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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