Economic Outlook 2017: The start of a new age of anxiety

On the advent of ‘Global Trumpism’, Stephen Kinsella, Ireland’s economic commentator of the year, reflects on its potential to destabilise the Irish economy.

In 1948, the poet WH Auden wrote The Age of Anxiety. Auden was talking about a world after the second world war in which the old certainties he was raised with had been blown away. By 1948, Britain had ceased to be a world power, the US was ascendant, and much of Europe was still in ashes. Auden was also talking about himself. Then aged 37, he was worried his best years were behind him, and did not look forward to old age.

The Age of Anxiety speaks to the mood we have as 2017 approaches. Auden’s book is about mirrors, and their effects on you. Auden is trying to tell us that mirrors don’t just reflect your face when you look at them. The person you see might not be the person you are. Even worse, the mirrors are made by other people and can be distorted for commercial or political reasons. (Think about those weird, bendy mirrors you often see at fairgrounds). Auden is very concerned about people like the police and those in fashion and the media “who manage the mirrors”. Given that the phrase of the year is ‘post-truth’, spending time looking at those who manage the mirrors will be key in 2017.

Anxiety is not uncertainty. One is not necessarily caused by the other. Anxiety is something that damages you as you experience it in large doses. Uncertainty doesn’t directly hurt anyone. Of course uncertainty affects your behaviour – you buy less and save more when you are uncertain about your job, for example – but it does not do so directly. Anxiety directly damages you.

This year will see the start of a new age of anxiety as the world pivots away from globalisation and liberalism, into a more contained, more national system. The process already has a name. Political scientist Mark Blyth calls it ‘Global Trumpism’, named after the lying, misogynist, nativist who will take control of the world’s most powerful economy in 2017.

Global Trumpism is a cool way to think about a set of factors causing the world to move away from the ever-increasing integration of product, labour and capital markets we’ve seen since the 1970s. Last year may well mark the end of the second great wave of globalisation. The first wave began in the 1870s and ended in 1914. There’s no need to explain why the first wave ended, but it does show how serious the consequences could be for us as we move into 2017.

Global Trumpism

What are the features of Blyth’s Global Trumpism? Think about the world economy in 1971. It was much smaller, dominated in trade terms by one superpower – the US – and in political and military terms by two superpowers, the US and USSR. It was quite difficult to move money from country to country because of the gold standard, which was then in its last days.

While people did move country, they did not move in large numbers. Governments pursued the mix of policies given to them by John Maynard Keynes in the 1930s, that is, they tried to reach full employment and control inflation while doing so. The result was a regime that generated a fair bit of inflation, low levels of corporate profits, and a high degree of equality.

Governments had real power to effect change at a national level, because national economies were fairly closed, multinationals were not yet the political force they would become, and the levers of power still produced a strong change when you pulled them. The political consequences of full employment were obvious, and it was a debtor’s paradise, where the inflation rate meant you paid back far less than you borrowed for large purchases like mortgages. As labour’s power increased, because the labour market was so favourable to them, governments tried to reduce that power, and the regime swung in the opposite direction.

In the 1980s, after the gold standard had finally collapsed, Margaret Thatcher and Ronald Reagan put in place the changes that moved the world from a relatively closed, full employment system where politicians had real power to affect the outcome of the economy, to the highly open, mobile capital world we live in now. Or, at least, used to live in.

Deregulation and technological advances meant financial markets became strong, and large players on the global scene. Central banks became strong as they tooled up to deal with the crises caused by financial markets. Multinationals became strong, as they were able to move their money around, gain the lowest possible wage costs, and use pliant countries like Ireland and others to pay less and less tax. The result was a weakening of national policy tools, a weakening of domestic politics, a crushing of labour’s bargaining power, and capital ascendant. In short, we moved over a 40-year period from a regime that generated inflation, low profitability, and a high degree of equality to one that generates deflation, high profitability for some, and high degrees of inequality. We live in the inverse of the 1970s.

Populism, political paralysis and the EU

The result of living in the inverse of the 1970s is political paralysis, falling real wages and real anger for populists to exploit, because people remember what it was like to live in a world when the people they elected could do things for them. The result is Global Trumpism. Global Trumpism is not specific to one individual. Rather, it is best understood as a collection of forces. Eventually some liar was going to come along and sell angry people magic beans about returning to an unspecified golden period when the world made much more sense, and things got better for people, not worse.

Trump is not alone. Either on the right, or the left, it doesn’t really matter, across the world, populists are gaining political power. The result will be the death of the second wave of globalisation as they close borders and pull up shutters in an effort to make country X great again. In 2017, France and Germany will elect new leaders. After the terror attack in Germany, it is unclear whether Angela Merkel, now the leader of the free world, will remain in power. Fresh Italian elections may see the Five Star movement take power. In the Netherlands, far-right Geert Wilders is now ahead in the polls. If hard-right parties in France and Germany get power, the EU and probably the euro are finished.

Meanwhile, Italy’s banking system is crumbling. Remember when we were told burning Ireland’s bondholders was going to result in plagues of frogs and locusts? Too big to fail, they are requiring the bondholders to get burned as the first large bank falls. The result on the markets? Little to no effect, thanks to quantitative easing and other measures. For all the free cash, however, markets aren’t buying Monte dei Paschi’s recapitalisation plans. This bank is the tip of the iceberg.

