The crisis of democratic capitalism and the rise of zombie ideas - - PowerPoint PPT Presentation

The crisis of democratic capitalism and the rise of zombie ideas

Martin Wolf, Chief Economics Commentator, Financial Times

KU Leuven Leuven 1st February 2018

Crisis of democratic capitalism

“[D]emocracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full.” Dani Rodrik

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Crisis of democratic capitalism

“Happy families are all alike; every unhappy family is unhappy in its own way.” Leo Tolstoy, Anna Karenina

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Crisis of democratic capitalism

“Enemies of the People.” Daily Mail,

4th November 2016. Headline of an article on the High Court decision that the government had to consult parliament on notification of Brexit,

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Crisis of democratic capitalism

• Democracy and global capitalism
• Erosion of trust: the long term
• Erosion of trust: the crisis
• Return of zombie political ideas
• Return of zombie economic ideas
• Challenges

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• 1. Democracy and global capitalism
• We increasingly see anti-capitalist democrats and anti-democratic capitalists
• So what is the relationship between capitalism and democracy?
• There are good reasons for believing the symbiosis is natural:

○Historically: ■ The rise of capitalism was at least associated with the elimination of serfdom and slavery and by ultimately successful movements for extensions of the franchise ■ Driving these changes were widely-shared prosperity, the spread of education, emergence of organised labour and the mobilisation of the adult population (male and female) for war ■ Also rising prosperity created an opportunity for “positive-sum politics”

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• 1. Democracy and global capitalism

○ Moreover, ideologically: ■The underlying idea of capitalism – that of that of the people engaging in “truck, barter and exchange” under the protection of the law – implies that the choices of individuals have an inherent value. ■The underlying idea of democratic citizenship – that of individuals engaged in collective decision-making

• also rests on the assumption that individual choices have value, this time in making public choices.
• Yet there are also potential conflicts between democracy and capitalism:

○Democracy rests on an egalitarian ideal (one person one vote); capitalism rests on an inegalitarian ideal (one dollar, one vote). ○Democracy is the domain of “voice” and capitalism is the domain of “exit”. ○High inequality may turn democracy into plutocracy or populist autocracy (or both, in alternation) ○Most relevant, global capitalism threatens “citizenship rent” – that is, the economic value of citizenship

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• 1. Democracy and global capitalism

0% 10% 20% 30% 40% 50% 60% 70% 0% 10% 20% 30% 40% 50% 60% 70% 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Proportion of democracies in world states (per cent) Trade over World GDP at Purchasing Power Parity (per cent)

GLOBALISATION AND DEMOCRACY (Source: "Our World in Data" and Center for Systemic Peace)

Klasing and Milionis (2014) Penn World Tables Version 8.1 Democratisation (Polity IV)

8 TRADE, WAR AND THE RISE OF DEMOCRACY

• 1. Democracy and global capitalism
• Yet the world is now in a “democratic recession”:

○According to Freedom House 2017 Annual Report, “A total of 67 countries suffered net declines in political rights and civil liberties in 2016, compared with 36 that registered gains. This marked the 11th consecutive year in which declines outnumbered improvements.” ○Moreover, “in 2016 it was established democracies – countries rated “Free” in the report’s ranking system – that dominated the list of countries suffering setbacks.” ○Also, according to Roberto Foa and Yascha Mounck, “Over the last three decades, trust in political institutions such as parliaments or the courts has precipitously declined across the established democracies of North America and Western Europe.”

• Trust has been lost in both the democratic (political) and capitalist (economic)

systems and this is not only in emerging and developing countries, but also in advanced countries

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• 2. Erosion of trust: the long term
• At bottom, trust has broken down in those who manage the political and

economic systems and so in the systems themselves

• Is this a cultural or an economic phenomenon? This is a heated debate.
• I would argue that It is impossible to separate cultural from economic factors:

○ Citizenship is indeed about identity; but citizenship is also an economically valuable asset ○ Gender roles are a cultural phenomenon; but they have economic causes and consequences ○ De-industrialisation is an economic processes;, but it has cultural and social consequences ○ Immigration, too, is an economic process, but one with cultural and social consequences

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• 2. Erosion of trust: the long term
• Furthermore, culture does not explain change well. It simply alters too slowly.
• It may explain why particular groups are open to various populist appeals. But it

does not explain why, relatively suddenly, populist, xenophobic and anti-market appeals became so attractive, as happened in the 1930s.

• The obvious explanation is that the economy has had very disappointing results.
• I will argue that this has been true in longer run and, even more so, since the

financial and economic crisis of 2007-09.

• The US and UK have been particularly politically vulnerable. This may be

because these countries were particularly attached to the free-market ideology. So failure has undermined the legitimacy of elites even more than elsewhere.

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• 2. Erosion of trust: longer term
• Immigration
• Globalisation
• De-industrialisation
• Inequality
• Employment

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• 2. Erosion of trust: immigration
• The age of globalisation has been an age of mass migration, as was also true in

the late-19th century.

