This is what depression era politics looks like


As I’ve mentioned before, for the past several years I’ve been working as a sell-side macro strategist in the banking world. All this means is that I help clients of the bank I work for to better understand the financial markets and make good investment decisions.

Oftentimes the most stimulating aspect of the job entails having broad conversations with clients about the global economy, given that what happens on that level weighs so heavily on the price of pretty much every financial asset. Right now there is a clear sense of pessimistic resignation among most of the clients I speak to, as more and more of the investment community comes to grips with the frustrating reality of the post-crisis economy. Europe and Japan appear to be dealing with a perennial threat of deflation. China is, at best, gradually slowing from its previously unsustainable pace of growth. Even the US, a relative shining light among developed country economies in recent years, is struggling with stagnating wages, especially for the poor and the middle class. Though few think to use the term, I personally think the period we’re in now may be classified by future economic historians as a global depression, one milder than what we experienced in the 1930s, but with the same features of sluggish demand and weak growth and inflation for years on end.

Lately these conversations have steered towards the question: How do we get ourselves out of this mess? There are no easy answers. That’s mostly because, like many things in life, the technical solutions are relatively straight forward, but the social and political backdrop makes those solutions essentially impossible.

To take an example, since the crisis in 2008, central banks have pulled out all the stops in an effort to boost growth and prevent inflation from turning negative. The first step was to cut their key interest rates in an effort to encourage investment and spending. But eventually many central banks hit zero or close to it, and the conventional wisdom was that banks’ target interest rates couldn’t go negative. So a number of central banks tried pulling other levers, given that cutting rates alone wasn’t doing the job, only to find that even this mix of policies wasn’t enough. Now policy makers are debating whether or not to cut interest rates deep into negative territory, an uncharted policy territory which may finally ward off deflation and kickstart the economy, but may also risk destabilizing banks and making the whole problem worse.

You get the point. There is a sense of desperation on the part of many of the officials around the globe in charge of monetary policy. Their bullets have essentially been fired, their caches emptied. And now they are scrambling for whatever other flotsam and jetsam they can throw at the problem.

So what is the solution when the usefulness of monetary policy is all but exhausted? For most of the clients I speak to (and I would agree), it’s fiscal expansion. As the argument goes, if loose money policies aren’t enough to get demand going, then maybe some combination of cutting taxes and increasing government spending should be next. Most economists see this as reasonable; these policies would increase debt levels, but then again, so would lackluster growth in a scenario in which we tried nothing. And besides, rather than expressing concern about too much debt, markets these days are practically begging governments to borrow and spend more; at the time of writing, Japan — a country with a debt level double its GDP — can borrow at negative interest rates going out ten years.

Here is the point: Politics makes a badly-needed policy intervention such as this one essentially impossible. As economic outcomes stagnate — unemployment remains high, real wages fall, etc. — democracies don’t tend to sway towards loosening the fiscal reins. Canada under its new prime minister, Justin Trudeau, is a notable exception to this. But it is very much an exception. In Europe, the UK, and the US, major political movements have emerged urging governments to tighten their belts, rather than let loose. You can blame part of this phenomenon on the preferences of very wealthy individuals with disproportionate political power, who might push policy away from anything that risks expanding the size of the state or making the tax code more progressive. But I’m convinced this isn’t the whole story. The concepts of belt-tightening and “making due in tough times” are easily understood by the typical democratic voter; the concept of a fiscal multiplier for economic output is not. So when economies face those tough times, politicians can signal their credibility, trustworthiness, and discipline by extolling the virtues of fiscal modesty and “pulling ourselves up by the bootstraps”. That such austerity actually drives an ailing economy further into the abyss is seen only as a minor nuisance along the road to political victory.

