Illustrations by Dan Woodger
A new normal
Forget everything you know about how the world works. This is the global economy, 3.0.
Most of the world’s leading economists reckon we are – probably – heading towards a future of slow, but steady growth. Great news, right? We survived the Great Recession. Back to normal. Phew!
Well, sort of. The bad news is that those same economists are pretty glum about that future. Not in a we-don’t-like-uncertainty, what-will-Brexit-and-populism-lead-to sort of way. Because, really, that would be understandable. More in a there-are-fundamental-problems-that-are-hard-to-fix kind of way. In a future-economists-are-going-to-struggle kind of way.
Take Adair Turner (Caius 1974), now at the Institute for New Economic Thinking, formerly of the UK Financial Services Authority and the International Financial Stability Board’s major policy committee: “The world economy does seem to be going through a bit of a recovery,” he says. “But the fundamental problems are still there, and they’re quite profound.” Profound you say? We wanted to know more.
Problem number one: globalisation
You may have got used to hearing politicians say that globalisation (the free movement of capital, goods and people) is a problem. But from some economists’ perspectives, it’s far from that alone – it just makes for an obvious target, as Dr Meredith Crowley, Lecturer in the Faculty of Economics and former senior economist at the Federal Reserve Bank of Chicago, explains: “Globalisation – for example, rising imports from China – bring a lot of benefits, especially to low-income people in high-income countries, because those imports are really cheap. It means the prices of consumer goods are falling, which means budgets can be stretched further,” she says.
“But at the same time as imports are pushing prices down, wage growth for that lower-income group has been very, very slow. Flat. For those at the very bottom it may even have been negative. Maybe both parents are working, all the time, but neither of the jobs is very good. Or where there’s only one wage-earner, and they lose their job, then that family is going to have a terrible struggle.”
But isn’t globalisation the reason why wages are flat? And haven’t the jobs all gone to China? According to Dr Crowley, this is only part of the picture. “I think the reason so many jobs have been lost is primarily due to automation – that’s the fundamental driver. But at the same time, the reason why firms in high-income countries want to pursue automation is because they are under competitive pressure from foreign imports. So while, in the long run, most economists would say the driver is technology, the two are self-reinforcing.”
Problem number two: automation
Which brings us to profound problem number two. Automation and new technologies are transforming our world – and creating great value. In theory, if robots take your job, the overall increase in productivity should result in your being able to get a better job – or, in wider terms, it should result in greater employment opportunities and rising incomes.
Indeed, says Todd Buchholz (St John’s 1986), US economist and George HW Bush’s White House director of economic policy, you just need to look at the New York Stock Exchange. “When I’m in New York, I often go down to the Exchange to do interviews. And it’s basically just a TV set – there aren’t any traders on the floor. They’ve been replaced by algorithms.”
Noreena Hertz (King’s 1992), author and ITV News’s Economics Editor, reckons traders won’t be the only ones. “I’m of the view that there are going to be very severe job dislocations and that technological disruption will create clear winners and losers,” she says. “The owners of machines will do well. Those who have been replaced by them, won’t. Which raises the question: will everyone ultimately lose out in the long term, including the owners of capital? Because there will be fewer people with money to spend.”
Indeed, it is the inequity that many economists find the most alarming. Dr Ha-Joon Chang, author of 23 Things They Don’t Tell You About Capitalism and Reader at the Faculty of Economics, says that this is what makes 21st-century automation different. “In the 1950s, ’60s and ’70s relentless automation resulted in many workers finding new and better jobs, because the economy was expanding. Workers’ rights were strengthened, and they took a substantial part of the gain,” he says. “So the problem is not automation itself, it’s the social economic arrangement: labour rights, the increasingly uncontrolled power of corporations and the increased financialisation of the economy.”
But even if you believe that, eventually, automation will bring benefits to workers, there remains a big question about how long that might take. “If you look at industrialisation in the first 40 years of the 19th century, almost all the benefits of rising productivity went to the capitalist class and particular categories of skilled labour,” says Adair Turner. “Eventually, in the late 19th century, it swings around – so in the very, very long term, real wages rise with productivity, but that might not take a decade, it might take a century.”
Leading to problem three: fewer good jobs
According to Dr Crowley, the biggest concern of policymakers across the world in 2017 is securing high-quality employment for their citizens. “Whether you are from a high-income, middle-income or low income country, it seems like everywhere you go in the world the concern is about jobs. People want good jobs – the chance to enhance their own life and wellbeing and, for the most part, not through a handout but through a job. They want to be able to contribute,” she says. “The really difficult question is: ‘What can we do to improve that?’”
