Long-Term Fundamentals of the 2008 Economic Crisis

40 Pages Posted: 25 Mar 2009 Last revised: 31 Mar 2009

See all articles by David Mayer-Foulkes

David Mayer-Foulkes

Centro de Investigación y Docencia Económicas (CIDE) - Division of Economics

Date Written: March 24, 2009

Abstract

The current economic crisis has long-term causes that are rooted in the economic dynamics of globalization. I construct a Solow-style endogenous model of capital accumulation, technological change, trade and foreign direct investment (FDI), based on myopic agents. Combining advanced technologies with low labor costs, FDI yields extraordinary profits that generate asymmetric innovation incentives that explain the following stylized facts. Globalization (a) increases the world economic growth rate; (b) is consistent with development, underdevelopment and miracle growth; (c) increases inequality in leading countries; (d) generates a transition path along which the interest rate diminishes if capital accumulates at a faster rate than technological change. 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 are immediate priorities for the US, 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. A global harmonization of taxes, which is eventually necessary anyway, is required to fund publicly provided goods, to balance incentives between local and international production, to reduce the polarization between developed and underdeveloped countries, to balance global markets with global governance, and to reinforce global cooperation. Developing the green energy sector is consistent with these aims.

Keywords: Globalization Reform, Economic Development, Financial Crisis, Sustainable Growth, Green Energy

JEL Classification: A1, E6, F00, O20, O51

Suggested Citation

Mayer-Foulkes, David, Long-Term Fundamentals of the 2008 Economic Crisis (March 24, 2009). Available at SSRN: https://ssrn.com/abstract=1367918 or http://dx.doi.org/10.2139/ssrn.1367918

David Mayer-Foulkes (Contact Author)

Centro de Investigación y Docencia Económicas (CIDE) - Division of Economics ( email )

Carretera Mexico Toluca 3655
01210 Mexico, D.F.
Mexico
+52 55 5727 9839 (Phone)
+52 55 5727 9878 (Fax)

HOME PAGE: http://www.cide.edu/investigador/profile.php?IdInvestigador=25

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