As if this reality — that politics seems intrinsically biased towards pulling back on the fiscal  reins at exactly the wrong moment — wasn’t depressing enough, the case of migration gives us another example. As I discussed in a recent post, all developed economies need some influx of workers, including the unskilled. The cases of Europe and Japan are especially dire; as the working age population shrinks in these places, generating demand and fighting deflation become considerably more difficult. Yet, the common response within democratic societies during bad times is to restrict the inflow of workers rather than expanding it, as we commonly rush to point the finger at immigrants and other foreign governments for our economic problems. Europe is nearly fracturing over this issue as swaths of Syrian and other refugees flood into the continent. Despite the continent’s desperate need for more young workers, it is abundantly clear how the European electorate feels about immigration. From the UK’s flirtation with exiting the European Union, to Germany’s recent regional election results, to the multitude of countries within the EU openly challenging its principle of free movement, the writing is on the wall. Here in the US the situation is somewhat similar, even as our population issues are less dire. It’s not a coincidence that both major American parties now feel more emboldened to rail against globalization and free trade, and that one particular party’s front runner has made building walls between us and them — in quite literal terms — the flagship idea of his campaign.*

Things are getting particularly scary, I think, because people are slowly coming around to the reality that democracy lacks built-in mechanisms to deal with these phenomena. A lot of investors had this feeling, as did I, in mid-2011 when a handful of US politicians nearly crashed the world economy by refusing to allow a rise in the nation’s technical debt ceiling. This near-catastrophe was brought together by a match made in hell: voters who didn’t understand the debt ceiling concept, wrongfully assuming it to be associated with government profligacy using the simple logic of “more debt equals bad”; and politicians eager to capitalize on this misunderstanding, willing to vote for economic calamity in an effort to ingratiate them to their constituents. The crisis was averted at the last minute, but the episode sent a chilling message: There truly are no adults in charge.

Our current economic challenges are creating a similar dynamic, but one that is much more permanent in nature. After a generation of stagnant wages and nearly a decade of post-crisis economic malaise, voters are understandably mad as hell, with that anger now able to be sharpened into a devastating weapon in an era of instant communication and ubiquitous social media. In previous eras, perhaps, business elites and captains of industry might have been able to rein in this type of destructive populism. That effort is very much in full force this time around, in both the US and Europe, but this time voters don’t seem so easily pacified. How could they, after so many years of failed economic promises that seemed only to line the pockets and strengthen the influence of the wealthy and powerful? To suggest that elites must now wrest democratic control from the angry mobs now seems laughably naïve at best, and suspiciously nefarious at worst.

Now more than ever, the combination of dishonest, opportunistic politicians; poorly-educated, apathetic, and easily distracted voters; and a feckless, click-baiting press threatens to render democracies powerless to solve their most urgent problems, and the issue of the economy is now serving as a perfect illustration. There is no Superman swooping in to deliver us to safety, no handsome and charismatic politician who promises to make it better, if only we might give him our vote. The solution will take something deeper, a personal and moral accounting on the part of every citizen, as we decide what kind of voters we want to be, what kind of elected officials we deserve, and what kind of journalists we entrust with the truth. That is, it requires an honest look in the mirror on the part of all of us about the ruptures in the democratic fabric and the personal efforts we must all make to repair them. Otherwise, years from now we may look back at this moment as the good times, when the cynical spiral of economics and politics was just getting underway.

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*Turning more protectionist towards trade or restricting immigration isn’t necessarily a cyclical economic issue the way fiscal policy is. The point is that to avoid long-term stagnation related to an aging population and a shrinking workforce, Europe and Japan need more young people coming from foreign countries, not fewer.

The dirty secret behind Europe’s migrant crisis

I’m not sure exactly how to feel about Europe’s migrant crisis, whereby 1.4 million individuals fleeing war or economic calamity are expected to seek refuge within the continent by the end of next year. It’s been startling, to put it mildly, to read about the risks some of these people took to escape their home countries, and the catastrophes that some of them have experienced. But beyond that, I hope and pray that the crisis forces a dialogue about the massive movement of human beings around the globe that will need to occur over the next several decades.

To illustrate what I mean, take a look at the chart below. It shows UN population projections in developing (i.e. “poor”) countries next to those in developed (“rich”) countries over the next century. I lump in China with the rich countries for two reasons: one is that China, though still poor by most measures, is rapidly converging towards being developed; and the other is that it’s facing the same potential slow-motion population disaster as places like Europe and Japan, thanks in large part to its one-child policy.

As you can see, the rich world is basically facing an epic storm of receding population levels, an issue that is destined to become more and more noticeable in our lifetime. As population growth turns negative in these countries and as their populations age, it will put huge pressure on fiscal budgets — think of all the money the government must come up with to pay pensions to an aging population, in the face of a shrinking pool of income tax payers. It also exacerbates the problem of sluggish aggregate demand and deflation, already a major issue in places like Japan and Europe.

