Populist elements are throwing out the old guard and imposing drastic change in the West. Brexit, Trump, the Italian referendum, and upcoming French and German elections – the election fallout reflects passionate disbelief in a globalized world and is bringing heightened awareness to the world’s low productivity problem.
Productivity adds to what was. Measures of productivity attempt to quantify excess value gained from value spent. In a perfect world, the most meaningful measures would delineate pure wealth creation compared to value derived from non-productive endeavors such as inflation of assets with increases in the money supply, stimulating bad investment through excessive debt, or transfers of wealth through rent-seeking activities. Unfortunately, measuring productivity has its limitations. Even so, many productivity measures have shown that wealth creation and global productivity has slowed since a post-World War II peak in the 1970s.
That’s not to say that there haven’t been good times – the early 2000s, for example. And within the longer downtrend, there have been some amazing upswings in the developing world, like those of China, India, Brazil, Mexico, Indonesia, and Turkey. But over recent years, even these upstarts have stalled.
The realization that productivity is off is not new. Most economists and policy-makers admit that productivity has faltered. Less agree that it is a contributing factor for the dangerous economic inequality witnessed worldwide. And fewer still, give it credit for the recent rise in populism.
Clearly, the causes of (and consequently, the remedies for) lower productivity are divisive, uncertain, and politically charged – lack of investment, changing demographics, systemic friction, education standards, lackluster research spending, services-dominated economy – the list goes on.
The troublesome state of affairs, and its enduring tenacity, has led to the belief in a lack of appreciation for the troubles of a growing and discontented mass. The appearance of only token recognition has inflamed the populists and seems a critical reason for their growing support. The incredulity of the elite’s response to the recent elections only fuels the populists’ argument of a privileged disconnectedness.
Unfortunately, the story doesn’t end there. Decreasing productivity has been financed with greater levels of debt – again at record levels. The debt’s persistence has come from fear that aggregate demand will weaken, and without it, unused capacity will surge, worsening economic woes.
Debt was large before the financial crisis and many wrongly believe that it has since been reduced. Incredibly, debt-to-GDP ratios continue to outpace new wealth creation. Many worry that the debt will reach some unknown tipping point, beyond the central banks’ control and result in a very ugly reckoning.
History reveals that debt mounted along with slowing of productivity and inequality rising. History also reveals that world has seen this setup before – typically occurring every four or five generations. And in each instance, once an extreme was reached, the economic order was significantly overhauled. Perhaps globalization has indeed reached its prime.
There are many cross-currents in today’s global economy. Expectations of higher interest rates and a rising dollar should lead to cheaper imports and more trade – arguing against globalization’s fall. But more cheap imports would probably lead to further populist upheaval.
Possibly, it’s time for the dollar to lose its dominance. For Americans, the thought is shocking and a cause unimaginable. Yet, there is a certain resonance with the story-line of less globalization. If this narrative plays out, the dollar could fall precipitously, forcing interest rates suddenly higher from the attempts to stem a dollar’s dangerous decline. Inflation, debt, and growth could then become even more tricky.
From the last recession to now (eight years), the U.S. has seen one of the longest stretches without a pullback in its economic history. A recession on the horizon is becoming ever more probable. Political divisiveness, regulatory obsession, and the world’s uneasy status – all are expected to carry on, with productivity remaining below potential.
Presently, central bank critics doubt whether lingering accommodating monetary policies have further value. And while calls for greater fiscal spending are growing louder, efforts to do so will likely be contained, affected by high debt levels, reluctance to increase deficits and taxes, and mistrust of policy-makers.
For now, it’s easy to appreciate the former Fed chair Alan Greenspan’s concerns on possibilities of coming stagflation and intensified global disorder. It’s rather difficult to foresee how either the populists or the globalists will ultimately get their ways.
Christopher Petitt – financial executive, board advisor, and business consultant – is the author of the book, The Crucible of Global War: And the Sequence that is Leading Back to It. It is available for sale at Amazon.com, Barnesandnoble.com and at bookstores everywhere.