For Buchholz, the answer is simple: education and training. “If you ask me what is the most important long-term economic challenge, it’s not interest rates or tariffs – it’s education. We’re in a global race for IQ points, and whoever harnesses intelligence will prosper most,” he says. “We need to recognise that the era of the long career at the single firm with a gold watch upon retirement doesn’t exist anymore. People will need to be more entrepreneurial and look after themselves, and we need to equip people for that world.”
But the future is unpredictable. The skills needed now may not be those most valued tomorrow. Worse, the real issue is not with the young, but with the old. “We know from the research that educating the under-fives has a major, and lifelong, economic impact,” says Dr Crowley. “But as people age, it becomes harder and harder to get value out of training and education. It’s really hard to come up with a programme that retrains 40 and 50-year-olds in a way that makes them really successful.”
That’s not the only problem. Even if you can train people in the ‘right’ skills, it may not help. “However skilled people may be, not everyone can earn their living writing software because there is only so much software that needs writing,” says Turner. “And while it is true that new jobs will be created – shining people’s shoes, looking after elderly people, gardening, serving at people’s parties, because there is no limit to what you can find people to do – those jobs may be at wages so low that the people who do them no longer feel they are equal participants in society. That means we cannot necessarily rely on participation in a free labour market to give people a standard of living that enables them to be equal and contented citizens.”
And that can lead to the kind of political unrest that could become really serious. “A regime of low investment, low growth and low quality of employment has been built into the system, resulting in the growth of income inequality, which in turn results in less demand and further discourages investment,” says Dr Chang. “This is a recipe for increasing social conflict, right?”
Problem number four: low growth
The usual solution to all of this would be to boost growth (low growth also being the cause of the problem). But as Dr Jeremy Green, Lecturer in International Political Economy, explains, growth is in short supply.
“Economist Larry Summers calls this the ‘secular stagnation thesis’ – the idea that there is a long-term decline in demand because of aging populations, technology companies like Apple and Whatsapp that don’t need to invest as much to generate profits, and the automation of the workforce,” says Dr Green. “And then you have someone like Robert Gordon who argues that the new sectors of the economy simply don’t generate productivity on the same levels as new industries did in the 19th and 20th centuries, again resulting in the long-term slowing of growth.”
In this model, income inequality and low investment are both causes and results of low growth and, for Dr Chang, that means the answer is to take a strong line across the board. “If I could implement any change I wanted, I would be arguing for some serious downward redistribution of income rather than the upwards redistribution we have seen in the past three decades.
“I’d want serious restraint put on the financial sector so that they would not be able to impose a short-term bias on the economy. I would abolish tax havens, with the income brought back home to fuel the national economy.
“And I would say, yes, there has to be more focused industrial policy if we are going to create decent jobs and not just these fake self-employed jobs that put people on the breadline. There are obvious things that can be done and have good backing of economic theories. But unfortunately few of these are likely to be done in the current political arrangement.”
However, Mervyn King (King’s 1966), former governor of the Bank of England, reckons that the solution lies at the international, rather than the national, level. “Monetary or fiscal policy is not the answer – we just end up returning to the pattern of spending in 2006 [just before the Great Recession]. Total debt is now higher than 2007 and we need to recognise that,” he says.
“Instead we need an array of incentives, changes to exchange rates and structural reforms to enable a rebalancing of global economies. Germany and China need to invest less in export sectors, and the UK and US need to invest less to support domestic spending.
“That’s difficult as no one wants to be the first mover. The International Monetary Fund needs to play a bigger role and bring countries together, but it gives no confidence it will. I don’t have confidence that the necessary changes will happen.”
Dr Chang and King may be sceptical about the political will required to implement change, but at least they think the problem can be fixed. Many economists believe that the most honest response to the current economic situation – low growth notwithstanding – is to accept that economics may not have an answer.
“We’re dealing with a situation in which the dominant thinking is lagging behind changes in the actual economy,” says Dr Green. “It’s a little bit like the 1920s – policymakers were so wedded to the idea of the Gold Standard that they tried to resuscitate that system, with very destabilising effects. That approach lasted until the 1930s, and the breakdown of the whole liberal economic order.”
So, there you have it. We may have turned a corner but there’s an awful lot waiting for us there.
Article by Alex Marshall. This article first appeared in CAM - the Cambridge Alumni Magazine, issue 81.