So the rich world already has a need for young, able-bodied workers, and will likely need more and more of them in the years ahead. Guess what? There are huge numbers of such people in the developing world, ready to pack up and come work in the rich countries, often for wages you and I find substandard but which represent a giant leap forward from the developing country status quo. And it’s likely that as developing country populations explode, and especially as issues like climate change destroy living conditions in many of these — more Syrias, in other words — there will be even more workers from poor countries looking for new places to live.

Meanwhile, economists have long highlighted the enormous gains to poor country residents from just small increases in international labor mobility. An oft-cited study on the economic implications for poor country residents immigrating to the United States, for instance, estimated a four-fold increase in real wages for the typical worker. But freer labor mobility should not be seen as an issue of charity. In reality, developed economies will soon become as desperate for young people to come in as today’s refugees currently are to get out.

So rich countries need workers, while poor countries have too many. The question is, Will this transaction actually take place? The economic case is unmistakably clear; without expanding their labor forces through immigration, rich countries are headed for a slow-motion economic train wreck. The stumbling block is not scientific evidence but pure, good-old-fashioned prejudice. We all see the need for more workers in places like Germany, Japan, and America. Let’s be real: We just don’t feel comfortable with them being Turkish, Indonesian, or Mexican.

This is why seemingly squishy, airy-fairy ideas such as “loving thy neighbor” and “universal brotherhood” are so important and potentially powerful. The tar of prejudice is so thick that whole societies would rather commit the equivalent of economic suicide than let brown-shaded, funny-accented people to join their nations. World unity is not some utopian ideal; it’s a matter of economic survival.

As Shoghi Effendi put it nearly 80 years ago:

The anarchy inherent in state sovereignty is moving towards a climax. A world, growing to maturity, must abandon this fetish, recognize the oneness and wholeness of human relationships, and establish once for all the machinery that can best incarnate this fundamental principle of its life.

The problem is daunting, but the solution is simple. Only stubborn prejudice and fear stand in the way.

What does a universal language have to do with sovereign debt crises?

As has been mentioned on this blog (and countless other places over the past few months), Greece and other heavily-indebted members of the Eurozone are faced with a uniquely difficult road ahead. Why? Because it’s very hard to lower debt as share of GDP if the economy isn’t growing, and these countries’ available options for stimulating growth are limited. Specifically, individual members of the Eurozone can’t devalue their currencies in order to make their exports more competitive (because they’ve got the euro of course), and can’t ease monetary policy to encourage consumption and investment over savings in rough times (because the European Central Bank determines that for the whole Eurozone). With those options to boost growth off the table, these troubled economies are essentially faced with a choice: painful cuts in government spending that drive the economy even further into recession, or a default that could imperil the whole continent.

This reality — that members of a common currency can’t really use policy to stimulate their economies — is often used to make the case that the Eurozone was a mistake in the first place. After all, how could you have such a big area with so many different kinds of countries with different levels of wealth, and one single currency and monetary policy for all of them?

The interesting thing to me is that this is exactly what we have in the United States, and yet this fact is almost never mentioned. Continue reading

The fallacy of a “world aging problem”

Recently I came across this article on immigration in Japan. The article is about an Indonesian nurse named Maria Fransiska who has spent the past couple of years working in Japan, but who is likely to have to return to her native country because of difficult obstacles to foreign immigration:

Despite facing an imminent labor shortage as its population ages, Japan has done little to open itself up to immigration. In fact, as Ms. Fransiska and many others have discovered, the government is doing the opposite, actively encouraging both foreign workers and foreign graduates of its universities and professional schools to return home while protecting tiny interest groups — in the case of Ms. Fransiska, a local nursing association afraid that an influx of foreign nurses would lower industry salaries…

Experts say increased immigration provides one obvious remedy to Japan’s two decades of lethargic economic growth. But instead of accepting young workers, however — and along with them, fresh ideas — Tokyo seems to have resigned itself to a demographic crisis that threatens to stunt the country’s economic growth, hamper efforts to deal with its chronic budget deficits and bankrupt its social security system.

Continue reading