Something incredible happened in October when I represented Canada’s youth at the annual World Bank/International Monetary Fund meeting in Washington.
The heads of the World Trade Organization, the World Bank and the International Monetary Fund, sharing a stage for the first time in history, openly conceded that the future of globalization and freer trade was “precarious.” The intellectual victory of neoliberalism was no longer inevitable; instead, it was under existential siege by the forces of nativism, nationalism and protectionism. Like schoolchildren at Hogwarts, they refused to utter the name “Trump,” as if he were He Who Must Not Be Named. They admitted Brexit was a wake-up call, a “brick through the establishment’s window.” By extension, the subsequent electoral victory of Trumpism must then be the wrecking ball through the front door.
To their credit, the heads of the world’s neoliberal institutions and their panel — including Canada’s minister of international trade, Chrystia Freeland — engaged in a sober, critical analysis of why the consensus on globalization and free trade was faltering. They embellished upon two important theses: first, that globalization was a failure of politics, not economics; and second, that protectionism would not halt innovation and associated job losses. However, they completely neglected to recognize the most insidious factor from which Brexit and Trumpism draw breath: liberalized financial markets.
The Brexit and US election results were more than mere nativism, nationalism and protectionism; they were a vote of nonconfidence in neoliberalism. Trumpism is therefore the gradual abandonment of the status quo in favour of a new international economic regime.
No speakers in Washington hid the fact that globalization and freer trade created winners and losers. Certainly, trade liberalization reduces costs to consumers, increases output and creates new jobs. The problem, as it has always been although it is rarely acknowledged, is the rate, quality and location of jobs lost versus those gained. As Brexit and Trumpism have demonstrated, people perceive the imbalance as massive: only seismic political change may resolve it. Freeland explained it well: governments are failing to reinvest the benefits of globalization into the losers. Not only is there a lack of reinvestment, but for decades, there has also been scant mainstream recognition of the losers’ struggles. They’ve been disenfranchised both economically and politically. There is dignity and self-actualization in a hard day’s work. Struggling families cannot put food on the table, and they cannot invest in their children’s future with empty platitudes. “Get a job!” Where? “The economy will pick up!” When?
Over time, the middle class decayed. Elections went by, and the numbers of the disenfranchised grew. The left, instead of acknowledging their legitimate concerns and working to bring people back into the economy and to include them in political discourse, continued to decry anyone who disagreed with the prevailing wisdom as irrational, racist, bigoted, xenophobic and ignorant.
Although it was heartening to hear the panellists recognize what Brexit was really about and discuss what it was going to take to save globalization, it was exactly a month out from the US election — too little, too late.
And yet we cannot pin economic disenfranchisement on globalization and trade alone. As the head of the WTO pointed out, innovation and disruptive technology will continue regardless of protectionism. He quipped that an initial team of just 15 American tech entrepreneurs created Instagram, putting some 10,000 Kodak employees out of work. Although that’s only somewhat true, it underscores the power of innovation. Another excellent example is the US manufacturing sector.
Earlier this year, I conducted research for the federal government on American manufacturing policy. The 2008 recession viciously hit the sector, already in decline for decades in terms of total jobs. Output fell by nearly 20 percent, and employment by two million jobs. Between 1997 and 2009, the United States suffered the greatest industrial decline in world history. President Barack Obama’s response was robust, consisting of a suite of policies investing in innovation, the education/skills pipeline, industry collaboration, global competitiveness and export growth. By 2010, output had surpassed pre-2008 crisis levels. Job gains, however? A complete and utter embarrassment. The manufacturing sector is a boom-and-bust industry. However, every bust, until the 2008 crisis, saw 95 percent of jobs return within six and a half years. It has now been eight years and a million jobs are still missing.
How could record output be achieved with net job losses? The Obama administration was clear that jobs recovery was a central tenet of the new policies. Analysts and experts asking “Why the abject failure?” need to go back to Economics 101.
Obama’s policy package was focused on advanced manufacturing: materials, processes, software and the like. Advanced manufacturing is more capital-intensive than classical manufacturing, which is labour-intensive. Proportionally, more of every dollar is spent on procuring or maintaining assets, facilities and intellectual property. Advanced manufacturing needs more scientists, engineers, software developers, senior managers and other highly skilled workers. Two things are certain: fewer people are employed overall, and displaced manual labourers don’t go out and get chemical engineering degrees in order to adapt.
Those blue-collar workers — the losers of the system, on the whole — are not reskilled; they are not given loans to start new businesses; they are not given meaningful severance or public assistance. They are forgotten, and they remained so until November 8, 2016.
To be clear, innovation grows the economy, even though, like trade liberalization, it produces losers as well. The highly skilled workers needed for innovation feed the economy through higher taxes on their greater incomes and their consumption habits. Furthermore, central banks have not been completely idle. They’ve poured trillions into the economy through quantitative easing (money printing), and governments have followed suit with billions in tax cuts and infrastructure spending. Yet, with all this new money and companies posting record profits as output, and with productivity and innovation rates constantly rising, economic growth remains anemic. Hard-working families are seeing paltry increases in median household income (1.2 percent per year, on average). Where are the profits? Where are the benefits from globalization and freer trade? Where are the booms to offset the ever deeper and more frequent busts? Not once did any of the World Trade Organization, World Bank or International Monetary Fund heads, or their panellists, bring up the financial sector’s role in all of this. It was dumbfounding to watch every soul ignore the massive elephant in the room.
