Can a Political-Economy Vicious Circle Be Avoided?

Resistance to globally integrated markets, reduced foreign investment, and less international cooperation mean slower economic growth and more frustration for working people. A column by Lawrence H. Summers.

Lawrence H. Summers
«Worldwide, the single most important choice made in 2020 will be that of US voters in the presidential election. A course correction is more important than at any time in American history.»

Domestic politics, geopolitics, and economics will be intertwined in 2020 to an extent unmatched in decades. Weak economic performance and problematic governance in much of the world risks setting in motion a vicious circle: adverse economic outcomes lead to populism at home and truculent nationalism abroad, which in turn exacerbate economic problems as protectionism increases, investment declines, and consumer confidence falls off. Bad economics drives bad politics, leading to worse economics and worse politics.

Both the bad news and the good news is that economics and politics will start 2020 in a parlous state. The global economy could fall into recession, and the risk of major political or even military confrontation is higher than it has been since the end of the Cold War. From a more optimistic perspective, with expectations very low, it will not take much to generate positive surprises that could lead to a virtuous circle of economic improvement and less toxic politics.

Start with the economics. The International Monetary Fund has coined the term «synchronized slowdown» to refer to our current predicament: growth is decelerating in 90% of the world economy and is expected to be slower overall than at any time since the financial crisis. It is a euphemism for the secular stagnation that increasingly characterizes the global economy. In the current climate of slow population growth, rising inequality and high uncertainty about the absorption of saving is a defining problem.

Emerging markets facing difficulties

Just as in the 1930s, the advanced economies are incapable of sustained growth at healthy rates with a sound financial and policy foundation. Markets expect that central banks will fail to achieve their 2% inflation targets over the next decade. Even to achieve what electorates see as inadequate growth in middle-class standards of living, the world has had to issue $15 trillion in negative interest-rate debt, run unprecedentedly large peacetime budget deficits, and allow various financial excesses to go unchecked.

While emerging markets represent a far larger share of the global economy than they have historically done, and came through the financial crisis with more resilience than most would have expected, their success remains dependent on the developed countries. The most successful emerging-market growth trajectories have been based on exports of manufactured goods to growing developed economies. A combination of slowing growth, reshoring of manufacturing, and rising protectionism means that this route to growth will be increasingly difficult in the years ahead. Forecasts of emerging-market growth have been consistently too optimistic in recent years, and I fear this will continue. China, in particular, faces profound structural challenges in the years ahead.

Judged purely on their own terms, these economic challenges would be considered serious, though perhaps not more so than the oil shocks or great inflation or financial crises of the past. What makes the current challenges worse is the deterioration almost everywhere in the capacity for a reasoned response. Under President Donald Trump, the United States, which underwrote the international system that won the Cold War and allowed emerging markets to converge toward developed-country living standards, has embraced an atavistic notion of perpetual struggle between nation-states and is leading a worldwide retreat from global integration. Whether the issue is trade agreements, cooperation on issues like climate change, or support for human rights, the US is reliably absent.

Trends towards nationalism

It is tempting to blame Trump, and he has rarely if ever missed a chance to blunder. But it should be remembered that until Trump withdrew the US from the Trans-Pacific Partnership trade deal, more Democrats than Republicans opposed the TPP, and that the Democrats’ presidential candidate in the 2020 election is likely to attack Trump’s policies toward China as overly conciliatory. In a sense, the post-World War II consensus on American leadership ended with President Barack Obama’s observation that his grand strategy could be boiled down to «Don’t do stupid shit.»

More fundamentally, the nationalist turn we have seen in the US is just one manifestation of a global trend that encompasses Brexit; populist governments in Italy, Hungary, Poland, Mexico, Brazil, and the Philippines; and rising ethnic nationalism in Turkey, India, and China, not to mention Russia after 20 years of Vladimir Putin’s rule. Decision-making based on reason, sound economics, and international cooperation is being overwhelmed by a wave of popular anger and nationalist fantasy.

More resistance to globally integrated markets, reduced foreign investment, and less international cooperation can only mean slower economic growth and more insecurity and frustration for working people. They will then be much more likely to rally behind those with the simplest stories and the most expansive promises than to support a return to centrist cooperative policies. This will only deepen the economic malaise.

In democracies as well as in dictatorships

These dynamics are not confined to democracies. If Russia’s economy were delivering for Russians, there would be much less need for Putin’s increasing concentration of power. It is no accident that decelerating growth and rising risks to financial instability in China have coincided with greater repression of dissent, crackdowns on minorities, and appeals to nationalism. Perhaps the massive military display that accompanied the celebrations marking the 70th anniversary of the People’s Republic – a spectacle that dwarfed the commemoration of previous anniversaries – was as much a reflection of insecurity as of confidence.

Worldwide, the single most important choice made in 2020 will be that of US voters in the presidential election. A course correction is more important than at any time in American history. The US and the world need a new president who prizes community over confrontation in pursuit of inclusive prosperity at home and abroad. This means focusing on necessary public investments in infrastructure, education, and innovation; making the tax code more efficient and progressive; and focusing businesses on meeting society’s needs rather than fomenting a war between labor and business or the middle class and the rich.

The case of ending the trade war

It also means ending the current US trade war against most of the world, ceasing the use of capriciousness to generate leverage, and dropping the use of diplomacy to pursue domestic political aims. The right focus is to restore US alliances, resist protectionism, and join with other countries to address global challenges such as climate change, tax evasion, and the regulation of new technologies.

A change in what America exemplifies, the policies it pursues, and how it influences the rest of the world is probably necessary to avoid a vicious political/economic circle. The degree of change in the global environment after Franklin D. Roosevelt’s election during the Great Depression, Ronald Reagan’s election during a period of self-doubt in the West, and Obama’s election after the Iraq War and in the midst of a financial crisis suggests that US elections have profound consequences for the global system. People watch and emulate the city on a hill. For better or worse, that will be true in 2020 as well.

Copyright: Project Syndicate.