This is a translation of an essay from the mid-May print version of Der Spiegel.
The spell worked its magic for three decades. For three decades humanity believed in the blessings that globalization would bring in its wake. It was assumed that in the end everyone involved will benefit when we remove regulations, when corporations become ubiquitous throughout the world, when the banks have lots of money, when tax havens exist, and of course when government stays out of our hair. What prevailed was the primacy of the economy, whether in Herne, New York or Shenyang. It was as simple as that.
But times have changed. Once considered to be the High Temple of market dogma, the mighty financial world was about to collapse ten years ago, before it had to be rescued by - surprise - the rest of us.
What also collapsed was the myth that markets can regulate themselves. Simmering unrest emerged, borne by diffuse fears, half-knowledge and justifiable rejection of what has gone wrong with globalization. It became an opportune time for con men and authoritarians.
We now see a void that cannot be remedied by trying to fix details. What the world needs instead is a new leitmotif, a new guiding concept. We indeed need it before populists of all stripes fill this void by inciting people against each other. Time is of the essence.
The tremendous power and impact inherent in such a myth was exemplified when Ronald Reagan relaxed banking regulations in 1982. All of a sudden, the Chicago Boys were considered hip. Supply and demand, so they believed, was the key to resolving anything and everything – whether it concerned a shortage of screws, demand for loans, or the desire to get married. Soon the apostles of the free market ruled everywhere, even in France. Mighty authorities such as the World Bank and the International Monetary Fund (IMF) preached the Washington Consensus; i.e. strict market orientation as a new world religion.
For more than a quarter of a century there was no doubt about what is right: The market trumps the state [no pun intended]. What to do with State-owned enterprises? Privatize them. Your pension? Self-provision through the free market. Unemployment benefits? Curtailments. Opening borders for Eastern Europeans? Certainly. And the next free trade round? Of course. And so forth. In the end, even Social Democrats contributed to lowering top tax rates and making hedge funds happy.
In these times a lot of prosperity was generated throughout the world. The Asians were able to sell off their cheap goods everywhere. And the West benefited from cheap clothing from Vietnam and toys from China. Germany enjoyed an export miracle because everyone needed machines made in Germany.
And yet something seems to have gone awry. There is this unease. There is this resentment. There are these downsides.
The reason why world inequality has fallen is due mainly to the fact that so many Chinese and Indians have experienced a rise in income, as was demonstrated by the former World Bank economist Branko Milanović.
The results elsewhere are less evident. Neither have Americans, Britons and Germans experienced faster growth in their economies compared to the decades prior to 1982. Nor were there fewer crises. On the contrary, the IMF has identified more than 120 banking crises and 200 currency crises since then – a dramatic increase.
True, companies make more profits today, but they invest a lower proportion in machinery and jobs than before. This is in part because in a financialized global economy it is more lucrative to speculate. In part because it is more chic to make a quick buck than to think long-term. To sum this up we see $200 trillion in debt generated in the old system.
More importantly, however, the greatest promise has remained unfulfilled: Half of the Americans today have seen stagnating or even significantly lower real incomes since 1989. In Germany, there are 40 percent who are less well-off in real terms, and half of Germans possess practically no wealth. And nearly one in four Germans works for little pay. Such enormous wealth gaps between the rich and the poor existed in the nineteenth century as well.
Depending on the calculation, progress has thus by-passed a third to half of the population. The Americans and Britons were the first to be jolted by this development through the election victories of Trump and Brexit. Ironically it is those very countries who most eagerly followed the mantra of the free markets that are now confronted with Industry 0.0 and social division. Meanwhile, IMF experts are having to concede that capital markets are probably not so efficient after all. And the once orthodox-liberal OECD is only defining growth these days as good growth if it benefits the poor.
The myth of the past has become passé. What is missing is the new, powerful concept.
Economists have begun to understand what went wrong in recent years. Kenneth Rogoff and Thomas Piketty evaluated enormous sets of data pertaining to financial crises and assets. Nobel laureate Angus Deaton reveals in a new study that in the US, the life expectancy of white men is on the decline in precisely those areas where local companies have been displaced. Robert Shiller and George Akerlof have found main reasons that explain why financial bubbles come about systematically in markets.
There is a growing suspicion that it was perilous to allow the economies to be determined by financial wizards who are incapable of foreseeing their own debacles, who follow every fad, who then in times of crises drive governments on before them.
Could this become the core of a new mantra – one that refrains from turning to financial magic for solutions? Possibly. Bonus calculations for managers should no longer be based on share prices, says Nobel laureate Joseph Stiglitz. Investors should be rewarded when they invest in the long term, says Andrew Haldane, chief economist of the Bank of England. And managers should have to pay back bonuses when it turns out that they made a mess of things. In other words, all incentives investing in human resources and machinery.
Many reasons point to the assumption that we would face fewer debts if, for instance, banks were required to provide more funds – especially when it comes to pure financial transactions as well as in times of distorted lending. The Bonn-based economic historian Moritz Schularick found that in the run-up to nearly all financial crises too many loans had been taken out on real estate. This problem could be solved if the loan portion for the purchase of a house was limited to around, let’s say, 50 percent.
And what about the pitfalls of free trade? According to Harvard professor Dani Rodrik, trade agreements in the future will have to be equipped with explicit clauses to enable import restrictions, if necessary. This would be the case, for example, when cost benefits are attributable solely to disregard for human rights in the countries of origin, however, not when the productivity is lower. When it is foreseeable that low-cost competition threatens to devastate entire industries. Thus, far more free trade could be rescued than through Trumpian protectionism, which comes with a high risk of escalation.
Moreover, it would be advisable to clarify what issues in a better world actually demand regulations on a global scale – climate protection would be an example. And in which cases, beyond the crude good vs. evil dichotomy, state government is actually useful. Experts today can determine with much more clarity which investments are worthwhile and which are not. And which expenditures on railroads, schools or research will ultimately bring the finance minister greater return on initial investment because they initiate growth and generate more tax revenues. Such projects could, under strict supervision, be exempted from rules limiting fiscal deficits. This would be a more farsighted approach than formally striving to balanced budgets every year. The innovation researcher, Mariana Mazzucato, has demonstrated how strongly government agencies have enhanced the development of technologies without which devices like the iPhone would not exist: A good reason to start making those dull authorities more attractive to top researchers.
Some of these ideas have already matured, others are still in their inception stage. What we need to find is a unifying formula to define the new paradigm: the leitmotif.
Finding it is a tremendous challenge. It cannot be as simple as the market-works-wonders formula. Yet it must be simple enough to make it plausible to everyone. The solution probably lies somewhere in the middle: in a better controlled, enlightened globalization that can do without the compulsion to standardize everything throughout the world. What is needed is a new balance of liberties with built-in safeguards against excesses. And an environment in which politicians can again shape and decide on policies instead of rescuing banks or states without having much choice in the matter.
This requires an economy that is more dynamic and innovative than in the imposter years – for the very reason that more money will flow into real projects and that higher incomes will increase sales. A good 80 years ago one myth already had to be replaced in the wake of a crash and a failed attempt at globalization. This brought populists to power, nourished nationalism and ended in a trade war and ultimately a world war.
At those times it was US President Franklin Roosevelt who coined a new slogan: the phenomenal New Deal, which embraced the losers of the economic crisis, placed bounds on the financial world, ensured investments in the future, and demonstrated political control: A model for the post-war world, during which almost everyone benefited for decades.
High time to draw our lessons from this.