Our economy consists of two dimensions. The first is the one you and I, Joe and Jane Main Street, are familiar with — the real economy. This dimension deals with the creation, trading and leasing of goods and services. The second is financial markets. Here investors and banks provide the dollars needed to allow for the creation of all these goods and services. Financial markets are a necessary part of the greater economy and enable growth. The problem is that ever fewer dollars in capital markets are connected to tangible goods or services, or, as the US housing bubble showed, too many dollars are attached to the same overleveraged assets. Every day, some US$5 trillion is traded in foreign exchange markets with only some US$50 billion traded in equities (real economy). A few decades ago, some 80 percent of dollars traded were connected to tangible goods and services. Today, about 99 percent of dollars are connected to capital markets.
All those dollars our central banks and governments keep pumping into the real economy frequently find their way into financial markets. A sliver is reinvested into the real economy.
Some of us have modest investments. A few hundred thousand of us have maybe a million or two in savings. Many of us have small, indirect claims through our pension funds. Substantively, however, the overwhelming majority of citizens have no stake in where 99 percent of the action is happening. All those dollars our central banks and governments keep pumping into the real economy frequently find their way into financial markets. A sliver is reinvested into the real economy. The remainder remains in massive speculation systems where the mind-numbingly wealthy accumulate additional wealth not tied to any physical asset or service. Nothing is created but empty platitudes of politicians reassuring us that the jobs will come back and the economy will pick up. Where? When?
It wasn’t always this way. There was a period when the middle class flourished, global markets were stable, recessions were shallow and quick, trade continued to grow, and the rich still got richer. The Bretton Woods system of 1944-73 enabled this pattern by constraining capital flows between countries. As a result, it was more difficult and less profitable to speculate on foreign exchange (currency) markets. These controls incentivized investment, particularly domestically, in tangible goods and services. This kept a higher ratio of dollars in the real economy and in the pockets of people like you and me. By no means was this a socialist paradise — industrialists made massive profits.
The Bretton Woods system did not just appear out of thin air. Classical liberalism had proven an abject failure. Free capital flows had led to rampant market volatility and the near-complete defanging of domestic fiscal and monetary policy: the Great Depression. A new international economic regime was demanded.
The system did not disappear by accident either. It was a gold standard system tied to the US dollar without a means of forcing economies in trade surplus to depreciate their currencies. But demand for the US dollar grew too great, and President Richard Nixon had no choice but to abandon the system. From the mid-’70s onward, Wall Street and British financiers lobbied for dismantling capital controls and deregulating financial markets: they brought us prudential lending, financial innovations and sophisticated derivatives, and tolerance for ever higher debt-to-equity ratios. Neoliberalism was birthed and re-enabled “hot money” to freely enter and leave economies, allowing investors to build speculation instead of widgets. It also allowed industrialists to enter and leave markets with more speed and at less cost, eroding workers’ bargaining power.
Removing capital controls was unnecessary to growing trade, but greed won out. Now that same greed has left some tens of trillions of dollars sitting in tax havens, with trillions more in investment portfolios of a few staggeringly wealthy individuals or entities. A small portion is connected to keeping me and you employed; the clear majority remains beyond us.
Until governments make it just as profitable, if not more so, to invest in the real economy, we will continue to have the paradox of anemic growth with record profits delivering fewer jobs: “jobless growth.”
It’s surprising that the economically disenfranchised of the left are not in solidarity with those on the right.
It’s surprising that the economically disenfranchised of the left are not in solidarity with those on the right. The Occupy Wall Street protesters should find natural allies in Trumpism and their shared repudiation of neoliberalism.
The last time we let the international economic system disenfranchise too many, it produced hypernationalist, fascist states that embroiled the world in war, claiming millions of souls. If history repeats itself, we appear to be on track for calamity.
To be clear, there is nothing wrong with individuals amassing incredible wealth if the means by which they do so buoys the rest of society. When I spoke with Foreign Affairs Minister Stéphane Dion on these issues, he conveyed his personal perspective that a form of “financial justice” was necessary. One version, he explained, was re-examining the share of capital earnings that people should be able to keep from transactions that don’t contribute enough to the real economy. Simply put: no more making quick bucks off betting that the British pound is going to tank.
Whether it’s through capital controls, capital gains taxes or other mechanisms, governments must begin to cooperatively restructure the international economic regime. This won’t be possible until we recognize and accept the powerful role that unregulated financial markets play in siphoning dollars from the real economy and exacerbating wealth inequality.
Neoliberalism is dying. The people want inclusive growth. They want dignity in honest work. Napoleon rode across Europe, bringing the rule of law with him. The German philosopher Georg Hegel wrote that, as he watched Napoleon ride by his window on a white horse, he believed he saw the spirit of history. Napoleon lost at Waterloo but his ideas ultimately brought down Europe’s ancien régime. Whether 2020 is President-elect Donald Trump’s Waterloo is irrelevant. He and Brexit are merely manifestations of massive discontent with the system. It is now entirely up to governments to decide which side of history they want to be on.
This article is part of the Public Policy toward 2067 special feature.
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