For some time I’ve been frustrated and struggling to find some coherence between what’s playing out in developed economies and the struggles of the ordinary man in the street. I don’t profess to have all the answers but I believe there is now a narrative starting to appear or at least it’s becoming a little clearer in my head.
The US election is a fascinating portrait of the struggles that most developed countries are now grappling with. The seeds were probably sown in the early 2000’s but have crystallised since the financial crash of 2008. Most of the economies of the developed world are all struggling with low growth, low or in some cases negative interest rates, qualitative easing (‘QE’) and debt. Trump in a bid to prop up his stalling election campaign announced his great economic plan last week. A return to the Reaganomics of the 1980’s. Cut taxes, protectionism (particularly against China) and glib comments about bringing back the old manufacturing jobs. Clinton has also been unveiling her plans, which largely involve public investment in infrastructure and an element of protectionism. In the last week we’ve also witnessed Japan’s attempts to find a way of out of it’s no growth freeze, when the government announced a massive public spending spree in investment.
In the aftermath of the crash, austerity policies ruled alongside a good old fashioned dose of monetarism. The trouble is it hasn’t worked. QE hasn’t achieved what it was planned to do, partly because banks haven’t passed the credit on and partly because there isn’t necessary the appetite to go on a spending spree (by business or households). Low (and now negative) interest rates haven’t worked either. Low interest rates have not encouraged businesses to invest or consumers to spend. Corporate investment to large extent relies on views towards growth. If growth forecasts are pessimistic then so will corporate investment. Consumers are wary of spending when living costs are rising due to stagnating wages. Traditional monetary policy is broken.
To some extent the tide has now turned in favour of Keynes — use the low cost of borrowing to make public investment in infrastructure to kick start the economy. It remains to be seen whether this will work either. I’m not convinced. I think we’re entering a new economic period which will require a new form of capitalism and economics that we haven’t yet found. I think the reasons for this is being driven by technological change and changes to our traditional economic structures, particularly around workplaces. I also believe that macro policymakers are stuck using outdated forms of measurement.
To understand the macro issues, we need to look at what’s happening at the micro level. Workplaces have changed. Old, traditional manufacturing jobs have largely gone from developed countries. Either to developing countries like China etc or have simply disappeared. Since the 1980’s we’ve seen the rise of the service sector, but even this has changed and continues to change dramatically. Since the early 2000’s we’ve seen the rise of the gig economy and the portfolio career. In recent years we’ve also seen the rise of the knowledge and sharing economy. In the gig economy people use online sites to compete for work, which drives everything downwards. Costs decrease for the business but so does the income of the worker. An extreme example of the new economy is Huffington Post. An online newspaper that pays very little for it’s content because it’s contributors are largely unpaid. It survives on advertising income and by keeping costs low.
All the indicators are that in the next 10 years, the number of people working as freelancers, independent contractors or for multiple employers will increase dramatically. In the US, already 35 per cent of workers are working in this way. So the sharing economy, made up of both lower-level gig workers and higher-end professionals with “portfolio” careers, is the future. The question is whether it will be an economy that creates more sustainable, robust growth? It won’t, if we’re measuring the wrong things and failing to place proper value on what is being created or produced.
Declining labour shares will not translate into commensurate improvements in
personal incomes of households. We’ve witnessed this over the last 10 years. A declining labour share can also have political consequences if it erodes support for market-oriented economic policies or for globalisation more broadly. Witness the vote in the UK for Brexit, the rise of Trump in the US and other more extreme parties across Europe. Importantly, trends in labour shares negatively affect the main macroeconomic aggregates, namely household consumption, private sector investment, net exports and government consumption. Changes at micro level are impacting macro economics and this isn’t being recognised or acted on.
We’ve always used GDP as a form of measurement for national income. What if that measurement isn’t appropriate in the new economy playing out at micro levels? What if value is being ‘produced’ but not measured? GDP was produced as a form of measurement back in the industrial age. It is struggling (some would argue not at all) to account for intangible assets that are being produced in the new economy. According to GDP, we are all headed into negative territory — likely because technology shrinks the goods we purchase, their required inputs, the time it takes to make them, and the place and space required to deliver them. Maybe the problem is that the world is stuck in old ways of measuring and reporting growth based on making and selling things (i.e., physical capital), rather than today’s growth drivers of developing and creating human, intellectual, and network capital. Using the wrong data leads to making the wrong decisions.
We need a new form (or even forms) of measurement at both the macro and micro level. Once policymakers, economists and decision makers understand this then we can start looking at making policy decisions based on the right data and what that data is telling us. We may find that we’re not heading into an abyss. It may require changes to taxation at both corporate and personal level. It may require us to re-think benefits and look at things such as a universal basic income. Public investment can be shaped to what’s needed not what was required in the old economy. Business valuations may need to change to reflect the value in intangibles. We will need to re-think old consumer spending models based around ownership.
Technological change is not going to stop. In fact it’s increasing. Unless we recognise this fact & that old models are broken we can’t look forward with the optimism we should have to how technological change can bring about something better.
I also understand why I’m frustrated (& probably millions the world over are too). It’s because politicians, central bankers, civil servants etc seem completely oblivious to what is playing out right in front of their eyes. It’s frustrating that there is absolutely no mechanism to effect the change required.