streeck, new left review 71, sept / oct 2011 or “ the true lessons of the recession : the west can ’ t borrow and spend its way to recovery ”, raghuram rajan, foreign affairs, volume 91, no 3, may / june 2012. tyler cowen ( 2013 ), the great stagnation, ebook, gordon, r. ( 2012 ), “ is us economic growth over? faltering innovation confronts six headwinds ”, nber working paper 18315. bis central bankers ’ speeches it is obvious from these lists of factors that it is hard to disentangle the effects of weak aggregate demand from slow growth in potential supply. population ageing contributes to both. indeed, one may cause the other. for example, anticipating a slowdown in growth potential, households, worried about impending retirement in the face of undeliverable pension and healthcare entitlements, may try and build savings. this will depress demand further. conversely, anticipated weak demand may reduce incentives for corporations to invest in physical and human capital, causing supply potential to grow more slowly. structural reforms, typically ones that increase competition, foster innovation, and drive institutional change, are the way to raise potential growth. but these immediately hurt protected constituencies that have become accustomed to the rents they get from the status quo. moreover, the gains to constituencies that are benefited are typically later and uncertain while the pain is immediate and its incidence clear. no wonder jean - claude juncker, then luxembourg ’ s prime minister, said at the height of the euro crisis, “ we all know what to do, we just don ’ t know how to get re - elected after we ’ ve done it! ” the growth imperative if indeed fundamentals are such that that the industrial world has, and will, grow slowly for a while before new technologies and new markets come to the rescue, would it be politically easy to settle for slower growth? after all, per capita income is high in industrial countries, and a few years of slow growth would not be devastating at the aggregate level. why is there so much of a political need for growth? one reason is the need to fulfil government commitments. as sociologist wolfgang streeck writes, in the strong growth years of the 1960s when visions of a “ great society ” seemed attainable, industrial economies made enormous promises of social security to the wider public. 6 promises have been augmented since then in some countries by politically convenient ( because

development banks can play and help bolster their capital. at the very least, they should not stand in the way of others augmenting capital and taking more ownership. clearly, sensible investment has a much better chance of paying dividends when macroeconomic policies are sound. and such policies are easier when the adverse spill overs from cross - border capital flows are limited. this may require new rules of the game for policy making. new rules of the game? how do we focus on domestic demand creation and avoid this game of musical crises with countries trying to depreciate their exchange rate through sustained direct exchange rate intervention or through unconventional monetary policies ( where demand creating transmission channels are blocked )? 15 it might be useful to examine and challenge the rationales used to justify such actions. rationale 1 : would the world not be better off if we grew strongly? undoubtedly, if there were no negative spill overs from a country ’ s actions, the world would indeed be better off if the country grew. but the whole point about policies that primarily affect domestic growth by depreciating the domestic exchange rate is that they work by pulling growth from others, not creating growth for others. rationale 2 : we are in a deep recession. we need to use any means available to jump start growth. once we get out of recession, the payoff for other countries from our growth will be considerable. this may be a legitimate rationale if the policy is a “ one - off ” and once the country gets out of its growth funk, it is willing to let its currency appreciate so that it absorbs imports, thus pulling other countries with it. but if the strengthening currency leads to a continuation of the unconventional policies as the country ’ s authorities become unwilling to give back the growth they obtained by undervaluing their currency, or if the strengthening currency leads to greater domestic political clamour about foreign countries undervaluing their currencies, this rationale is suspect. moreover, policies that encourage sustained unidirectional capital outflows to other countries can be very debilitating for the recipient ’ s financial stability, over and above any effects on their competitiveness. thus any “ one - off ” has to be limited in duration. rationale 3 : our domestic mandate requires us to do what it takes to fulfil our inflation objective, and unconventional monetary policy is indeed necessary when we hit against the zero lower bound. this rationale has two weaknesses. first, it places a