• Immigration reinforces the effects of globalisation of trade and capital.
• But it adds a powerful cultural dimension to these forces.
• In the context of the democratic state, immigration also raises questions about

who “we” are.

• Citizens want to decide who can live with them or become citizens themselves.

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• 3. Erosion of trust: immigration

17% 20% 12% 13% 11% 16% 8% 12% 11% 13% 10% 12% 4% 9% 5% 13%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 2000 2013 2000 2013 2000 2013 2000 2013 2000 2013 2000 2013 2001 2013 2000 2013 Canada Germany Sweden UK US France Italy Spain

FOREIGN-BORN POPULATION (as per cent of total)(Source: OECD)

14 IMMIGRATION

• 2. Erosion of trust: globalisation
• One element of the hollowing out of national sovereignty is supra-national

decision-making. This appears to be a particularly big issue in the superpower.

• Another element is the increasing effectiveness of “exit” by owners of capital and
• labour. (See Richard Baldwin, The Great Convergence.)
• Yet another element is the rise of supra-national business entities that no longer

“belong” to a country. National capitalism has morphed into global capitalism.

• This has undermined what I call “citizenship rent”: the value of the birth right of

citizenship.

• The “China shock” also seems to have been exceptionally severe in the US,

perhaps because of the scale of the country and obstacles to moving. (See David Autor et al, “The China Shock”.)

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• 2. Erosion of trust: globalisation

5 10 15 20 25 30 35 J P N U S A D E U O E C D I T A F R A G B R E S P N L D C A N S W E

RISE OF GLOBAL VALUE CHAINS (foreign value added share of gross exports, 1995 to 2011, per cent)(OECD)

1995 2011

16 GLOBALISATION

• 2. Erosion of trust: de-industrialisation
• All high-income economies have seen a huge decline in the proportion of

employment in manufacturing

• This change has been particularly large and the share has reached particularly

low levels in the UK and US

• De-industrialisation of employment is largely driven by changes in demand and

productivity growth. But trade has also played a role

• The reduction of employment in large manufacturing establishments has a

particularly large effect on the job opportunities of medium-skilled men

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• 2. Erosion of trust: de-industrialisation

0% 5% 10% 15% 20% 25% 30% Italy Germany Japan EU France UK US

SHARES OF MANUFACTURING IN TOTAL EMPLOYMENT (Source: OECD)

2008 2016

18 DE-INDUSTRIALISATION

• 2. Erosion of trust: de-industrialisation

0% 5% 10% 15% 20% 25% 30% 35% 40% 1970 1975 1980 1985 1990 1995 2000 2005 2010

SHARE OF EMPLOYMENT IN MANUFACTURING

US Germany

19 DE-INDUSTRIALISATION

• 2. Erosion of trust: inequality
• A related challenge is inequality
• While this is not a universal phenomenon, it is quite general
• Inequality has political implications, since the possession of economic resources

is always converted into political power

• Inequality is particularly high in the US and has risen more in the US than in
• ther high-income countries

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• 3. Erosion of trust: inequality

25% 30% 35% 40% 45% 50% 55% 1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 2013

INCOME SHARES OF TOP 10 PER CENT (Wealth & Income Database)

US UK Japan France Germany

21 INEQUALITY: DOWNS AND UPS IN THE US AND UK

• 2. Loss of trust: inequality

0.28 0.29 0.29 0.32 0.33 0.33 0.35 0.36 0.40

0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 Sweden Germany France Canada Italy Japan Spain UK US

GINI COEFFICIENT OF 2013 HOUSEHOLD DISPOSABLE INCOME (OECD)

22 INEQUALITY: WHERE IT IS HIGHEST

• 2. Erosion of trust: employment
• The most important test of a labor market is whether it generates jobs for prime-

aged adults with family responsibilities

• In this regard, the UK does a mediocre job, while the US is doing a bad one
• US employment rates for prime-aged adults are now very low by international

standards

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• 2. Erosion of trust: employment

69.4% 73.0% 78.5% 80.2% 82.3% 83.8% 84.0% 84.2%

50.0% 55.0% 60.0% 65.0% 70.0% 75.0% 80.0% 85.0% Italy Spain US France Canada UK Japan Germany

EMPLOYMENT RATIO FOR PEOPLE AGED 25-54 (OECD)

24 JOBLESSNESS

• 2. Erosion of trust: the long term
• The exceptional features of the US and UK were high and rising inequality and

the decline in the proportion of workers in manufacturing

• The US has exceptionally low employment of prime-aged adults: it is down there

quite close to Italy and well below the UK

• The UK has had exceptionally rapid increases in the proportion of the foreign-

born in the population

• This is not true of the US. But it may matter that the US has apparently had an

exceptionally high rate of illegal immigration

• It is not clear that globalisation of trade has had a particularly severe impact on

the US or UK, other than via the trade balance in manufactures

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• 3. Erosion of trust: the crises
• The age of market liberalisation has been an age of devastating financial crises
• The last ones, which began in 2007, imposed very large economic costs:

elevated unemployment, a permanent decline in levels and rates of growth of GDP, and a huge rise in public debt

