Can global cap­i­tal­ism be saved amid a pop­ulist surge?

The Myanmar Times - - News / Views - ALEXAN­DER FRIED­MAN news­room@mm­times.com

THE pol­i­tics of eco­nomic anx­i­ety has now driven the elec­torates of the United King­dom and the United States into the hands of pop­ulists. If only, so the re­ceived wis­dom goes, economies could get back to a more “nor­mal” rate of GDP and pro­duc­tiv­ity growth, life would im­prove for more peo­ple, anti-es­tab­lish­ment sen­ti­ment would wane, and pol­i­tics would re­turn to “nor­mal” as well. Then, cap­i­tal­ism, glob­al­i­sa­tion, and democ­racy could con­tinue their for­ward march.

But such think­ing re­flects an ex­trap­o­la­tion from one largely aber­rant pe­riod in his­tory. That pe­riod is over, and the forces that sus­tained it are un­likely to align again any­time soon. Tech­no­log­i­cal in­no­va­tion and de­mo­graph­ics are now a head­wind, not a tail­wind, for growth, and fi­nan­cial en­gi­neer­ing can’t save the day.

The aber­rant pe­riod in his­tory is the hun­dred or so years after the US Civil War, dur­ing which break­throughs in en­ergy, elec­tri­fi­ca­tion, telecom­mu­ni­ca­tions, and trans­porta­tion fun­da­men­tally re­shaped so­ci­eties. Hu­man lives be­came markedly more pro­duc­tive, and life ex­pectan­cies rose dra­mat­i­cally. The global pop­u­la­tion grew over 50 per­cent be­tween 1800 and 1900, and then more than dou­bled over the fol­low­ing 50 years, with economies grow­ing much faster than in pre­vi­ous cen­turies.

By the end of the 1970s, growth be­gan to slow in many of the de­vel­oped West­ern economies, and US Pres­i­dent Ron­ald Rea­gan and Fed­eral Re­serve chair Alan Greenspan ush­ered in a debt cy­cle that su­per­charged ac­tiv­ity. The US, un­til then a net cred­i­tor to the world, be­came a net bor­rower, with China and other emerg­ing mar­kets ben­e­fit­ing from Amer­ica’s ris­ing trade deficit. Fi­nan­cial lever­age drove global growth on­ward for al­most an­other 30 years.

The 2008 global cri­sis brought an abrupt end to the era of fi­nan­cial en­gi­neer­ing. But pol­i­cy­mak­ers don’t like to see growth slow, and cen­tral bankers ex­hausted their tool­kits in an at­tempt to stim­u­late eco­nomic ac­tiv­ity de­spite in­suf­fi­cient de­mand. With less and less yield to be found in tra­di­tional fixed-in­come as­sets, in­vestors piled into risk as­sets of all forms, driv­ing up their price; the rich got richer, and the mid­dle class was left fur­ther be­hind. As growth in the real econ­omy con­tin­ued to stag­nate, an­gry pop­ulism surged, re­sult­ing in Brexit and Pres­i­dent-elect Trump.

For all that cen­tral bankers have done to re­vive eco­nomic growth, the forces of de­mo­graph­ics and in­no­va­tion have worked against them. Ad­vanced economies’ ag­ing pop­u­la­tions are draw­ing more and more on so­cial safety nets. China is also ag­ing. Most of to­day’s (and to­mor­row’s) de­mo­graphic growth is in Africa, where it doesn’t drive global pro­duc­tiv­ity to the ex­tent that it does else­where.

Fur­ther­more, the cur­rent wave of tech­no­log­i­cal in­no­va­tion is not lift­ing all boats. Even as the likes of Uber and Ama­zon, and, more fun­da­men­tally, ro­bot­ics, add con­ve­nience, they do so by dis­plac­ing work­ing-class jobs and/or driv­ing down wages.

