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, globalization, 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 do not 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 does not 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 globalization; 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 ‘normalization’ 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 normalize interest rates with extreme caution, while allowing the share of labor 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.
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.