By William Reinsch
On May 8, the ever-resourceful Robert Samuelson produced another thoughtful column for the Washington Post. This one discussed an article by Ruchir Sharma of Morgan Stanley in the current issue of Foreign Affairs. In it, Sharma concludes that the conventional economic tools employed after the Great Recession — deficit spending, low interest rates, and other stimulus policies — have not worked as expected and that we should not expect that to change immediately.
Instead, he argues that countries are caught in the trap of “depopulation, deleveraging, and deglobalization” — the ‘Three Ds.’ Global population growth is slowing and in some developed countries actually declining — something I’ve talked about before — so the increase in demand brought about by so many new people in the post-World War II era as well as the rapidly growing supply of workers are slowing down. Banks are more careful in their lending, a consequence of both their 2008 experience and the tighter regulations that followed in many countries. Finally, the increase in global trade is also slowing down.
These are not immutable developments, although the first — depopulation — is difficult to change in the short-term. The other two — deleveraging and deglobalization — are the results of decisions individuals and companies make to lend less and trade less, and actions governments take to make both those things more difficult.
This leads to a chicken-egg argument: Is the slow economic growth the developed world is experiencing causing political instability, or is political instability causing the slow growth?
The correct answer is probably both — that they feed on each other. We have had political turbulence for centuries, and the arrival of the 21st century has not changed that, but isolated turbulence has never by itself prevented growth of lending and trading in the parts of the world that are not plagued with instability and violence, although globalization links us all together in more ways than a century ago. Even so, I am more optimistic than Sharma that we can overcome slow growth if governments pursue policies that restore some certainty to the economy.
The new plague, however, seems to be internal turbulence. In the United States, as I wrote last week, we seem to be on Mr. Toad’s Wild Ride. In the U.K., Brexit and the snap election have left everyone confused and uncertain about the future. France just took a step toward stability in its recent election, but it has a long way to go to restore an acceptable level of growth. Germany is on hold until after its election in the fall. Brazil is mired in corruption scandals. And I could go on. In many of these countries populist movements of the right or the left or both erode the center, poison the political atmosphere, make compromise impossible, and encourage investors and companies to postpone decisions until the situation clarifies. Polling suggests the roots of this anomie lie as much in feelings of disrespect, disempowerment, and perceived cultural threats as they do in economics, something I will discuss in greater detail at another time. That means an attitude adjustment as well as an economic policy adjustment is in order.
So, instead of the ‘Three Ds,’ I suggest the ‘Three Ns’:
- The need to restore confidence through certainty and policy consistency.
- The need to understand and accept that although we can do better than we are doing right now, the era of rapid growth in developed countries may is over.
- The need to adjust our expectations accordingly because they lead us into trouble.
We are a mature slow-growth economy; 3% annual GDP growth would be a significant accomplishment. And, by the way, with 96% of the world’s consumers outside our borders, trade will have to be a more important part of that growth than ever. That means we need an administration that provides clear and consistent policy leadership and does not make unrealistic promises about what it will accomplish. It also means we need a population that understands and accepts the limitations of our growth trajectory and does not have unrealistic expectations.
There is an old joke about when the Shah of Iran was becoming increasingly unpopular in his country his advisors told him he should try to rule more like the king of Norway. The Shah’s response was that would be a lot easier if his subjects were Norwegians rather than Iranians. We don’t benefit from a government that veers all over the map in its policy pronouncements and unrealistic promises, but neither do we benefit from a population that believes those promises and expects to return to a ‘Golden Age’ that exists only in their minds.
William Reinsch is a Distinguished Fellow with the Stimson Center, where he works principally with the Center’s Trade21 initiative.