Capitalism: East or West? (4)
Canada is proof western capitalism needs to have built-in safeguards. Does it surprise anyone that Canada was largely unscathed by the most recent global financial crisis despite its close connections with the United States? It was not just good fortune. Martin (2020) points to certain features in the Canadian financial system to show why. For instance, there is a required decennial review provision in Canada’s financial regulatory regime.
“Regardless of the situation, regardless of the political context, [Canada’s Bank Act] was to be formally reviewed every ten years (Martin, 2020).” Now shortened to every five years, the periodic review “enabled Canada’s regulators to balance continuity with change, tweaking regularly so that the system never becomes unbalanced (Martin, 2020).”
There were other factors; like not allowing the big banks to merge, a more proactive informal non-punitive ex ante regulatory style, and so on. But the part about the review is more pertinent to our exposition as it is evidence that capitalism when left to its whims and caprices births an American and global financial crisis and when safeguarded like in the Canadian case, achieves better and sustainable outcomes.
That said, it might actually be erroneous to say America is in bad shape. Put another way, if the American economy seems sluggish or less vibrant, it could be argued to be the consequence and evidence of its success. That is the argument pushed by Dietrich Vollrath, economics professor at the University of Houston in his 2020 book “Fully grown: Why a stagnant economy is a sign of success”. “Slow growth, it turns out, is the optimal response to massive economic success (Vollrath, 2020).”
According to Vollrath (2020), “starting around the early 2000s, the growth rate of real GDP in the United States dropped compared to the historical norm of around 2.25% per year, and now is somewhere around 1.0% per year (Vollrath, 2020).” Does that mean America is falling behind? Vollrath (2020) does not think so. Instead, he believes “compared to other developed economies, the growth slowdown in the United States is not extraordinary (Vollrath, 2020).”
According to Vollrath (2020), even though “China’s real GDP per capita grew very, very quickly compared to that of the United States in the past twenty years… [it] is not an indication that the US fell behind in the level of living standards.” In fact, Vollrath (2020) believes “even if China manages to retain its high growth rate, it will still be another twenty-five years before real GDP per capita catches up to the US level.”
And he is doubtful that China would be able to sustain such high growth rates for long. In any case, an investigation into what underpins the prevailing US growth slowdown allows us garner insights into the potential pitfalls of Western capitalism to avoid. For instance, Vollrath (2020) finds that “the single most important explanation for the [American] growth slowdown was the decline in the growth rate of human capital per person.”
From a growth rate of 0.96% in the twentieth century, America’s human capital per capita has declined to -0.15% in the twenty-first century (Vollrath, 2020). “The fall in fertility rates during the twentieth century can explain much of that slower human capital growth”, Vollrath (2020) finds. And he argues this in itself is due to American success.
Because as wages rose, Americans chose to marry later and have fewer children (Vollrath, 2020). Also, labour-saving household technologies “made remaining single a more attractive situation – for both men and women – and contributed to the delay in the age of marriage and a reduction in the marriage rate overall (Vollrath, 2020).” And having chosen to marry later, there was also a reduced amount of time to have and care for children. The resultant effect was slower population growth and by extension, reduced human capital.
Vollrath (2020) also suggests another reason for the American growth slowdown: “innovations are getting harder to find.” Another potential explanation, albeit tenuous, is the increased concentration of firms and the observed consequent reduction in net investment. This would be “consistent with the basic theory that firms with market power restrict output in favour of keeping their prices above costs (Vollrath, 2020).”
It is also tempting to suggest that China’s rise underpins the American slowdown. Still, this is not totally baseless. There is evidence of significant American manufacturing unemployment owing to Chinese competition. But as Vollrath (2020) asserts, that in itself was not significant enough a factor in the American growth slowdown. “The growth slowdown would have happened even if China had never become a major exporter, as the US was already in the middle of a long-run shift away from goods production toward services production (Vollrath, 2020).” Yes, “China accelerated this in a small way but was not responsible for it (Vollrath, 2020).”
What really underpins the American growth slowdown are “the drop in family size and population aging…[which] lowered the growth rate by about 0.80 percentage points all by itself,…the shift from goods to services [which] took off another 0.20 percentage points, at least…[and when put together, both]…account for the three-quarters of the drop in the [American economic] growth rate (Vollrath, 2020).”
‘ Capitalism when left to its whims and caprices births an American and global financial crisis and when safeguarded like in the Canadian case, achieves better and sustainable outcomes
“Dr Raji is chief economist at Macroafricaintel. He was previously an Africa Economist at Standard Chartered Bank, London, UK. (Twitter: @ DRRAFIQRAJI)”