‘FOR every complex problem, there is an answer that is clear, simple and wrong.’ The western world undoubtedly confronts complex problems, notably, the dissatisfaction of so many citizens. Equally, aspirants to power such as Donald Trump in the US and Marine Le Pen in France, offer clear, simple and wrong solutions — notably, nationalism, nativism and protectionism.
The remedies they offer are bogus. But the illnesses are real. If governing elites continue to fail to offer convincing cures, they might soon be swept away and, with them, the effort to marry democratic self-government with an open and cooperative world order.
What is the explanation for this backlash? A large part of the answer must be economic. Rising prosperity is a good in itself. But it also creates the possibility of positive-sum politics.This underpins democracy because it is then feasible for everybody to become better off at the same time. Rising prosperity reconciles people to economic and social disruption. Its absence foments rage.
The McKinsey Global Institute sheds powerful light on what has been happening in a report entitled, tellingly, Poorer than their Parents?, which demonstrates how many households have been suffering from stagnant or falling real incomes. On average between 65 and 70pc of households in 25 high-income economies experienced this between 2005 and 2014. In the period between 1993 and 2005, however, only 2pc of households suffered stagnant or declining real incomes. This applies to market income. Because of fiscal redistribution, the proportion suffering from stagnant real disposable incomes was between 20 and 25pc.
Focus on international cooperation where it will help governments achieve significant domestic objectives
McKinsey has examined personal satisfaction through a survey of 6,000 French, British and Americans. The consultants found that satisfaction depended more on whether people were advancing relative to others like them in the past than whether they were improving relative to those better off than themselves today. Thus people preferred becoming better off, even if they were not catching up with contemporaries better off still.
Stagnant incomes bother people more than rising inequality. The main explanation for the prolonged stagnation in real incomes is the financial crises and subsequent weak recovery. These experiences have destroyed popular confidence in the competence and probity of business, administrative and political elites. But other shifts have also been adverse. Among these are ageing (particularly important in Italy) and declining shares of wages in national income (particularly important in the US, UK and Netherlands).
Real income stagnation over a far longer period than any since the second world war is a fundamental political fact. But it cannot be the only driver of discontent. For many of those in the middle of the income distribution, cultural changes also appear threatening. So, too, does immigration — globalisation made flesh. Citizenship of their nations is the most valuable asset owned by most people in wealthy countries. They will resent sharing this with outsiders. Britain’s vote to leave the EU was a warning.
So what is to be done? If Mr Trump were to become president of the US, it might already be too late. But suppose that this does not happen or, if it does, that the result is not as dire as I fear. What then might be done?
First, understand that we depend on one another for our prosperity. It is essential to balance assertions of sovereignty with the requirements of global cooperation. Global governance, while essential, must be oriented towards doing things countries cannot do for themselves. It must focus on providing the essential global public goods. Today this means climate change is a higher priority than further opening of world trade or capital flows.
Second, reform capitalism. The role of finance is excessive. The stability of the financial system has improved. But it remains riddled with perverse incentives. The interests of shareholders are given excessive weight over those of other stakeholders in corporations.
Third, focus on international cooperation where it will help governments achieve significant domestic objectives. Perhaps the most important is taxation. Wealth owners, who depend on the security created by legitimate democracies, should not escape taxation.
Fourth, accelerate economic growth and improve opportunities. Part of the answer is stronger support for aggregate demand, particularly in the eurozone. But it is also essential to promote investment and innovation. It may be impossible to transform economic prospects. But higher minimum wages and generous tax credits for working people are effective tools for raising incomes at the bottom of the distribution.
Fifth, fight the quacks. It is impossible to resist pressure to control flows of unskilled workers into advanced economies. But this will not transform wages. Equally, protection against imports is costly and will also fail to raise the share of manufacturing in employment significantly. True, that share is far higher in Germany than in the US or UK. But Germany runs a huge trade surplus and has a strong comparative advantage in manufactures. This is not a generalisable state of affairs.
Above all, recognise the challenge. Prolonged stagnation, cultural upheavals and policy failures are combining to shake the balance between democratic legitimacy and global order. The candidacy of Mr Trump is a result. Those who reject the chauvinist response must come forward with imaginative and ambitious ideas aimed at re-establishing that balance. It is not going to be easy. But failure must not be accepted. Our civilisation itself is at stake.
Published in Dawn, Business & Finance weekly, July 25th, 2016
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