We are defining prosperity down — or, more accurately, prosperity is defining itself down. We are eight years into the recovery from the Great Recession, the unemployment rate has dropped to 4.4 percent, the stock market is pushing record highs, and consumer confidence seems robust. And yet the economy doesn’t feel as good as it looks. Anxieties lurk.
There is an explanation, argues Ruchir Sharma. This doesn’t feel like a typical business cycle recovery, because it isn’t. We have entered a new era of low economic growth and high political disappointment. Our democratic system requires strong-enough economic growth to raise living standards and support activist government. These expectations, present in most advanced democracies, are no longer realistic, because the global economy has changed in ways that reduce growth.
Sharma, a top investment strategist at Morgan Stanley, lays out his thesis in the current issue of Foreign Affairs. In a standard recovery, low interest rates, big government budget deficits, the repayment of private debt and the sell-off of surplus inventories and investments suffice to restore satisfactory economic growth. By Sharma’s logic, this didn’t happen after the Great Recession, because deeper forces dominated.
“The causes of the current slowdown can be summed up as the Three Ds: depopulation, deleveraging and deglobalization. Between the end of World War II and the financial crisis of 2008, the global economy was supercharged by explosive population growth, a debt boom that fueled investment and boosted productivity, and an astonishing increase in cross-border flows of goods, money and people. Today, all three trends have begun to sharply decelerate: families are having fewer children . . . , banks are not expanding their lending [as before] . . . , and countries are engaging in less cross-border trade.”
Sharma calls this the “low-growth trap,” which has now been inherited by President Trump. Sharma worries about its political consequences as much as its economic effects. Already, it seems a breeding ground for nationalist and populist surges in many countries. (Read: Trump, Britain’s Brexit, Russia’s Vladimir Putin and France’s Marine Le Pen.) He expects more tension and discontent:
“Many governments are still trying to push their economies to reach unrealistic growth targets. Their desperation is understandable, for few voters have accepted the new [economic] reality either. . . . This growing disconnect between the political mood and the economic reality could prove dangerous. . . . Some leaders are. . . scapegoating foreigners or launching military adventures to divert the public’s attention from the economy.”
Note that Sharma is not forecasting anything like another Great Depression or even a repetition of the 2007-09 Great Recession. He’s simply predicting an extended slowdown of economic growth. “No region of the world is growing as fast as it was before 2008,” he writes, “and none should expect to.”
For the United States, Europe and other developed nations, this means that “anything over 1.5 percent [annually] should be seen as healthy,” he says. This would be a big drop for the United States. Since World War II, the American economy has usually grown each year by 3 percent or better.
Less-developed economies can still take advantage of existing technologies and under-schooled workers. Growth rates can be faster — but not as fast as before. China, Russia and Vietnam had all grown at annual rates of 7 percent or better, but that won’t continue. All in all, the world economy will slow.
To be fair, there’s no technical consensus on these issues. Consider another recent report by innovation experts Michael Mandel and Bret Swanson. Contrary to Sharma, they predict a productivity boom that would boost annual U.S. economic growth closer to 3 percent a year — a target of the Trump administration — from the 2 percent of recent years.
They argue that roughly 70 percent of U.S. business sectors (including manufacturing, construction, health care and transportation) have underinvested in digital technologies. But this is changing, they say, and it promises major gains in efficiency and economic growth. The point is not to arbitrate between these views; it is rather to acknowledge legitimate differences.
Still, Sharma’s broader point remains: The real threat of the economic slowdown is to political stability. For decades, advanced democracies, including the United States, have adopted a similar political model. It assumed that economic growth could deliver social peace and loyalty to democratic values. Protective social institutions — widely called the “welfare state” elsewhere and the “social safety net” in the United States — shielded against economic upsets and personal misfortune. Democracy mitigated capitalism’s worst excesses.
The system’s victims and critics could be bought off. But the model required — and most people took for granted — a dynamic economy that could boost living standards and expand welfare benefits. This assurance has now gone missing. At best, the model desperately needs repair; at worst, it is busted.
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