This is typ­i­cal of the process of “cre­ative de­struc­tion” that Joseph Schum­peter fa­mously de­scribed as be­ing the hand­maiden of growth in cap­i­tal­ist economies. The first wave of a break­through in­no­va­tion chiefly ben­e­fits a few en­trepreneurs. Then comes a wave of dis­place­ment, as the tech­nol­ogy is adapted to ex­ist­ing in­dus­tries. Three decades ago, it was Wal-Mart us­ing com­put­ers and lo­gis­tics to wipe out small “mom and pop” stores; to­day, it is Ama­zon tak­ing on Wal-Mart.

The third wave is the widespread dif­fu­sion of the in­no­va­tion in ways that lift over­all pro­duc­tiv­ity and liv­ing stan­dards. This takes much longer. Or, as the No­bel lau­re­ate econ­o­mist Robert Solow ob­served in 1987, “You can see the com­puter age ev­ery­where but in the pro­duc­tiv­ity sta­tis­tics.”

North­west­ern Univer­sity’s Robert Gor­don has ar­gued that the eco­nomic im­pact of to­day’s in­no­va­tions doesn’t hold a can­dle to that of plumb­ing or elec­tric­ity. Per­haps, or it may be that we are at an early stage of the Schum­pete­rian cy­cle of in­no­va­tion (en­rich­ing a few) and de­struc­tion (cre­at­ing anx­i­ety in vul­ner­a­ble sec­tors). Even­tu­ally, av­er­age pro­duc­tiv­ity and real in­comes are likely to ben­e­fit as break­through tech­nolo­gies en­able new kinds of growth.

The prob­lem is that it may take a decade or longer be­fore ro­bot­ics and the like feed a broader ris­ing tide that lifts all boats. And whether Schum­peter or Gor­don is right is ir­rel­e­vant for politi­cians fac­ing an­gry vot­ers whose stan­dard of liv­ing has de­clined. To­day, their fed-up con­stituents re­ject glob­al­i­sa­tion; to­mor­row, they may be­come Lud­dites.

The ques­tion now is whether a shift in fo­cus from un­con­ven­tional mon­e­tary poli­cies to Key­ne­sian de­mand man­age­ment can save the day. It is widely as­sumed that mon­e­tary pol­icy is a spent force in the US and Europe, and that fis­cal stim­u­lus and ex­pan­sion – for ex­am­ple, via tax cuts and in­fra­struc­ture spend­ing – must take over. But this re­quires sta­ble po­lit­i­cal sys­tems that can sus­tain long-term fis­cal strate­gies. Re­cent de­vel­op­ments, par­tic­u­larly in Europe, sug­gest that such strate­gies will be dif­fi­cult to im­ple­ment.

In the US, Trump’s vic­tory, cou­pled with Repub­li­can ma­jori­ties in both houses of Congress, paves the way for tax cuts and in­creased de­fense spend­ing. The pump looks set to be primed. But fis­cal ex­pan­sion is likely to meet re­sis­tance from mon­e­tary pol­icy, as the Fed resumes its “nor­mal­i­sa­tion” of in­ter­est rates.

Still, the hope is that faster US growth and ris­ing wages will quell vot­ers’ pop­ulist re­bel­lion. The onus, iron­i­cally, will re­main on the Fed to “do the right thing” – namely, to nor­malise in­ter­est rates with ex­treme cau­tion, while al­low­ing the share of labour in­come in GDP to rise, even if that re­quires some over­shoot­ing of in­fla­tion.

To para­phrase Dy­lan Thomas, we be­liev­ers in mar­kets should not go gently into the pop­ulist night. We should fight against the dy­ing of the light of global cap­i­tal­ism with ev­ery tool we can muster. To­day’s slow­ing growth and po­lit­i­cal back­lash is not some “new nor­mal.” Rather, it harks back to an “old nor­mal,” last ex­pe­ri­enced in the 1930s. What­ever the right way for­ward for the global econ­omy, we know that it can­not mean a re­turn to the iso­la­tion­ism and pro­tec­tion­ism of that era. Alexan­der Fried­man is Chief Ex­ec­u­tive Of­fi­cer of GAM. He has also served as Global Chief In­vest­ment Of­fi­cer of UBS, Chief Fi­nan­cial Of­fi­cer of the Bill & Melinda Gates Foun­da­tion, and a White House fel­low dur­ing the Clin­ton Ad­min­is­tra­tion.

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