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Precarious Employment

Posted by Grant Murray on
Precarious Employment

It is widely accepted that the scrooge of precarious employment is spreading across the western world and even as far away as Australia and the consequences are very worrisome.

As might be expected, many fine minds are focused on the problem; its definition, its causes, its impact, and, above all, how to eradicate the problem.

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In this paper, I do not plan to tread over old ground to any extent but, rather, to provide some broader context to the problem as an economic issue and later on to assess its impact beyond its economic implications. I hope I can provide a somewhat broader framework to assist future debate on this very important issue.

In the economic context, the first problem is a problem of definition.

There are many definitions proposed by many organizations, scholars and other assorted pundits. They range from a very simple sentence to several paragraphs.

The following are three of the simplistic examples:

  • Workers who lack or who have inadequacy of rights and protection at work: International Labour Organization
  • Workers who are subject to unstable employment, lower wages and more dangerous working conditions: International Labour Forum.
  • Work that is poorly paid, insecure, unprotected, and cannot support a household: Wikipedia

Whatever the definition, part time employment, temporary employment, contract work, on-call employment, and self-employment are typically classified as precarious employment.

These types of employment have a number of common deficiencies. They are of indefinite duration. They provide irregular working hours or work weeks. They provide insufficient or no social or health benefits. They provide no old age security. Much of this type of employment is fashioned in a way that is designed to allow employers to escape certain legal obligations.

However, it is virtually impossible to define these types of employment in a way that would provide a legally precise definition suitable for use in any legislative framework to solve the problems. The parameters of these jobs vary widely and it would be very difficult to find language that would capture all the variances. And, it must be remembered that in some cases, perhaps not too many, the employment arrangement does in fact meet the requirement of secure and fair employment.

Therefore, bottom line, it is unlikely that anyone can write a definition that would be very effective in solving the problem.

Next, in order to fix the problem, it is important to try to determine the factors that created the problem in the first place.

In my view, business leaders and governments must both share the blame.

Why so?

Going back to the 1930’s, society during the depression did try to define corporate responsibility and whether it included any social responsibility. In the early 1930’s, Henry Ford added his voice to the debate and declared that “a business that makes nothing but money is a poor business”.

The discussion continued throughout the depression but when the war came along, social responsibility gave way to civic responsibility. Following the war, everyone was preoccupied with rebuilding a peacetime economy. However, in 1970, the economist, Milton Friedman famously declared that the “business of business is business” and the debate about corporate social responsibility started once more. Again, nothing was really resolved.

However, as the 1970’s wore on, there was a major shift in the corporate paradigm.

All of a sudden, the mantra for business was to increase “shareholder value” and the CEO’s bible became his quarterly financial statements. As a consequence, the rush to reduce costs as a major business objective was on.

As might be expected, since labour costs usually represented the lion’s share of total costs, they became a prime target. As a result, the whole model of work underwent a dramatic change.

Under pressure to significantly reduce labour costs, CEO’s set about to achieve this in two ways.

First, they took measures to reduce the costs of having permanent staff. Second, they sought out alternative models of work so that work could be done more cheaply.

There were substantial layoffs throughout the business world in order to reduce the cost of maintaining permanent staff.  Some companies used severance packages to incent employees to resign. Ironically, many of these companies soon realized they were short of staff and before long replaced these displaced workers with part time or temporary workers. Even more ironically, often these were the same people who they had earlier let go.

Another technique involved farming out whole corporate functions to an outside firm. Usually these firms were not unionized and, therefore, were able to provide a cost saving for the company doing the outsourcing. If a company needed new workers, more often than not, it would hire new workers as temporary or part time workers or, in the case of more skilled workers, as contract personnel. Again, this usually represented a major cost savings because the company avoided responsibility for the cost of benefits.

As a result of these measures, the pool of temporary, part time and contract workers became larger and larger. Today, in some industries such as the retail and food distribution industries, employers now rely almost entirely on temporary or part time workers.

As part of the drive to reduce costs, employee benefits for regular staff also took a very big hit. Frequently, these benefits were eliminated or substantially reduced. In some cases, rather than enjoying a full range of benefits the employees were given a menu of benefits and were allowed to choose two or three of these benefits. In this way employers were able to avoid the cost of a full range of benefits for all employees but could still claim they provided benefits.

Defined benefit pension plans became a thing of the past. The only organizations now offering these pensions are governments and educational institutions because they have access to tax dollars to cover their risks.

Today’s pension plans, if they exist at all, are defined payment plans which shift the risk of funding from the employer to the employee. This is true even when the employer makes some contribution to the plan.

In summary, two things have happened. Full time work has become less secure and less rewarding. Worse, much more work has become precarious work which is even less secure and less rewarding.

The spread of globalization has also been a major factor in the reshaping of the work force. Faced with increasing competition from low wage countries, companies were able to rationalize their drive to reduce labour costs domestically. Their rationale does not hold water in many cases but it has provided a convenient excuse to justify the attack on labour costs.

Therefore, it is clear that the business community has, itself, done many things to bring about the new model of work and to perpetuate the problems this has created.

Perhaps, it is time for business leaders to step back and consider the long term damage these problems are doing to their broader business interests. More about this later.

As I said earlier, governments are also to blame for this state of affairs and it is important to look at the role government has played as an incubator in allowing this situation to blossom.

For many, many years there has been a proliferation of laws on the statute books designed to govern behaviour in the workplace. Sadly, in most cases, these laws are obsolete and do not reflect current circumstances. Many more are honoured in the breach than in the observance. Moreover, governments themselves have been extremely lax in enforcing these laws. There are many examples to prove this point e.g. minimum wages, overtime payments, unpaid wages, vacation pay, hours of work, and safety laws, to name a few.

Sometimes, when governments do pass laws to protect workers, these laws end up having the opposite effect. The laws governing the funding of pension plans are a good example. Usually, these laws provide that companies must live up to their funding obligations in good times and bad and, in principle, these seem like good laws to protect workers. But, when there is an economic downturn, companies cannot adjust their contributions during the downturn and this law can create a financial hardship to companies trying to weather the storm. The impact of these restrictions has been one significant factor in driving companies away from defined benefit plans to defined payment plans and, in the process, shifting the risk from the companies to the workers.

So, all in all, the existing laws have been largely ineffective in protecting workers or workers’ rights and, increasingly, have become a greater issue when they are being applied or not applied to precarious workers.

As we have seen, politicians are very reluctant to tackle this problem head on and update or revise these laws. Worse, when they choose to do so, they are frequently doing so to take away workers’ rights or workers’ protections.

In response to lobbying by business, governments in many jurisdictions have passed many new laws which on balance tend to favour business rather than workers.

Many jurisdictions have enacted laws aimed at weakening the rights of unions or their members. The rash of these Workers’ Rights laws give workers additional individual powers but at the expense of union power. Therefore, the workers in these jurisdictions have less collective bargaining power and before they know it, their wages are dropping and they have fewer individual rights.

It is well documented that a significant reason for the loss of manufacturing jobs in the rust belt is because companies are moving these jobs to the ‘Right To Work” states where wages are lower and where unions have very little power. As well, many of these jobs now qualify as precarious jobs.

