Michael Spence
Michael Spence, a Nobel laureate in
economics, is Professor of Economics at NYU’s Stern School of Business,
Distinguished Visiting Fellow at the Council on Foreign Relations,
Senior Fellow at the Hoover Institution at Stanford University, Academic
Board Chairman of the Asia Global Institute in Hong … read more
MILAN
– Successful economic globalization requires reasonably successful
growth patterns in individual countries. That dynamic characterized the
30 years or so after World War II: growth rates were relatively high
across a wide range of countries; their benefits were broadly shared
within countries; and the rise of developing countries reduced global
inequality. This period was arguably the heyday of globalization.
Of course,
globalization continued through the 1970s and beyond. But the underlying
growth patterns changed. Driven by the labor arbitrage embedded in
economic globalization and the rise of disruptive digital technologies,
advanced economies’ middle-class manufacturing jobs disappeared, their
median incomes stagnated, and job and income polarization grew, even as
GDP growth remained strong. This new pattern – which persisted through
the 1980s and 1990s, and accelerated after 2000 – caused inequality to
rise sharply, weakening the foundations of globalization.
Countries’ responses
have varied widely. Some have taken steps to reduce inequality, such as
redistribution through the tax system, social security and education
systems, various kinds of social protection, and support for effective
retraining. The potency of such efforts tends to be shaped by cultural
norms, the institutional bargaining power of labor, the level of trust
between labor and business, and the influence of individual and
corporate wealth on politics.
In countries with
weaker mitigating forces – particularly the United States and the United
Kingdom – disparities of income, wealth, and opportunity became the
most extreme. The lack of any substantial policy response, together with
the apparent lack of concern from those whose economic bargaining power
had increased, incited deep anger among those most affected.
Beyond the
distributional issues that many countries face, Japan, parts of Europe,
and some developing countries are confronting weak growth and
persistently high unemployment. In Europe’s case, these problems are
rooted in a system with few escape valves and adjustment mechanisms.
But the fact remains
that persistent non-inclusive growth has lately been transforming
economies. In such situations, the circuit breaker is political, and
often dramatic. Outside of developed democracies, persistent lapses in
inclusiveness are nearly always devastating for long-term growth and
development, and often lead to violence and civil strife – a tendency
that the Growth Report of the Commission on Growth and Development highlighted several years ago.
In functioning
democracies, the political drama usually remains confined to elections
and referenda – such as the British vote to leave the European Union and
the US presidential election, won by the populist outsider Donald
Trump. Disaffected voters reject the systems that produced the
deficiencies. This is a normal and healthy response. And, absent a
tectonic shift in growth dynamics and policies, we may well see more of
it in the next few years in Europe – specifically, in France, Italy, and
Germany.
It may be too late to
persuade voters not to reject the existing systems, but there is still
time to build effective alternatives. The potential upside to the
tremendous uncertainty that many around the world feel is that we
essentially are confronted with a clean slate. With previous
presumptions, biases, and taboos having been erased, it may be possible
to create something better.
Consider the US. New
growth patterns and policies could take many directions, including the
rejection of multilateralism, in favor of bilateralism or protectionism;
immigration-policy shifts; expanded public investment and fiscal
stimulus; regulatory changes; tax reform; or supply-side measures in
education, training, and health care. There are risks and potential
benefits in all of these areas, and the results will depend on the
entire policy package.
While the potential
combinations remain bewildering at this stage, a few things are clear.
First, when it comes to investment, consumer spending, and employment
growth, expectations and confidence matter. Hints that more robust and
balanced policy responses are coming have had a noticeably positive
effect, though it may be transitory, depending on implementation. The
uptick in expectations is reflected in financial markets, though many,
including me, believe that current asset valuations are too optimistic.
Second, it seems
likely that nominal growth in the US will rise, though the underlying
mix of inflation and real growth is yet to be determined. This matters,
because it will shape the US Federal Reserve’s response, affecting asset
prices in America and beyond.
One possibility is
that expanded public and private investment begins to reverse the
downward productivity trend, thereby generating real growth. But the
return of gridlock in Congress could short-circuit this trend and put a
damper on expectations, while growth-constraining secular trends like
demographics are not just going to disappear.
A third feature of
America’s new growth pattern is likely to be added pressure on large
companies to maintain their reputations within the US. Even before his
inauguration, Trump was trying to influence companies’ choices about
manufacturing locations, including by threatening import tariffs on
products manufactured in, say, Mexico. While Trump has made deals to
keep some jobs in the US, such as the agreement with Carrier, his more
powerful tactic has been to threaten companies’ brand image, including
via Twitter.
Some characterize
Trump’s efforts – and his Twitter forays, in particular – as more style
than substance, unlikely to have any longer-term quantitative impact.
They may be right. But, in my view, Trump seems to be sending a deeper
message about corporate decision-making. Despite Trump’s own business
record – which, his opponents will point out, includes multiple
bankruptcies and non-payment of contractors and their workers – it’s
possible that he is now trying to change a business and investment
culture that elevates the interests of capital, corporations, and
shareholders, and treats labor as expendable.
The fourth trend we
can count on is the continued march of digital technology. That,
however, is where the certainty ends: the Trump administration has so
far offered few, if any, signals about how it will approach the issue of
supporting adaptation by the workforce.
In the next few
months, we will learn more about whether the recent uptick in economic
optimism is robust; whether Trump’s efforts to fight offshoring and
boost growth and employment have a long-term impact; and whether
protectionism prevails. Only then can we determine whether Trump really
was the right economic choice for America’s disaffected workers.
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