• But the crisis also imposed large political costs: conflict over how the losses

should be allocated; and, above all, loss of confidence in elites – businesses, politicians and economists

• This may have been particularly important for countries that had put most faith in

financial capitalism

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• 3. Erosion of trust: output in the crisis

27 DIVERGENT REAL INCOMES

85 90 95 100 105 110 115 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

GDP PER HEAD (AT PPP)(Conference Board)

Japan Canada United States Belgium France Germany Italy Spain United Kingdom

• 3. Erosion of trust: unemployment in the crisis

2 4 6 8 10 12 14

1 / 1 / 2 1 / 1 / 2 2 1 / 1 / 2 4 1 / 1 / 2 6 1 / 1 / 2 8 1 / 1 / 2 1 1 / 1 / 2 1 2 1 / 1 / 2 1 4 1 / 1 / 2 1 6

UNEMPLOYMENT RATES

US Germany France Italy UK Eurozone

28 JOBLESSNESS

• 3. Erosion of trust: income stagnation in the crisis

97% 81% 70% 70% 63% 20% 65% 0% 20% 40% 60% 80% 100% 120% Italy US UK Netherlands France Sweden Weighted average

PROPORTION OF HOUSEHOLDS WITH FLAT OR FALLING REAL INCOMES FROM WAGES AND CAPITAL 2005-14 (Source

McKinsey)

29 THE YEARS OF LIVING STAGNANTLY

• 3. Erosion of trust: fiscal austerity in the crisis

2.0 2.5 3.0 3.7 3.7 4.4 5.7

• 10.0
• 8.0
• 6.0
• 4.0
• 2.0

0.0 2.0 4.0 6.0 Canada Italy Germany Japan France UK US

STRUCTURAL FISCAL DEFICITS (per cent of GDP) (IMF)

2010 2016 Tightening

30 AUSTERITY

• 3. A partial summation

Exposed to globalisation (supply chains) Rise of foreign born in population High inequality Rising inequality Big financial crisis Weak post- crisis recovery High unemployment Discourage d prime- age workers Total

Italy 3 3 2 NA 2 3 3 3 19 UK 2 3 3 2 3 2 1 2 18 US 1 2 3 3 3 2 1 3 18 Canada 3 3 2 2 1 1 1 2 15 France 3 2 1 1 2 2 3 1 15 Japan 2 1 2 3 1 2 1 2 14 Germany 3 2 1 NA 2 1 1 1 11

31 ADDING UP SOURCES OF DECLINING TRUST

• 4. Return of zombie political ideas
• Our politics have become fragile: anything can happen
• Populism and demands for absolute national sovereignty are among the results
• These are zombie political ideas

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• 4. Return of zombie political ideas: populism
• Populism is not the same thing as the idea that the political and economic elites

should pay more attention to the interests of the majority of the people.

• As a political philosophy, populism is different
• Populists, be they of the left or right:

○ Distrust institutions that check the “will of the people”: courts, established media and the bureaucracy ○ Reject “experts”. ○ Are hostile to those not part of “the people”

• “The elites” are seen as corrupt and treacherous:
• These attitudes lead to autocracy (now known as “illiberal democracy”)

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• 4. Return of zombie political ideas: sovereignty
• Sovereign autonomy is also a zombie idea
• The world has been brought together by technology
• and the impact of humanity has radically increased
• This necessitates an ability to deliver global public goods: financial stability and
• pen trade; security; and protection of the environment
• No state can deliver these things on its own, not even a superpower
• We have to create supra-national regimes. These are inescapably technocratic
• r “expert” regimes
• Such regimes clash with simplistic versions of democratic sovereign autonomy

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• 5. Return of zombie ideas: economics
• Among zombie economic ideas are:

○ Protectionism ○ Marxism ○ High costs of immigration

• At the same time, our present fiscal and monetary arrangements are also based
• n zombie ideas:

○ Ability to make the current financial system stable ○ No need for an active fiscal policy ○ Unimportance of inequality

• We need a new balance between markets and the state, as de Grauwe argues

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• 6. Challenges
• We need to find a way of reconciling global integration and global impacts with

the welfare of domestic citizens and demands for a democratic voice

• That will require painful choices over policies towards immigration, the social

safety net, redistribution of wealth and incomes and international trade and capital flows

• That will also require painful choices over how to manage the tension between

demands at the European and global levels and democratic politics

• In general, our politics makes us more inward-looking while global demands

become more pressing

• We have to manage this tension. At present, we seem to find it hard to do so.

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