So, in my view, there is no doubt that governments are also to blame and must accept their share of responsibility.

There is no doubt either that governments should take strong action to help solve the problem.

Unfortunately, this is unlikely to happen, at least in the short term. As long as there is economic uncertainty in the air, politicians will avoid doing anything which might further rock the boat. After all, their own jobs are more important than the state of the nation. They do not understand, or do not want to understand, that sometimes you need to take a strong dose of medicine you do not like in order to cure your sickness.

In summary, I believe that, from an economic point of view, this potentially unstoppable trend to various forms of precarious work will have very damaging consequences not only for our workforces but for the world economies at large.

However, my major concern goes well beyond the strictly economic ramifications. I believe the explosion in precarious employment is a major factor, if not the main factor, feeding the fires of populism.

By now, it is well recognized that there has been a huge outburst of populism throughout western society and, mostly, it has been populism of the right. There is a growing concern that, if this movement continues to gain momentum, it will have a very serious damaging impact on the world order that has evolved since the end of the Second World War.

Obviously, there are many factors responsible for this rise in populism both on the right and on the left.

However, in my view, the major factor has been the way society has been treating the working class.

Consequently, most workers are afraid. Most workers are also mad. Finally, they are crying out for change and crying out for fairness.

As I said in my paper on Globalization, it is no wonder that, more and more, they are making their voices heard in the political arena and through the ballot box, warning politicians of every persuasion that they mean business. Their unrest is very real and growing faster than we probably realize. It is increasingly possible that if politicians do not respond to their real concerns very soon, they could very well take to the streets.

If workers should more fully embrace populism and give populists, especially populists of the right, the reins of power, we will be living in a much different world . . . a world we will not like.

Unfortunately, there are many chess pieces on the board and the winning strategy is far from clear. But, one thing is clear. If business leaders and politicians continue to put their selfish self-interests ahead of the legitimate concerns of the citizens, we should prepare for the worst.

Let us all pray that saner minds will prevail.

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Remembering Yalta

Posted by Grant Murray on
Remembering Yalta

­The purpose of this paper is to discuss a theory being talked about in the United Kingdom regarding President Donald Trump’s possible plans for his relationship with Russia. At first glance this plan is so absurd as to be laughable. However, given that we are now living in Donald Trump’s world, and given his unpredictability and his lust for chaos and the dramatic, it might not be quite so laughable after all.

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By now, it is crystal clear that Trump, aided and abetted by Steve Bannon and Steve Miller, are intent on blowing up the existing world order and, so far, they are doing a pretty good job of doing just that.

However, one big question still haunts us. How do they plan to deal with Russia?

A few days ago, I heard a discussion on TV by a British journalist who referred to Trump’s possible plan as the Yalta plan. The discussion was quite brief and she was very sketchy on details. However, she did say enough to pique my curiosity and to allow me to fill in some of the blanks. And, on my own, I have tried to fill in a few more blanks.

I have concluded that while the plan is very far-fetched and, hopefully unlikely to go anywhere, it does have a certain rationale which could definitely appeal to Trump and Messrs. Bannon and Miller.

Let’s begin by looking at the current state of play in Trump’s world.

First, while Trump has been extremely critical of many countries and transnational alliances across the world he has, in most cases, adopted a somewhat laissez faire attitude about their roles and their importance in the world scheme of things. While he continues to make threats and condemn everybody and everything, his bark has actuality been much worse than his bite.

For instance, he says the United Nations is nothing more than a “club” for “people to get together, talk and have good time”. He has expressed doubts about the worth of the European Economic Community saying he “does not care about the EU’s future”. He also said “I don’t think it matters much for the United States”. He has threatened to withdraw support of NATO because it is obsolete and a free loader. He has trashed NAFTA and vows that he is against any multilateral trade deals preferring to enter into deals with individual countries where, presumably, he feels the United States would have the upper hand. Remember, he loves to make deals where he is always the winner.

Admittedly, he has withdrawn from the Trans Pacific Partnership Trade deal and, recently, introduced a crude and bungled ban on Muslims. However, beyond these two initiatives, he has been all talk and little action.

I think it is increasingly clear that Trump feels that this array of transnational institutions and alliances are impediments to his goal of not only making America great again but in maintaining world dominance. To him, these institutions and alliances are not just an irritant but are dispensable and can be cast aside if it suits his purposes.

Having said all this, it is of course very strange that he has remained so quiet on China. During the campaign, China was a constant target of his litany of complaints bur since the election not so much. More significantly, he is doing some things which play directly into China’s hands. His withdrawal from the Trans Pacific Partnership Trade deal opens the door for China to move into the vacuum he created and become the dominant trading country in the Far East. For the time being, however, his approach to relations with China is very passive and, strategically, this could prove to be a huge mistake down the road. Nevertheless, for whatever reason, he has chosen not to join battle with China at this time.

But, the strangest thing of all is his treatment of Russia which, to say the least, is most puzzling. At the moment Russia in his eyes can do no wrong whether hacking U.S. election data, stirring up trouble in the Ukraine, cuddling up to Hungary, etc. etc. Admittedly, Nikki Haley gave a strong speech in the UN condemning Russia’s incursion into the Ukraine. However, heretofore, Trump has been mostly silent on this issue and he has yet to make any strong statement endorsing her views.

His profuse praise of Putin is also strange. This admiration certainly creates the impression that he is very envious of the power Putin wields and wishes he had the same power. Members of his own party are reminding Trump that Putin is an autocrat and a killer but this seems to have no impact on Trump’s admiration for the man. Surprisingly, he recently made a comment on Fox News implying that there is a moral equivalency between the U.S. and Russia and that remark is causing uproar.

Not surprisingly, speculation is again rife that Putin has some embarrassing information from Trump’s past.

All of this love-in is happening despite Putin’s well known determination to do whatever is necessary to become a world power. If Trump’s aim is to “make America great again”, Putin’s aim is to “make Russia great again” even though that status was largely illusionary in days gone by. High on his list of priorities is his goal to resurrect the USSR thereby once more giving him political control of many eastern European and Balkan countries.

Next, it must be remembered that under the U.S. Constitution the President has considerable power when it comes to foreign affairs and can take considerable action without requiring approval or ratification from Congress. This is particularly true of non-military actions. Therefore, if he wishes to reshape America’s international relationships to his own liking, there is little to stop him.

Finally, when trying to determine Trump’s intentions, it is necessary to take the measure of the man. Here, we have a number of clues which certainly ring alarm bells.

He very much wants to be loved by everybody and goes to great lengths to prove to himself this is true. Next, he is an extreme egotist and cannot conceive of being accused of being wrong. To the contrary, he believes he alone can make anything happen and that, therefore, he can cure all the world’s problems. Finally, he sees himself as a pivotal player on the world stage and, in my view, is determined to create a memorable legacy for himself in the history books.

So, where does all this lead to? I believe that looking at all the available evidence he is intent on reaching a detente with Russia as a major priority in achieving his goals.

I believe he has convinced himself that reaching a detente with Russia would be a landmark achievement which would guarantee world peace for years to come. Ergo, he would become a hero in everybody’s eyes and everyone would love him.

