Voters sour on traditional economic policy

October 9th, 2016

It is hard to escape the conclusion that the world is seeing a renaissance of populist authoritarianism

October 9, 2016

As the world’s finance ministers and central bank governors came together in Washington last week for their annual global financial convocation, the mood was sombre. The spectre of secular stagnation and inadequate economic growth on the one hand and ascendant populism and global disintegration on the other led to widespread apprehension. Unlike in 2008 when the post-Lehman crisis was a preoccupation or 2011 and 2012 when the possibility of the collapse of the euro system concentrated minds, there was no imminent crisis.

Instead, the pervasive concern was that traditional ideas and leaders were losing their grip and the global economy was entering into unexplored and dangerous territory.

International Monetary Fund growth forecasts released before the meeting were again revised downwards. While recession does not impend in any large region, growth is expected at rates dangerously close to stall speed. Worse is the realisation that the central banks have little fuel left in their tanks.

Recessions come intermittently and unpredictably. Containing them generally requires 5 percentage points of rate cutting. Nowhere in the industrial world do central banks have anything like this kind of room even making allowance for the effects of unconventional policies like quantitative easing. Market expectations suggest that it is unlikely they will gain room for years to come.

After seven years of economic over-optimism there is a growing awareness that challenges are not so much a legacy of the financial crisis as of deep structural changes in the global economy. There is increasing reason to doubt that the industrial world is capable of simultaneously enjoying reasonable interest rates that support savers, financial stability and the current financial system and adequate economic growth at the same time. Saving has become overabundant, new investment insufficient and stagnation secular rather than transient.

It can hardly come as a great surprise that when economic growth falls short year after year and when its beneficiaries are a small subset of the population, electorates turn surly. They lose confidence in traditional policy approaches and their advocates.

Looking back at the political traumas of 1968 when there were people in the streets in many countries, it is clear that there was something going on beyond specific issues like Vietnam in the US.

In the same way as with Brexit, the rise of Donald Trump and Bernie Sanders, the strength of rightwing nationalists in many European countries, Vladimir Putin’s strength in Russia and the return of Mao worship in China, it is hard to escape the conclusion that the world is seeing a renaissance of populist authoritarianism.

These developments are mutually reinforcing. Weak economics promotes angry politics which raises uncertainty leading to even weaker economics. And so the cycle starts again. People have lost confidence both in the competence of economic leaders and in their commitment to serving the wider public rather than the global elite.

A number of traditional economic leaders in the public and private sector seemed to be making their way through the traditional grief cycle — starting with denial, moving to rage, then to bargaining and ultimately to acceptance of new realities.

It is untenable to ignore public sentiment. Nor, as 60 years of experience with populist policy cycles in Latin America demonstrates, is economic nationalism a viable strategy. Rather the challenge is to find a path forward in which international co-operation is supported and enhanced. This should focus on the concerns of a broad middle class rather than of global elites.

Concretely, this means rejecting austerity economics in favour of investment economics. At a time when markets are pointing to the problem over the next generation as being inadequate rather than excessive inflation, central bankers need to spur demand and co-operate with governments.

Enhancing infrastructure investment in the public and private sector should be a fiscal policy priority.

And the focus of international economic co-operation more generally needs to shift from opportunities for capital to better outcomes for labour. The achievement of this objective will require substantially enhanced co-
operation with respect to what might be thought of the as the dark side of capital mobility — money laundering, regulatory arbitrage, and tax avoidance and evasion.

These are a few ideas. The general point should be clear. Few things will be as important for the success of the next president as the restoration of confidence in the global economy.