Populists are people who tell you the constraints that bind everyone in office won’t bind them when they are in office. Populists are always liars, their policies always damage the people who vote them in, and the result of populist policies is usually national humiliation. The results speak for themselves. Every Latin American country that has tried populism has been damaged by it. But here’s the problem. Any politician hungry enough for power has just seen that facts don’t matter in 2017. There is a very strong incentive for them to move away from facts towards feelings and nonsense. They will give in to those who manage the mirrors, and become like them.

In The Rise and Decline of Nations, Mancur Olson wrote about how small groups with similar incentives bend large, diffuse groups to their will. By getting what they want, these small groups harm economic growth by instilling essentially protectionist policies to benefit themselves and diffuse any costs throughout society.

These policies will tend to be protectionist, which will hurt economic growth; but because the benefits of such policies are concentrated and their costs are diffused throughout the whole population, there will be little public resistance to them. As the rent extraction of these smaller groups continue, the end of this process is inevitable, national decline or the upending of the power of the smaller groups. This is the end result of Global Trumpism – more for the billionaires, less for everyone else. A deepening, rather than a draining, of the swamp.

Global Trumpism is one set of forces at work on the global economy. The second set of forces centre on China and the emerging markets of the developing world.

China, India and oil

At the start of 2016, everyone was worried about China. China’s housing bubble looked solidly burst. It was moving away from investment-based development to a more consumption-based development. The result was a rapid slowdown in oil and commodity markets, and a change of fortunes for countries like Australia, Nigeria, and Venezuela, who produce the primary commodities to power China’s economy. As prices collapsed, Chinese authorities stepped in. There is no rise of populism in China, and the Chinese government still holds the kind of power a country like Britain had in the 1940s. The Chinese authorities stepped in and reflated the economy using a massive stimulus programme, which helped the fortunes of the producer countries like Australia and helped push up global growth.

Those bad debts haven’t gone away however, and China’s bumpy deceleration from 10 per cent growth rates to 6 per cent in 2017 to something closer to 3 per cent in the 2020s will continue. China will also do very well if President Trump increases spending on things like airports and roads, because he will borrow from them to do so. It will still do pretty well if President Trump spends his money on tax breaks for rich people, because he’ll do it with debt.

India’s demonetisation experiment will be talked about for years. It is economics-textbook gold. What happens when you have a policy to reduce grey-market labour and increase taxes, and you do it by cancelling the value of higher denomination notes that make up 86 per cent of the value of currency in circulation? Total chaos. India’s economy will suffer in 2017 as Prime Minister Narendra Modi’s sharp shock to his economy takes effect. The demonetisation move is part of a larger anti-corruption push by Modi and may well damage his credibility.

Unlike China, Modi does not have centralised control of the Indian economy in the same way, and his ability to implement policies to redistribute income and enrich his citizens is very limited. India’s economy will grow next year, as will China’s, but the cumulative effect of less trade – thanks to Global Trumpism – and damage to large emerging economies will be slower global growth.

Turmoil for advanced economies, risks for Ireland

The advanced economies live in conditions of secular stagnation, where too much saving happens relative to investment, high pre-existing debt levels constrain expansion of either the public or private sectors, and interest rates are too low for the central bank to be much use. The result is falling productivity across the ageing economies of the global north.

One place we haven’t seen secular stagnation taking hold is Ireland. This tiny open economy facilitates multinational export hubs and has grown rapidly since austerity policies stopped in 2013. The Irish economy has been blessed with low interest rates and low sovereign borrowing rates, thanks to quantitative easing, cheap oil prices, thanks to China’s pivot, and a very favourable exchange rate.

None of these factors are under Ireland’s control. Oil is on the way back up from its low levels in 2016, and the results of Global Trumpism – Brexit, turmoil in Europe, and changes to the US corporate tax regime, in particular – have the potential to destabilise the Irish economy in 2017.

Total virtual war

2017 will be the year that cyber warfare becomes ingrained into the collective consciousness. In the same way that email existed for decades before it became a household term, the concept of warfare using the fact that the advanced economies of the world are highly interconnected is not a new idea.

Cyber warfare has global connotations, but it can also hurt rural solicitors in Ireland and cabinet members in Austria. The general public will have to learn to adopt two-factor authentication, paid email services, and hard-disk encryption in the same way as we all learned to seat belts. We already live in a world where one billion Yahoo! accounts can be stolen in a few hours.

The consequences for our daily lives will be pretty small but when highly sensitive information begins getting leaked at the national level because our leaders use gmail accounts with passwords like 0000, expect to see real changes.

News and media

The New Age of Anxiety is happening because we can’t trust the people who make and manage the mirrors any more. The democratisation of publishing via social media has meant that a lot of absolute crap has been published.

The reaction to the spread of fake news and prior-affirming political entertainment like Breitbart or The Daily Show should be a move back to traditional, trusted journalistic sources. Companies like the New York Times are experiencing large increases in subscriptions as people try to get a sense of what is happening to them. The world has never needed real news more urgently. The winners from Global Trumpism will try very hard to remove real news from any position of influence as a result.