The question becomes, therefore, how would he plan to do it?

It is this question that has given rise to the theory that is going the rounds in the United Kingdom. And, this is the link to Yalta.
Those of us in our golden years remember Yalta. We remember that Winston Churchill, Franklin Roosevelt and Joseph Stalin met in Yalta in early February, 1945 to “shape a post second world war peace”. We remember that they signed an Agreement to politically carve up Eastern Europe and the Balkans which basically partitioned these countries from Western Europe. Finally, we remember that in the long run the consequences of that Agreement were disastrous.

As we know, Germany was divided into two countries. Berlin was divided into four sectors and placed under the control of four separate countries. Stalin was given oversight authority over a number of Eastern European and Balkan counties and promised to hold free elections but soon reneged on this promise and created the Soviet bloc of satellite nations. He then imposed authoritative communism on these nations. The USSR, as it became known, alienated itself from the rest of the world and the Cold War was born. The divide between most of the Western world and the Soviet empire was complete and each group felt they were entitled to govern without any obstruction or criticism from the other group.

This was the sad outcome of the Yalta accord.

Remember as well, that throughout this period the people living in the USSR lost their freedom and suffered from a very poor standard of living. As well, their countries fell behind the western world economically and this perpetuated their plight.
So, all in all, this effort by a strong leader to hive off a significant part of the world was an absolute disaster.
This brings us back to Mr. Trump and his intentions.

Certainly, he is unable to enter into any formal agreement like the Yalta Agreement. But there is a concern that given the latitude he has under the U.S. Constitution, he could reach an “accommodation” with Mr. Putin, which would embody many concepts from the Yalta Agreement and thereby accede to Putin’s objective to achieve his own goals.

In effect, he would say to Mr. Putin…..“If you stay out of my back yard, I’ll stay out of yours”. Effectively, he would stand aside and give Putin a blank cheque to pursue his goal of political expansion just as Stalin was able to do.

Under this arrangement, each country would be free to pursue their own agendas without interference or obstruction by the other. They would be able to pursue their own political and economic but hopefully not military objectives, in jurisdictions of their own choosing. They would be free to impose or withdraw sanctions. They would be free to enter into alliances with other countries or to create political blocs. In many ways such an arrangement could look like a mini Yalta agreement, partitions and all.

In order to temper the expected negative reaction to such a deal, the two leaders could agree to co-operate on a number of feel -good issues such as fighting ISIL, denouncing torture, attacking child hunger, controlling nuclear proliferation, to name a few possible candidates.

Regrettably, it is more than likely such an accommodation would hold great appeal for the hard core Trump faithful. It could convince the faithful that Trump is a legitimate world leader and someone to be reckoned with on the world stage. It would be seen as weakening the bargaining power of many countries, especially Europe, in trade matters. This would bring cheers from the faithful because it would allow the U.S. to negotiate individual trade deals that impose its terms on its weakened trade partners. It could appease their concerns about the influence of transnational institutions. It would make it easier for the U.S. to further back off any serious attempts at dealing with climate warming. In other words, to the faithful it would Make America Great Again. All of this could be red meat to Trump’s supporters.

Unfortunately, in the long run, it could also give new life to Russia and perhaps lead to an expanded stable of Russian satellite nations ruled by autocratic leaders who could, once again, wreck havoc on an established world order. We must never lose sight of Putin’s grand plan.

Very definitely, such an accommodation would be fiercely condemned by many countries and alienate almost all of America’s allies and supporters. Europeans especially have too many bad memories of the situation that existed for so many years under two regimes and certainly remember the impact of the cold war. They will quickly realize that they are being stranded in between two powerful entities and left to fend for themselves with reduced power of their own. Their situation would be even worse if the EU should collapse or NATO should disintegrate.

The rest of the world would be just as upset. In my view, they would also quickly realize that this new alignment would once again be a real threat to an established world order and object very strongly to such a rearrangement of world affairs.

As I said at the beginning of this paper this whole concept is very far-fetched and is most unlikely to succeed and I agree. However, the fact that people are talking about it, if only in hushed tones, is a cause for concern. Also, given the tenor of Mr. Trump’s remarks in the last few days, we have to worry about his true intentions and this plan in his mind may not be too far-fetched at all.

We can only hope the Republican Party and others will come to their senses and rein Trump in before it is too late.

 

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Is World Order At Risk?

Posted by Grant Murray on
Is World Order At Risk?

In my June, 2016, paper, Globalization At Risk?, I wrote about the impending attacks on this hugely popular economic phenomenon.  Regrettably, many of the concerns I spoke about in that paper have come to pass.

However, this is just one of a litany of significant global issues which are flooding the world scene and creating an unsteady world order.

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You will all recall that following the second world war, the world slowly evolved into a new world order which became known as the Liberal World Order . The developed nations, for the most part, collectively supported policies, treaties and transnational institutions designed to maintain peace, to foster economic prosperity, to protect human rights and, generally speaking, to make the world a better place to live.

As a result, for many decades, the world has enjoyed a period without a major war, economic prosperity unheard of in history, technological advances undreamed of by anybody, and unbelievable medical breakthroughs.

Regrettably, in recent times, a number of new and disturbing issues are now front and center and many of these are threatening the established world order and could quickly destroy much of the stability that protects us in today’s chaotic world. It is even more concerning that these issues are rattling our world concurrently which increases the risk we could face the perfect storm.

As I reflected on the many issues that are in the news these days, it struck me that issues are usually addressed individually and usually in isolation and not as part of the totality of many issues.  Hence, any discussion or analysis usually underplays the impact these issues, when taken together, would have on our world.

A quick review of these issues through this lens makes it very clear that our world is under attack on a multitude of fronts both in the short term and the long term. Further, given this array of issues, it is no wonder that the world is in disarray in trying to deal with them.

This has led me to addressing a number of the issues as a collection of concerns which I believe provides a more realistic portrayal of the dangers we face. I have chosen these particular concerns because I consider them to be overarching concerns which are already disrupting world order.

I have not made any attempt to prioritize these concerns because in most cases they are interdependent or interconnected with many other concerns. As I said earlier, they are all happening concurrently. Also, in many situations, it is impossible to separate cause and effect.

Not surprisingly, the tone of this type of analysis is very negative. Regrettably, when working through the concerns as a totality, it became very difficult to spot anything positive. Indeed, I believe that given the vast number of issues and their connectivity, as I said earlier, there is a growing probability that we could soon end up smack in the middle of the perfect storm. I hope I am wrong.

Here, therefore, are several issues that I perceive to be major overarching and often overlapping concerns:

Anemic World Economic Growth

The world is plagued with very low economic growth and there is every indication this will continue indefinitely. Growth rates hovering in the 1% to 1.5% range will not sustain healthy economies but these are the rates most economists are predicting for a long time to come.

Continuing low growth can lead to severe economic stagnation which, of course, causes many associated problems which in turn can have a snowball effect. Not the least of these problems can be political unrest. There is understandable concern that the ravages caused by long term slow economic growth or the impact widespread economic depressions or economic isolation would have on peoples’ lives would be extremely damaging to world order.

There is considerable debate about the underlying causes of the problem and even more debate about the solutions. Indeed, there does not appear to be any clear cut solution. Certainly, politics play a major role. The foreseeable lack of a breakthrough technology to stimulate demand and the propensity for saving over spending are factors. Further, demographic factors such as low population growth and aging populations are becoming significant factors underlying slow growth.

Unfortunately, if the problem continues, desperate remedies attempted by individual nation states could be counterproductive and exacerbate the problem thereby rendering the road to recovery even more difficult than it may need to be. All in all, low economic growth could continue to be a disruptive factor in maintaining world order.

POLITICAL DESTABLIZATION

Political unrest is rampant in many parts of the world. The United Kingdom; the European Community and individual countries within the European Community such as Italy, Spain, Austria, the Netherlands, and Greece;  Eastern European countries such as Ukraine and Poland; Middle East countries such as Syria and Iraq;  South American countries such as Venezuela and Brazil and, of course, several countries in Africa are all experiencing significant unrest.

Further, given the turmoil following the recent election, I would argue the United States has joined the ranks of those countries where political unrest is alive and well.

Political unrest is happening for different reasons in different countries.

Some countries which are already autocratic, such as Syria and Venezuela, are dealing with civil strife. Countries such as Turkey and Poland are in the process of moving from democracy to a form of dictatorship. Greece is struggling to stay democratic while trying to recover from a bad case of extreme left wing policies.  Still others, such as several European countries, are experiencing a crisis of leadership leaving their citizens in a quandary as to how they should be or want to be governed.

However, the single most significant factor causing widespread political unrest is the wave of populism that is sweeping across the developed world. In some cases this is populism of the left and, in others, populism of the right.

Populism of the left usually leads to social upheaval and weakens the authority of governments. Populism of the right, while it can strengthen the authority of governments, usually leads to an autocratic, even a dictatorial model of government which creates other problems. Either way, millions of people feel disenfranchised or downtrodden and that’s not good.

Currently, in Europe there is already a major tug of war between populism of the left and populism of the right to govern and this is causing much unrest.

As one pundit recently said, “Populism is a wonderful thing until you actually have it” and I believe this tsunami will cause much more harm than good.

In my view, we are sitting on a powder keg of political issues which can not only quickly become more contagious but could suddenly explode in unexpected fashion causing untold damage to world order.

Economic Destabilization

The world is very much on edge as traditional economic thinking is being swept aside in very short order and the consequences are not pretty.

Globalization is under attack. Trade deals are out of favour and protectionism is back in vogue. Intellectual property rights are being trashed. International financiers have become robber barons. The upper management class is reaping unjust rewards. Workers have lost their rights. The very nature of work is undergoing dramatic change. Secure employment is a thing of the past. Golden retirement is nothing but a dream.

There is no single explanation for this state of affairs but there are many causes. More importantly, there is plenty of concern.

Without doubt, very large segments of the population feel that they have been left behind, no longer enjoy the fruits of their labour and will have no security for their old age….and they are frightened and they are mad.

It is no wonder that they are crying out for change and crying out for fairness.

And, it is no wonder that they are making their voices heard in the political arena and, through the ballot box, warning politicians of every persuasion that they mean business. It is increasingly clear that if politicians do not respond to their concerns and if economic unfairness and economic uncertainty persists, they could very well take to the streets.

This would be another nail in the coffin of world order.

Waning Support for Democratic Governance

Our democratic model of governance is under considerable pressure in many places and, in some countries, even under attack and rejection. And, there are signs that this form of government is not necessarily favoured by a lot of people or in some cases even feasible.

In my view, one size does not fit all and this is leading to divergent views brought about by different circumstances.

In many countries, the population is of course already ruled by a dictator or an autocratic form of government and even though they might long to live in a democracy that is not likely to happen unless there is a regime change. In other cases, some countries such as Turkey, Libya and even Iraq have implemented demographic governments but they are now regressing to more autocratic governments. There are a number of reasons this is happening. In the case of Turkey, a strongman has grabbed the reins of power. In Libya and Iraq, culture, religious rivalry, and tribal factions are major obstacles to implementing democratic values. This is the situation in many countries, and they are not ready for a democratic form of government or a democratic form of government is not sustainable.

Finally, and this is most worrisome,  in many advanced countries which already have a well established form of democratic government, recent analysis is showing a worrying drop off in support for this form of government.

In a research paper entitled “The Signs Of Democratic Deconsolidation” and published in the Journal Of Democracy, the researchers conclude that liberal democracies around the world “may be at serious risk of decline”.

Using a number of criteria comparing the 1980’s with the 1930’s,  they state that “across numerous countries, including Australia, Canada, Germany, Sweden, the United Kingdom and the United States, the percentage of people who say “it is essential” to live in a democracy has plummeted”. In Canada, support has gone from 75% to 40%. In the United States, it has dropped from 80% to 30%. Further, the numbers are similar across the other developed countries. Worse, support is now substantially lower among younger people.

Admittedly, this is only one study and more research is needed, especially to examine the causes. However, data from other world studies such as the European and World Values Survey, do support the conclusions in this study.

While this is only one factor in the possible disruption of world order, it is a most important factor and needs to have a prominent place on our radar screen as we go forward.

Growing Mistrust of Intellectuals, Elites and the Media

In a recent interview on CCN, Celissa Ward, a political commentator, said  “Americans have become anti-facts, anti-elite and anti-science”.

This statement certainly rings true in view of what happened during the recent elections in the United Kingdom and the United States. Many, many voters did not believe what they were being told by intellectuals, elites and the media.  Sadly, I think this malaise has also spread well beyond election campaigns and has become part of the everyday mindset of many people.

Throughout the country and especially in rural areas, many people now firmly believe that intellectuals do indeed live in ivory towers and do not understand what is happening in the real world and so cannot be believed.

A large number of people believe the elites live a privileged life and are only focussed on their own desires and self enrichment, and so do not have any creditability when dealing with the travails of the “working” class.

The media, largely because of the rhetoric in the United States’ election, is now viewed as very biased and incapable of being objective and cannot be trusted .

The problem is exacerbated because voters themselves often substitute their own biased views for other people’s opinions. For the most part, voters do not apply any meaningful filters to what they hear or to what they are told. Rather, they react positively to what they want to hear and ignore or reject what they do not want to hear. The inability or unwillingness of voters everywhere to be critical is giving the practitioners of propaganda and false news a free path to do harm.

If the voting population does not exercise any constructive criticism over information flow, voters can be deluged with incorrect facts, ill conceived policy proposals, propaganda and fake news, all of which could be taken at face value and influence voting decisions. Even more concerning, this is a technique which a foreign power, Russia, is already using.

Unfortunately, if these techniques are used as a deliberate strategy to disrupt world order they could be very successful.

Weakening Support for Transnational Institution

As I said earlier, following the second World War, there was concerted effort on the part of many nations to create a global infrastructure to establish a new world order which would foster peace and enhance economic prosperity. Therefore, in the years following the war, hundreds of transnational institutions or treaty organizations have been created for these purposes. These cover a wide range of disciplines such as political entities, military blocs, economic forums, environmental watchdogs, workers rights and trade agreements and come in variety of shapes and sizes.

