by Peter Thal Larsen via REUTERS BREAKINGVIEWS
What went wrong? Many books have attempted to tackle that question since 2016, when the Brexit referendum and Donald Trump’s U.S. presidential victory threatened to upend the global economic order. Replies tend to fall into two broad categories. One is hand-wringing by anxious liberals, who lament the unravelling of a system that has brought so much peace and prosperity. The other is hand-waving by more conservative writers, who welcome electoral revolts as an overdue reassertion of national sovereignty.
Two new books take a more forensic approach. Martin Sandbu’s “The Economics of Belonging” and “Angrynomics”, by Eric Lonergan and Mark Blyth, offer a clear-eyed analysis of the origins of the malaise. As the titles suggest, the focus is on the economic roots of the upheaval. But the authors are alert to the dismal science’s limitations in explaining why advanced societies left so many people behind. Both books offer detailed and practical ideas for fixing the problem. They are also mercifully short, cramming a wealth of analysis and insight into a few hundred pages each.
Most of “Angrynomics” consists of a dialogue between Lonergan, a macro hedge fund manager, and Blyth, a professor of international political economy at Brown University. The conceit keeps the reader’s attention as the authors race through decades of economic history.
The main objective of “The Economics of Belonging” is to defend globalisation, which even many liberals now blame for the political backlash. In a style that will be familiar to readers of his Financial Times columns, Sandbu dismantles the conventional view, arguing that the hollowing out of manufacturing jobs owes more to automation than trade with China, and that immigration did little to suppress wages.
In this narrative, globalisation is a bogeyman constructed by the true villains of the story: the politicians and bureaucrats who made a series of catastrophic errors. They neglected workers whose jobs became redundant and failed to prevent banks from inflating a catastrophic credit bubble. After the 2008 financial crisis, they compounded the error by embarking on austerity policies that led to a lost decade in many Western countries.
The damage need not be fatal. Sandbu thinks bad policies can be remedied with better ones, and offers a lengthy list of the latter.
He proposes higher minimum wages to encourage productivity-enhancing investment, breaking up monopolies, regulating finance, taxing wealth, and offering citizens a basic income, possibly funded by a carbon tax. While these may offend orthodox economists, Sandbu insists they are market-friendly. “Protective policies can be pro-competitive, and vice versa.”
Lonergan and Blyth are only slightly less ambitious. They argue that smart policy ideas have to be big enough to make a difference, easy to explain, and appeal to both sides of the political divide. In this spirit, they want governments to take advantage of negative real interest rates to borrow, say, 20% of gross domestic product and set up something akin to a sovereign wealth fund to finance payments to citizens. “The existence of negative real interest rates for the government is like discovering oil,” they write. “It is a source of wealth.”
Many of these ideas merit a wider airing. However, largely absent from the discussion is an analysis of why policymakers made terrible errors, and why they have not embraced better solutions.
Bad ideas are partly to blame. It took a global financial meltdown in 2008 to undermine the widespread belief in efficient markets. But multinationals have been good at shaping political decisions, through lobbying, revolving-door hiring, and increasingly savvy media strategies. This manipulation has often occurred across borders, as this week’s long-awaited parliamentary report into Russian influence in the United Kingdom confirmed.
The biggest obstacle to improving capitalism, however, may be the lack of credible alternatives. “The Economics of Belonging” begins with a paean to Franklin Delano Roosevelt, whose radical policies saved U.S. democratic capitalism when communism and fascism appeared to many to be better alternatives. The implication is that today’s politicians require a similar vision.
Yet contemporary capitalists don’t fear a communist-style overthrow of the system. The global climate crisis may provide the impetus to push through radical changes. But the failings of the past three decades make it hard to be optimistic.
Both “Angrynomics” and “The Economics of Belonging” were written before the pandemic and published in the middle of it. Covid-19 has only made the questions they explore more urgent. In a postscript Lonergan and Blyth approvingly note that the health crisis has hastened the adoption of some of their ideas, like central banks offering dual interest rates.
However, the pandemic has also exposed vast shortcomings in basic administrative management. Perhaps this will underscore the importance of competent, rational government. Right now, however, the gap between the ambitious policy solutions laid out in these two books, and the ability of politicians to implement them, seems as wide as ever.