Today's Top 5 is a guest post from Jeremy Couchman, senior economist at Kiwibank.
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The root cause of most of the economic and financial risks we face today is populism. From Brexit in the UK, to the man occupying the most powerful office on the planet, populism has created seismic shifts in our international rule based system (see our 2019 outlook note for details of these risks). But where has this political force come from? It turns out many of the driving forces of populism have been bubbling away for years.
Source: Bridgewater Daily Observations
The seismic shifts to the global order, such as Brexit and rise of seemingly fringe political parties into the mainstream, stem from the pull of populist politics.
The populist narrative provides a convincing, if not false, story to those in developed nations that have seen their incomes stagnate while at the same time watched those at the top of the tree (the ‘elites’) get a massive QE induced injection in wealth.
The rise in populism has weakened many western governments, enabling China, Russia and other nations to take a bigger role on the global stage – in direct challenge to our rules-based system.
Populism is not tied to any one side of the political spectrum - tending towards the extremes of both the left and right. What is common among populists though, is their anti-establishment rhetoric, and their supposed representation of the ‘common’ people. On the left, the narrative is built along social divides – i.e. super rich vs. the poor. On the right, the narrative is built along cultural divides, wrongly blaming minorities such as immigrants for the cause of society’s ills.
“Across Europe parties of the far left and the far right are seeking to exploit this opportunity — gathering support by feeding off an underlying and keenly felt sense among some people — often those on modest to low incomes living in relatively rich countries around the West — that these forces are not working for them… Those parties embrace the politics of division and despair and the sense among the public that mainstream political and business leaders have failed to comprehend their legitimate concerns for too long.” - Theresa May, British PM.
What is clear is that populism is not the answer to society’s problems. Yes, there are legitimate grievances caused by liberal economic policies – such as multinational corporate tax evasion, and rising inequality. But history offers us a bleak outcome when populism is allowed to run riot – WW2. Below we list the top five drivers that have given rise to the current brands of populism.
1) Globalisation – ‘Cause we are living in a material world.
In the post-war period (that’s post WW2) we in the west have only known globalisation as the true path to prosperity – after all it did win over communism.
Breaking down barriers to trade, capital flow and movement of labour across borders. We now have a much more open and interconnected world, and with it has come significant benefits. It has expanded opportunities for exporters, boosting growth, productivity and wealth.
The incidence of armed conflict has been lessened, because if you own a factory in a neighbouring country you would hardly want your own Government to bomb your neighbour. In addition, millions – largely in the developing world – have been lifted out of poverty as they have become integrated into a truly global supply chain.
But for all its positives, there have been losers of globalisation, often forgotten or largely dismissed.
Simple economic models of trade tell us that if you become more open to trade, the owners of the factor of production used most heavily in imported goods are made worse off.
In developed economies this factor has been labour, and the owners are workers. In the US the term “the hollowed-out middle” is used to describe the loss of many skilled blue-collar jobs that have been replaced by the developing world to produce the vast number of cheaper consumer products.
2) Technology –The Robots are taking over.
Globalisation and the seemingly “unfair” trade it has created (according to US President Trump) is often the focus of populists.
But an arguably bigger generator of the yawning gap between the haves and have nots is the rapid change in technology. It is believed that most of the decline in manufacturing jobs in the US since the start of the century has been due to automation, rather than the liberalisation of trade (or China).
Technological change, via automation and artificial intelligence will continue to disrupt. However, this disruption won’t be isolated to low skilled blue-collar jobs. Increasingly at risk are many white-collar service sector jobs. Jobs involving repetitive tasks, often a law clerk is cited, are low hanging fruit ripe for disruption.
But before we start crying Armageddon for the working class, there is likely to be a whole host of jobs created out of technological change that we can’t even begin to imagine. The quality of our education system is key here to help society to adapt to these changes.
3) The GFC – It came on like a sandstorm.
The effects of the GFC of over a decade ago hit hard across the developed world. And these effects still linger.
While unemployment rates have fallen substantially, a feature of developed economies since the GFC has been depressingly weak income growth. This has aggravated the despair felt by many simply trying to get ahead. Meanwhile, quantitative easing (QE), central banks’ process of buying up bonds to fight the fallout of the crisis, helped to drive up the prices of equities, bonds, and even real estate.
As a result, the owners of assets benefited at the expense of others. And many have been priced out of the aspiration to own a home.
4) The decline of labour's bargaining power – We can work it out.
A clear trend in the developed world over the last 30-40 years has been the decline in the bargaining power of labour. Labour union membership has dwindled across many industries. At the same time labours’ share of income has fallen. Here in NZ, labour’s share of GDP fell following the economic reforms of the 1980s and 90s. The share has been largely unmoved since the early 2000s.
Also adding to the lack of bargaining power is the credible threat posed by some employers. Firms have the choice to outsource many aspects of their operations. If labour costs rise too quickly, outsourcing begins to look attractive.
5) Rising inequality – It’s hard to imagine.
Inequality is an inescapable feature of our world, in part because talent and ability are not spread around the population in equal measure. Although as Kiwis we pride ourselves on our egalitarian society, inequality in NZ is high by international standards (see chart below).
A degree of inequality is accepted by society so long as there is a sense of fairness, of social mobility, that if you work hard you can get ahead – a type of implicit social contract if you like.
However, global inequality is increasing, meaning the wedge between the haves and have nots is widening.
People are rightly questioning this social contract.
The problem is the perception that those of privilege stay privileged because they have undue influence over things, but not necessarily the talent.
In essence: ‘the system is rigged’. And if you needed an example, the case of wealthy celebs bribing their children’s way into top US universities seems a cruel joke. Added to the sense of unfairness is the prevalence of multinational corporate tax avoidance. The owners of mobile capital benefit from corporates being able to keep large chunks of their profits at arm’s length of the tax man.