Any list of the important organizations would include the United Nations, the European Economic Community,  the North Atlantic Treaty Organization, the North American Free Trade Agreement, the Organization For Economic Co-operation and Development, the World Bank, the International Monetary Fund, the International Court Of Justice, the World Health Organization and the International Labour Organization.

Even this short list illustrates the complexity of today’s world order and underscores how interconnected and interdependent world affairs have become. It also emphasizes how necessary it is to have global infrastructures in place to maintain this new world order.

Unfortunately, there are an increasing number of attacks from numerous sources challenging the need for or the effectiveness of many important transnational organizations. The policies of austerity being pursued in so many countries have given the critics an additional argument or excuse, namely that they can no longer afford the luxury of these transnational arrangements.

Brexit certainly lit a fire under the embers that had been smouldering in many places concerning the effectiveness of political and economic blocs. The odds are now much greater that Scotland and Ireland will split from England and join the European Community. The problem is that the European Community itself may no longer exist. Many member states of the community are in political turmoil themselves and actively contemplating leaving the community as populism, nationalism and protectionism become rampant in their countries.

Trade agreements are also increasingly under attack and the trading arrangements that have been negotiated with great difficulty over many years are in imminent danger of becoming undone.

Even more worrisome, some of the most vocal and critical attacks on transnational institutions are now coming from this side of the ocean. The most strident criticism of several transnational organizations is coming from the new Trump government in the United States.

Donald Trump has criticized the United Nations as nothing more than a “club” for “people to get together, talk and have a good time”.

Lately, he has expressed doubts about the worth of the European Economic Community. As recently as the weekend of January 14, 2017, Trump, in an interview with two journalists from the Times of London said he did not care about the EU’s future. He said” I don’t think it matters much for the United States.” He went on to t say “you look at the European Community and its Germany”.

He is also very critical of NATO. He says it is obsolete and a free loader and is in need of a major overhaul if the U.S. is to continue its membership.

He claims that NAFTA has been a disaster for the United States and he plans to get rid of it. He also intends to withdraw from the Trans-Pacific Partnership Trade Deal (TPP). Ironically, he professes to be a supporter of free trade. However, when you look closely at his words and his actions he is really a mercantilist. In his world, there can only be one winner not several winners. As one critic said “he wants to not only keep all the jobs in the U.S. but he wants to take everybody else’s jobs away from them”.

He says the international nuclear deal with Iran is the worst deal ever negotiated by the U.S. and he intends to have the U.S. withdraw from it.

Whether he ever succeeds in following through with his threats is somewhat beside the point. The concern is that he is adding his voice and the voice of the U.S. to the questioning of the current world order without proposing any constructive or meaningful alternatives.

No one will argue that these transnational mechanisms have been overwhelmingly successful or that they have been particularly cost effective. However, it can be argued that they have done many great things to maintain world peace and to foster economic well-being and also to prevent many bad things from happening. If they continue to be underpinned, this will represent a huge rupture in world order and we will all suffer greatly.

Terrorism

There is no doubt that the world will be plagued with terrorism for many, many years to come.

Given the concentrated and co-ordinated efforts now under way, it is at least possible that institutionalized terrorism can be largely wiped out or at least suppressed. Therefore, such organizations as ISIL, Al Qaeda, Hezbollah, Boka Haram and Hamas will eventually be rendered mostly ineffective.

However, it is more than likely that radicalized individuals will remain active and cause havoc in many places. In most cases the damage will not be great but the impact will continue to be heartbreaking. More importantly, their attacks will continue to spread fear and, in far too many places, prompt over reaction. Many nations will limit freedom of movement, take military measures and even build walls in mostly futile attempts to eliminate the threats. For some time, I have been saying that Americans, for example, are in the process of shutting themselves off from the world and becoming prisoners in their own country.

Having said all this, I am concerned that there will be one very insidious fallout while terrorism remains rampant. As I pointed out, terrorism creates fear. There are several recent examples of politicians in several countries using this fear factor for political purposes to advance their causes. This tactic causes considerable unrest in the country and often pits citizens against each other thereby leading to major divisions among the voters.

Exhibit A in this regard, is Donald Trump’s campaign in the recent U.S. election. As we know, using this tactic, he succeeded in creating major divisions across the country and, even after winning the election, he continues to use fear as a motivating technique.

It will be virtually impossible to totally stamp out terrorism because, among other things, it is an effective and cheap form of modern warfare and, when conducted individually or in small groups, it is so diffuse it is difficult to attack. This being the case, in my opinion, we will have to learn how to contain the threat as best we can and minimize its impact on the public at large.

In the meantime, terrorism as an issue will continue to be another thorn in the already vulnerable side of world order.

Increasing Risk of Nuclear Conflict

This is another over arching issue which represents a major threat to world order and we can only hope that sane minds will prevail since this issue shows signs of potentially lurching out of control.

There are a number of factors at play. As we know, the relationship between the U.S. and Russia has been deteriorating and currently is very tense. The U.S. and Russia, both signatories to the Nuclear Proliferation Treaty, have recently announced that they are spending money to modernize their nuclear arsenals. Many countries are suspicious that they are actually spending money to increase their stockpiles. As well, the Russians backed out of recent conferences dealing with nuclear security and have ceased having discussions with the U.S. on various nuclear issues. If this state of affairs continues, the two countries could find themselves in a nuclear standoff with each one trying to out manoeuvre the other to achieve the upper hand.  Matters could easily get out of hand with disastrous consequences.

India and Pakistan both have nuclear weapons but are not signatories to the Nuclear Proliferation Treaty and there are concerns that if their relationship goes completely sour and hotheads prevail, there could be some form of a nuclear confrontation.

If Iran does not comply with the recently signed nuclear agreement, there is concern that the U.S. would not be content with increased sanctions but would withdraw from the agreement thereby leading to another confrontation which could turn nasty. Moreover, if this happens the other countries who are signatories to the agreement could be forced to take sides and this could cause a rift between the U.S. and some of its allies.

And, of course, there is the rabble rousing going on in North Korea. If North Korea should test a nuclear weapon which could reach U.S. shores and China remains on the sidelines, Donald Trump could easily take military action in lieu of imposing more sanctions. If this should happen, things could easily spin out of control into something much more serious.

All in all, the whole issue of nuclear proliferation continues to be a very serious issue and, like terrorism, continues to be a thorn in the side of world order.

Climate Warming

In my view, there is major warfare between the people who truly fear the ravages of climate warming and those who discount its seriousness. It seems to me that this is not so much an argument about whether it’s going to happen or when it is going to happen but about who is at fault and who should bear the responsibility for dealing with it. The people who have an economic interest in keeping control of their traditional energy sources claim there is a lack of proof beyond a reasonable doubt that it is human activity causing the problem and, therefore, their activities should not be curtailed. Those who do not have a direct economic investment at stake, claim there is enough plausible evidence or balance of probabilities to support this connection and this is all the proof needed to justify dramatic and urgent action.

This is the classic legal distinction between a criminal burden of proof and a civil burden of proof and if this continues to form the debate it is most unlikely that anybody will be able to get the two sides on the same page. This being the case, it will fall to governments to take the lead in resolving the dispute. Politically, this is a dynamite issue and, even though most politicians acknowledge it  exists,  in most countries they are staying as far away from the issue as they possibly can. Also, there is a concern that Donald Trump, who is a sceptic about climate warming, will not support the Paris Treaty.

In my view, this issue is so important that we cannot afford to be wrong and we may only have one chance to get it right. Therefore, I come down on the side of plausible cause and believe the world needs to take effective action without delay.

However, since the debate will no doubt continue for some time, this is another issue which will be unsettling to world order.

Putin’s Game Plan

Putin is a trained spy who is obsessed with Russia’s loss of its status as a world power following the breakup of the USSR. Because of his obsession, there is widespread concern that he is using all his wiles learned as a spy in an irrational campaign to restore Russia’s status. Therefore, we can expect he will try a number of things to disrupt world order in an attempt to achieve his objective.

There is a growing amount of evidence to support this concern.  His annexation of Crimea. His military incursion into the domestic affairs of the Ukraine. His involvement in Syria ostensibly to go after ISIL but in realty to prop up Assad’s embattled regime. His downing of a commercial airliner over the Ukraine. His frequent use of his veto in the United Nations to put down proposals that are favourable to other political philosophies. His covert activities to influence political thought and behaviour throughout Europe. His efforts to suppress freedom of thought and freedom of speech in the satellite countries adjacent to Russia. His hacking of computers in several countries to access state secrets. His hacking of computers during the U.S. elections and arranging for a third party to leak private data presumably to assist Trump’s campaign. These are all known examples of the techniques he uses to achieve his goals.

Lately, he seems to be using the “nice” guy approach in certain situations which do not ruffle his core objectives and this has led some people to believe he can be reasonable and possible to deal with. Unfortunately, recent history shows this has not worked with other world leaders or, indeed, with American Presidents who went down this path. Ask Obama and Bush. Regrettably, these attempts have distracted world leaders from focusing entirely on Putin’s long term game plan.

I remain convinced that Putin will never be swayed from his ultimate goal and western leaders must tread very carefully when dealing with him. As the saying goes…”be sure to count your fingers before you leave the room”.  It looks like Trump may be falling into the same trap and this is very worrisome.

Whatever happens, this issue will continue to disrupt world order.

 

CONCLUSION

Despite some bumps along the road, the liberal world order developed after the second world war has served us well. Its focus on lofty goals such as the human condition and fairness for all have become the hallmark of much of today’s society. It would be a shame to dismantle all of this in the face of irrational attacks by irrational people. It would be even more shameful to regress to the world that existed prior to the war.

Unfortunately, many of the concerns are already in full flight and it is going to take considerable will and considerable effort to halt or reverse many of the trends before it is too late. If we cherish our current world order, scabs and all, we need to be a warrior in the battle otherwise we could lose by default.

I am an optimist by nature and I have every confidence we can win the battle. But let’s be very honest with each other. It is going to be a very tough battle.

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Globalization At Risk?

Posted by Grant Murray on
Globalization At Risk?

As could have been anticipated, there has been a frenzy of media coverage following the vote by the electorate in the United Kingdom to leave the European Union. The pundits have been falling over each other tying to analyze the causes and to predict the consequences of this decision.

Much of the analysis makes sense but there is also a lot of analysis at the periphery which does not make sense or is based on misinformation and only serves to confuse the issues and frighten people. Only the future will tell us how much of this will prove to be true.

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This being said, in my opinion, there is a theory finding favour among some observers which does make considerable sense and certainly deserves further study and probably immediate action.

This theory holds that the economic tsunami of globalization is now facing serious headwinds and this is leading to a new political world order and a new economic world order that will shape our world for many, many years to come.

This paper will address some of the thinking behind this theory.

Let me begin by summarizing what is currently happening in the United Kingdom.

It is well known that a significant percentage of Britons have been against the EU (and its predecessors) since the beginning. They resent the growing interference from the EU into their affairs. They perceive the EU to be too impersonal and too far removed from the scene to understand their problems and desires. They object to the exploding number of restrictions imposed by the EU which are constraining their traditional way of life. They perceive that the EU has failed to bring any economic prosperity to the country but, instead, has brought widespread economic hardship. They have lost hope that the politicians can change the country’s arrangements with the EU in any meaningful way.

For a variety of reasons, Britons have also lost faith and trust in the elites and are no longer prepared to do their bidding.
As well, a large number of citizens have not personally benefitted from the single European market or globalization in general. Indeed, many people have been disadvantaged and they do not see any change down the road. They are particularly frustrated by the austerity mantra that has spread across Europe and wonder why it is being foisted on them.

They have also become increasingly upset about the large number of foreigners and refugees who are flooding into the country bringing with them different values, different religious customs and different cultures. They also accuse these immigrants of taking away their jobs. This has led to a surge in xenophobia and many Britons now perceive a huge erosion in their old way of life. Even more frightening, this is happening at rate which is much too rapid for them to deal with.

The breakdown of the Leave vote is, of and in itself, most illuminating. The voters sent a clear message that older people, rural dwellers, those less educated and lower wage earners are the most disenchanted and wanted to be heard.

In hindsight, it has become crystal clear that there are numerous issues preying on the voters’ minds, not just immigration issues. While immigration was clearly the lightening rod issue which triggered the widespread vote against the Remain side, it is also obvious that there are many other issues which played on the voters’ minds and which they feel strongly must be addressed.

Is it any wonder that the electorate, finally given a voice, chose the Leave option?

And now, since the Leave movement was so successful, everybody has suddenly become seriously worried about the contagion effect and, in my opinion, they should be.

Even prior to Brexit, the EU was under attack by many critics. Almost every country in the EU has one or more political parties who advocate withdrawing from the EU. While some already have more clout than others, most are growing in popularity and becoming a force to be reckoned with. For instance, Marine Le Pen who is head of the National Front party in France is also internationally known and influential beyond her own country and could very much help the cause in other countries. Already, a growing chorus of politicians in several EU countries are calling for similar referendums.

So the seeds are already sown and capitalizing on the success of Brexit and the reasons underlying its success, it is anticipated that many politicians in many more countries will be mounting vigorous campaigns for a similar referendum in their own country. It is also expected that some of the campaigns will be successful. If so, this will increase the odds for similar success in more and more countries and many people fear there will be a domino effect spreading across most of the EU.

The end result could be the breakup of the EU in its current form. This may seem like a long shot but so was Brexit. Also, frightening as it sounds, the odds that Donald Trump could become President of the United States are increasing and this is another long shot that could come to pass and which was not expected. If that should happen, it would be in large part due to many of the same problems that plague Europe.

The theory which I referred to holds that if the EU should fall apart and Europe should splinter into a collection of individual countries and if the UK and the US should move towards various forms of protectionism, economic globalization could become one of the first casualties.

Each country in the former EU would be very much on its own and there would be a major restructuring of the world’s economic affairs. There could be an unworkable web of trade restrictions and outright trade barriers. It would be extremely difficult to create, let alone maintain, trade blocs of any significance. Markets would shrink in size and in importance. Economies of scale would not justify huge investments because there would be no global marketplace for many industries’ products and services sufficient to earn a reasonable return on investment. There could be a resurgence of cottage industries within individual countries. Intellectual property protection would be fragmented and inconsistent throughout the world and this would be a major barrier to doing business in many jurisdictions. At a country level, politicians and decision makers would scramble to help local businesses weather the storm and, rather than help the situation, they could cause further damage.

Whichever way you cut it, all the rationale and benefits which support globalization would be at risk and, in their own self-interest, companies would take whatever steps they can to survive.

All of this is shades of the ‘30’s and there is general agreement the fall out would be brutal. Therefore, no one in their right mind is advocating that the world should unfold this way.

Nevertheless, there is also general agreement that the British electorate voted on emotion not facts. There is no denying that this a very emotional issue for a lot, and probably a growing number of people, in many places across the world. And, as we all know, experienced politicians are very adept at tapping into human emotions. And, to make matters even worse, as we saw in the UK referendum, most Britons did not make any effort to understand the issues or to challenge the propaganda. Finally, and this most worrisome, the general public is less inclined to accept any leadership from the elites or to listen to any facts.

Conventional wisdom tells you this scenario should not even be in the cards. However, it is and, if it comes to pass, the whole world is in for a very rough ride. Also, public figures will need a lot of wisdom to right the ship. If it does not unfold this way, public figures will still need a lot of wisdom to resolve the collateral and residual issues that have suddenly become more urgent because of Brexit. There is a widespread recognition that the United States is experiencing a myriad of problems which are jeopardizing the American dream. These problems are well known and well documented.

Increasing racial violence, a widespread illegal drug culture, insidious gang warfare, military like law enforcement, inhuman incarceration, inequitable gerrymandering of electoral boundaries, voter suppression, permanent electioneering, political gridlock, the overwhelming political clout of Political Action Committees (PAC’s), income inequality, crony capitalism, eroding social consciousness, erosion of workers’ rights, eroding international respect are some of the most talked about.
I contend that these examples are only the symptoms. They only categorize the problems in behavioural terms and this descriptive terminology does not identify or address any underlying causes which I prefer to label root causes. It’s like a doctor who tries to address an illness with pain killers without trying to understand the cause of the pain. Unless steps are taken to deal with root causes, it is going to be practically impossible to treat the symptoms.

I have identified five root causes which I believe collectively or individually underlie many of the symptoms which I listed earlier. These are a mix of cultural behaviour and structural shortcomings.

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Is The World Becoming Flat?

Posted by Grant Murray on
Is The World Becoming Flat?

Since the 2008 recession, world economic growth has been slowing down everywhere and there is a consensus among economists, investors, bankers and others that this economic stagnation will continue worldwide for a long time to come.

As one pundit said: “The world is stuck in the slow lane and nobody seems to know what to do about it”.

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The economic statistics seem to bear this out. Prior to 2008, many developed countries were enjoying annualized growth rates in the 3 to 4 percent range. China and some of the emerging markets were enjoying growth rates in the double digits.

Since 2007 however, world growth rates have fallen significantly and continue to fall with almost every updated forecast. Canada’s annualized growth rate for 2016 was recently reduced by the OECD from 2% to 1.4 %. The U.S. rate has been revised from 2.4% in November, 2015 to 2.0 % in February, 2016. During this same time frame, the world rate has also been revised downward from 2.8% to 2.5% and this rate, of course, includes developing countries which have still enjoy much higher rates than the world average. European counties are almost all at about 1.5%. Japan is 1% and Russia is -1.0%. China’s growth rate, which averaged 9.88% from 1989 until 2015, is currently forecast at 6.3% for 2016, the lowest growth in 25 years.

In its February 2016 economic update, the OECD stated that all sectors of the economy have forecast downgrades in their growth forecasts since November, 2015 and, further, there continues to be a significant slowdown in global trade growth. This being so, it seems more than likely that the trends will continue. Interestingly, the Trudeau government in its recent budget has used a growth rate of 0.4% which some observers point out is probably too low but politically very shrewd.

There is other data which paint a very negative outlook for the world economy. Governments’ debt-to-GDP ratios have risen significantly around the world since 2008. Yet long term interest rates remain extremely low. Ten year government bond rates in the U.S. are around 2%. They are around 0.5% in Germany and 0.2% in Japan. Many market commentators believe that real interest rates could be around zero or even go negative for another decade and that inflation could stay close to 1% during this time frame.
Clearly, considering all these negative economic outlooks, there is ample evidence to support the experts who claim that, not only are we currently experiencing economic stagnation, but that it will continue for some time to come and probably even get worse.
Economists contend that countries need to have annual growth rates on a continuing basis approaching 3% in order to sustain economic prosperity and, if they are right, and the doomsayers are also right, we could be in for a rough ride.

The question arises, of course, why is this happening and what can we do about it?

As you might expect, there are a number of theories going the rounds and several of these are being promoted by very prominent scholars.

Kenneth Rogoff blames the problem on debt buildup. Ben Bernanke blames the problem on a savings glut. Paul Krugman says it is a liquidity problem.

In this paper I have chosen to address three other theories that seem to be generating much discussion in economic circles.
The first is called “Secular Stagnation”. The second has been dubbed “Supply Side Headwinds”. Finally, a theory called “The Demographics of Stagnation”.

 

Secular Stagnation

The well-known proponent of this theory is Lawrence Summers, a former U.S. Secretary of the Treasury and a Professor of Economics at Harvard University.

In a nutshell, this theory holds that the economies of the developed world are suffering because of an increasing propensity to save and a decreasing propensity to invest (spend).

Excessive saving acts as a drag on demand thereby reducing growth and inflation. The imbalance also pulls down real interest rates.
So, when the desired levels of saving exceed desired levels of investment, we experience shortfalls in demand and stunted growth.
In the last six years or so, real interest rates have been near zero and have even turned negative in Europe and Japan. During this same time frame, inflation has also stayed very low. Summers is particularly concerned that real interest rates have remained so low for so long and that they are expected to stay that way. He also reminds us that demand has been weakening for some time.
Summers argues that during this time there has also been an increasing propensity towards saving and a decreasing propensity towards investing or spending.

He points out that the central banks in the G7 have collectively improved their balance sheets by $5 trillion. Large corporations such as Apple and Google are awash in cash but are reluctant to distribute more of it to their shareholders. The top 1% is accumulating untold wealth but is hording it or simply swapping paper among their peers to buy existing assets. At the individual level, people are saving more for retirement or to hedge against costs that used to be covered by employers because these benefits are being taken away by employers. CIBC claims in a recent report that individual Canadian investors are currently sitting on $75 billion in extra cash. This is money which has been accumulating since the 2008 recession and that would normally be invested.

He concludes that we have reached the tipping point and that there is an undesirable imbalance between saving and investments. There is too much saving (or hording) and this is a major cause of reduced demand and low growth.

To solve the problem he recommends that governments working in concert with each other use fiscal policy to reverse the trend. He believes that monetary policies have run into diminishing returns. He contends that the core problem of secular stagnation is that “the neutral’ real interest rate is too low and that this rate cannot be expanded through monetary policy”. He also makes it clear that international intergovernmental co-operation and co-ordination is absolutely crucial for the use of fiscal policy to succeed.
He also points out that fiscal policy is the best way to incent public spending on infrastructure, such as roads, bridges, sewers, transit, etc., all of which is badly needed.

He believes the key priority at the G-20 summit in China this September should be to increase global demand. After all, he says, “Raising demand is actually not that difficult, and it is much easier than raising the capacity to produce”.

Interestingly, while Summers and Krugman differ as to the causes of the problem, they both agree that fiscal policy is the best tool to correct the problem. However, in an interview with Fareed Zaharia on Fareed’s GPS program on March 6, Krugman stated he supported using fiscal policy but would avoid using tax policy. He fears that any funds generated by tax policy would likely be saved or used to pay down debt and not be used for additional spending.

Bottom line . . . Summers believes strong government intervention using fiscal policy is necessary to solve the problem.

 

Supply Headwinds

This theory is proposed by Robert J. Gordon in his new book, the Rise and Fall of American Growth. Mr. Gordon is a professor of Economics at Northwestern University.

In a nutshell, Mr. Gordon argues that from 1870 to 1970, Americans benefited from a number of developments which dramatically transformed living and working conditions in the U.S. and which created huge consumer demand and demand for investment but, that since then, technological advances don’t really compare to the ones that transformed the U.S. economy in the earlier century. Therefore, more recent developments have not spurred the same consumer demand or the same demand for investment. In other words, the supply side of the economy is now a major part of the problem.

From 1870 to 1970, there was a bonanza of breathtaking and transformative innovations. He identifies five Great Inventions which occurred during this century: electricity, urban sanitation, chemicals and pharmaceuticals, the internal combustion engine and modern communication.

These innovations led to new and often labour saving conveniences which allowed more and more people to abandon hard physical labour for good. Because of these transformative innovations, we now enjoy conveniences such as electric lights, running water, flush toilets, central heating, automobiles, airplanes, telephones, radios, vaccines, antibiotics, all conveniences which we currently take for granted.

However, Gordon argues that since then most technological advances have only resulted in marginal improvements in our well being. Most often they only build on or exploit or refine existing knowledge. We have fancier and safer automobiles, better heating and air conditioning systems, clearer and larger television sets, smarter phones, faster and more comfortable trains, more effective antibiotics, improved surgical procedures and on and on.

Nevertheless,, while useful and while they usually lead to improved productivity and additional comfort and convenience, these technological advances are not transformative. This being the case, he argues they do not generate the kind of explosive demand necessary to support strong economic growth.

He concludes that he cannot foresee the new transformative technologies needed to drive the necessary growth and predicts economic growth will remain around 1% for some time.

His critics, and apparently there are many, are less pessimistic than he is and are optimistic there will be major advancements around emerging technologies such as artificial intelligence or genetic engineering. They also point out that he fails to mention his own mixed record as a forecaster. In a 2003 essay titled “Exploding Productivity Growth” he optimistically stated that productivity in the United States would grow at an average of 2.5% per year for decades. Yet, as we know the nest year, 2004, was the tail end of the high growth rates that had started in the 1990s and which have been going downhill since then.

Bottom line………Gordon is hoping some inventive entrepreneurs will come up with the transformative technologies that will solve the demand problem. Moreover, he does not put forth any policy suggestions which might be used to accomplish this.

 

The Demographics of Stagnation

This theory has been put forth by Ruchir Sharma who is the author of a forthcoming book titled “The Rise and Fall of Nations”.

In a nutshell, this theory holds that the declining population growth rate together with the changing population demographics i.e. the slower growth in people of working age and the greater growth of more elderly people, will result in lower economic growth.

The author says the experts have largely overlooked these changing demographics, particularly the collapse of the working age population, and claims this may be one of the most important factors in the negative prognosis for world economic growth.

Unfortunately the book is not yet available but from articles I have read, he seems to be arguing that due to low fertility rates and healthier older people, there will be relatively fewer people of working age available to produce the goods and services to fill consumer demand. Coincidently, there will be fewer working people with the purchasing power to support robust consumer demand. And, while there will be a larger number of older people, they will only need minimal goods and services at minimal prices. These older people, whose number is statistically increasing every day, spend less, save more, pay fewer taxes, etc. In other words, even with their growing numbers, they will not create enough robust consumer demand of the kind necessary to drive meaningful and sustained economic growth.

It is true that unemployment rates for the working class remain high at the present time which suggests they are in over supply. This is particularly true for the younger people in the workforce. However, it can be argued that a major factor contributing to this problem is the mismatch between job opportunities and the skills necessary to fill them. There are jobs in many sectors of the economy but there are not enough workers with the necessary skills to fill these jobs. As the demographics of the population continue to shift there should be continuing pressure on more education and probably different kinds of education for young people which should alleviate this problem to a large degree.

It is widely understood that the replacement fertility rate (the rate below which the population starts to shrink) is 2.1%. Currently, world population growth is predicted to be around 1 to 1.5% and is trending downward which means on a world basis we are already below the replacement rate.

Further, as Indicated earlier, declining population growth generally is having a significant impact on the working class population. Between 1960 and 2005, the global work force grew at an average rate of 1.8%. And since then has dropped to 1.1%, and is likely to drop further given the declining fertility rates throughout the world. In the United States it is 0.5% compared to 1.7% from 1960 to 2005. It is already below that in some countries such as China and Germany.

Some economists claim that a one point decline in population growth will eventually reduce economic growth by a percentage point. The percentage drop can very well be higher when an increasing proportion of the population, such as older people, is not making any significant contributions to society either by producing something or as consumers.

Governments around the world are very much aware of the problem and many are already taking steps in an attempt to deal with it. Many countries have implemented guest worker programs. Several countries, especially in Europe, have increased the retirement age from 65 to 67 to keep more people in the workforce. Many countries, at least until the recent wave of terrorism, had adopted more aggressive immigration policies to attract workers although eventually this is a zero sum game because the number of available workers remain the same. They are just located in different places.

Quite apart from the concern about the looming drop in the working class, many countries have also become very concerned about the alarming drop in fertility rates generally. China has changed its one-child policy. India has abandoned its forced sterilization campaign. A number of developed countries have programs to subsidize motherhood. In some countries such as Chile and France, the subsidies increase for additional children.

Notwithstanding all these efforts, it is generally felt measures such as these will not be enough to turn the tide and population growth will continue as a major challenge. Many believe the problem will likely get worse.

The author reminds us there are many factors which will continue to drive down population growth. These include wide spread birth control education, the growing acceptance of birth control methods, the increase in educational levels among women, the increase in working women, economic hardship, economic prosperity, to name a few. Therefore, it is fair to conclude that the rate of population growth and the proportion of working age people will continue to decline and based on this theory, there will also be a negative impact on world economic growth. Indeed, there could be “negative” growth on both fronts.

Bottom line . . . the solution lies in a change in human behaviour with an occasional nudge from government policy and, as we know, neither is very predictable.

Dear reader, which of the three theories do you believe?