They say that if you took all the world’s economists and laid them end to end, they’d never reach a conclusion. The relevant question today is whether new economic thinking has hit a wall, depriving leaders of the ideas to confront the challenges of a slow-growth age.
When the 1930s Depression hit, economics put forward John Maynard Keynes and his theories for stimulating demand. He gave rise to a new political consensus that lasted two generations. Then, when stagflation dulled growth and eroded incomes in the 1970s – overwhelming Keynesianism with the co-existence of high inflation and low demand – economics threw forward Milton Friedman and his Chicago School of free-market disciples. Politics, in the guise of Margaret Thatcher and Ronald Reagan, fervently embraced this laissez-faire alternative.
With the winding-down of the Thatcher-Reagan neo-liberal regimes and their attachment to market fundamentalism, economist John Williamson set forth what became known as the Washington Consensus. It advocated three core ideas: disciplined macroeconomic policies, trade liberalization and the use of markets. Leaders such as Bill Clinton, Tony Blair, Brian Mulroney and Jean Chrétien hewed to this world view.
Then came 2008. Nearly a decade on from the great global financial crisis, a fresh economic narrative is in desperate demand. So where is the new set of big ideas? Economics, it seems, is missing in action.
This hollowing out of economic thinking is on display in post-Brexit Britain, the deeply polarized electorate of America, Marine Le Pen’s disillusioned France and Brazil’s broken spirit.
Politics abhors a vacuum and so the failure of economic imagination is being filled by old, disproven ideas, such as the protectionist claptrap so prominent in the U.S. presidential election campaign or the notion that growth in the labour market creates competition for a finite number of jobs. Trust in government and business stand at dismal levels as the middle class howls at being left behind by technology, globalization and growing income inequality.
When it comes to the attack on trade, neither Keynes nor Friedman nor the Washington Consensus would dispute the principle, espoused by economic theorists back to Adam Smith, that trade liberalization benefits all sides. Trade remains a public good even if economics has failed to reckon with necessary adjustment policies and the maldistribution of its gains.
That Republican candidate Donald Trump operates in opposition to such fundamentals is hardly a revelation. The more mystifying economic failure belongs to establishment leaders espousing relatively progressive policies on both sides of the Atlantic, including U.S. President Barack Obama, Democratic candidate Hillary Clinton and former British prime minister David Cameron. Along with economists, they bear some responsibility for the populist backlash through their inability to recognize the understandable sense of exclusion and grievance felt by large swaths of Americans and Europeans. Nationalistic fervour lies forever in wait for such policy disappointments.
Canada, with its long tradition of a credible political middle, has so far avoided such populism, aided and abetted until recently by a resource sector that supported well-paying jobs. With growth now tepid and the middle class squeezed, talk of “inclusive growth” – a relatively new term much in vogue with the Organization for Economic Co-operation and Development and our federal government – is timely.
While its definition remains much too vague, it nonetheless takes aim at the two core failings of the past decade of economics: too little growth and too much concentration of its spoils.
The relationship between growth and distribution, while not decoupled, has become wobbly. The winners from globalization in the United States, aside from the famous 1 per cent, are the wide body of consumers who benefit from inexpensive Asian goods, such as big-screen televisions. The losers are the workers rendered uneconomic by globalization.
Here’s what exclusion looks like: living both with the indignity of your own falling standard of living and the anxiety that your children will do no better. As troubling as it is that the average disposable income of the top 10 per cent of U.S. households has soared to 19 times that of the bottom 10 per cent, the fact that OECD educational performance measures parrot these income differences also points to inequality of opportunity.
This is precisely what the United States does not stand for – locking in privilege and knocking down mobility. It’s the stuff of a revolt of the masses.
In Europe, with its more robust redistribution policies and solid public-education systems, the problem is more lack of growth – combined with inequality of opportunity for marginalized communities.
In Canada, where we also have serious structural growth challenges, inclusive growth is an opportunity to show our Atlantic allies a different approach.
Governments must fulfill their essential role in assisting those being displaced to adapt and adjust to global competition through world-beating skills training and education and to promote innovation in the goods and services we produce while opening new markets in which to sell them.
They must also shift the policy mix to tackle persistently weaker growth, relying more on pro-growth fiscal policies such as productivity-enhancing strategic infrastructure investments and structural reforms, and less on ultra-low interest rates.
This is hardly the second coming of Keynes, and it will take more than consultations, but with its focus on both words in the term “inclusive growth,” our government is at least injecting fresh thinking into a tired discourse. If Canadians really want to help the world, the time is ripe for an economic model capable of becoming the next policy consensus.
PPF holds its Growth Summit in Ottawa on Oct. 12.
Edward Greenspon is CEO of the Public Policy Forum. Kevin Lynch is vice-chair of BMO Financial Group and former clerk of the Privy Council.Report Typo/Error
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