A better G20 communique
Another year, another G-20, another yawn. The group of the world’s 20 biggest economies performed some useful services in the aftermath of the 2008 financial crisis, when it helped coordinate the massive monetary and fiscal stimulus that warded off a second Great Depression, organised an agreement among big trading nations to keep their trade balances within reasonable limits, and set in motion efforts to rein in financial excess.
Since then, though, it has degenerated into yet another one of those global drawing rooms where leaders get together and explain to one other how the world would be a better place if only it were a better place. Last weekend’s conclave in Hangzhou went true to form. Aside from some fiercely negotiated but in the end tepid language about the need for certain unnamed countries (namely, China) to reduce steel capacity, the final communique was a 48-point laundry list of laudable notions (freer trade, less protectionism, more investment, more infrastructure, more efficiency, less corruption, etc.), with no indication of how these notions might be turned into reality.
This was a missed opportunity. Even if the G-20 is powerless to act, it could help the world by describing economic reality accurately, and laying down some parameters for what individual governments can and cannot reasonably hope to achieve. My suggestion for a better communique follows, with the added benefit of having only five points rather than 48.
First, set realistic expectations for global growth. In the decade before the financial crisis, one could safely expect the United States to grow annually by more than 3%, and for China to grow by 10%, with enormous spillover benefits for everyone else. Over the next decade, the baseline growth rates for the world’s two biggest economies will probably be closer to 2% and 5%, respectively, with consequently smaller spillovers.
These lower growth rates are not caused by a conspiracy of central bankers to manipulate interest rates, nor by overzealous governments taxing and regulating entrepreneurs to death, nor by underzealous governments failing to invest as much as possible in infrastructure. They result from demographic shifts that will reduce the working-age share of population in both countries, and from China’s necessary transition from rapid investment-led to slower consumer-led growth. Lower growth is a fact, not a crime.
Second, recognise that lower growth is still growth, and not “stagnation.” One useful definition of economic stagnation is zero growth in real per capita income. Even in Japan, which has supposedly stagnated for a quarter century, real per capita income has grown significantly, and the average quality of life has visibly improved. Scare stories about the dire effects of growth that is lower than it was once upon a time divert attention from the real question, which is how to extract the most social benefit from the growth actually on offer.
Third, accept that in a lower-growth world, distributional questions must be taken more seriously. For three decades after 1980, the world’s rich economies, led by the US and the UK, essentially took the view that growth-friendly policies made it unnecessary to worry about how wealth or income were distributed. This may or may not have been true in the high-growth boom years. What is certain is that when growth is lower, distributional claims cannot be so easily ignored.
Fourth, promote free trade and crossborder investment, but don’t kid yourself that everyone benefits from the “average” gains. One of the stupidest speeches I heard this year was by a Fortune 500 CEO who lamented the rise of Donald Trump and other anti-globalisation populists, and attributed it to the failure of elites to “explain” how free trade was actually good for everyone. This is idiocy. Globalisation did not lose credibility because it wasn’t explained properly. It lost credibility because the bosses of society failed to recognise and take care of the people who were inevitably, and through no fault of their own, hurt by it.
Finally, understand that what may be good for economies and societies in the long run may not necessarily be good for asset prices in the short run. In the 1990s and early 2000s both the US and China, for distinct but related reasons, experienced a period of high growth during which national income was substantially redistributed from labour to capital. The resulting boom in corporate profits was great for investors in public equities in the US, and for entrepreneurs and private equity investors in China. It was all right for the working class in China, and basically bad for the working and middle classes in the US and other rich countries.
For these societies to stay stable, and to sustain growth based on household spending, we probably need an extended period during which labour income grows faster than profits. This is tough luck for equity investors. And unfortunately, the long boom also created a superabundance of global wealth which is now looking for safe places to rest, and keeping yields down. This is tough luck for bond investors. Eventually, rising incomes and the gradual reallocation should create the conditions for stronger asset prices. But for a while, investors may just have to accept low returns as the price of a necessary and long overdue economic adjustment.