicate