MILAN/STANFORD – Over the last 35 years, Western democracies have seen a rapid rise in political instability, characterized by frequent shifts in governing parties and their programs and philosophies, driven at least partly by economic transformation and hardship. The question now is how to improve economic performance at a time when political instability is impeding effective policymaking.
In a recent article, one of us (David Brady) shows the correlation between rising political instability and declining economic performance, pointing out that countries with below-average economic performance have experienced the most electoral volatility. More specifically, such instability corresponds with a decline in the share of industrial or manufacturing employment in advanced countries. Though the extent of the decline varies somewhat across countries – it has been less sharp in Germany than in the United States, for example – the pattern is fairly ubiquitous.
Over the last 15 years, in particular, increasingly powerful digital technologies enabled the automation and disintermediation of “routine” white- and blue-collar jobs. With advances in robotics, materials, 3D printing, and artificial intelligence, one can reasonably expect the scope of “routine” jobs that can be automated to continue expanding.
The rise of digital technologies also boosted companies’ ability to manage complex multi-source global supply chains efficiently, and thus take advantage of global economic integration. As services became increasingly tradable, manufacturing declined steadily as a share of employment, from 40% in 1960 to about 20% today. But, in most advanced countries, the tradable sector did not generate much employment, at least not enough to offset declines in manufacturing. In the United States, for example, net employment generation in the third of the economy that produces tradable goods and services was essentially zero over the last two decades.
Partly driven by these trends, the share of national income going to labor, which rose in the early post-war period, began falling in the 1970s. While globalization and digital technologies have produced broad-based benefits, in the form of lower costs for goods and an expanded array of services, they have also fueled job and income polarization, with a declining share of middle-income jobs and a rising share of lower- and higher-income jobs splitting the income distribution. The magnitude of this polarization varies by country, owing to disparate social-security systems and policy responses.
Until 2008, when economic crisis roiled much of the world, the concerns associated with rising inequality were at least partly masked by higher leverage, with government expenditures and wealth effects from rising asset prices supporting household consumption and propping up growth and employment. When that growth pattern broke down, economic and political conditions deteriorated rapidly.
Most obvious, the drop in growth and employment has amplified the adverse effects of job and income polarization. Beyond the obvious practical problems this has raised, it has impinged on many citizens’ sense of identity.
In the post-war industrial era, one could reasonably expect to earn a decent living, support a family, and contribute in a visible way to the country’s overall prosperity. Being shunted into the non-tradable service sector, with lower income and less job security, caused many to lose self-esteem, as well as fostering resentment toward the system that brought about the shift. (It did not help matters that the same system bailed out the main driver of the economic crisis, the financial sector – a move that exposed a stark disparity between exigency and fairness.)
While technology-driven economic transformation is not new, it has never occurred as rapidly or on as large a scale as it has over the last 35 years, when it has been turbocharged by globalization. With their experiences and fortunes changing fast, many citizens now believe that powerful forces are operating outside the control of existing governance structures, insulated from policy intervention. And, to some extent, they are right.
The result is a widespread loss of confidence in government’s motivations, capabilities, and competence. This sentiment does not appear to be mitigated much by a recognition of the complexity of the challenge of maintaining incentives and dynamism while addressing rising inequality (which, at its most extreme, undermines equality of opportunity and intergenerational mobility).
As Brady points out, during the more stable period immediately following World War II, growth patterns were largely benign from a distributional perspective, and political parties were largely organized around the interests of labor and capital, with an overlay of common interests created by the Cold War. As outcomes have become increasingly unequal, there has been a fragmentation of interests across the electoral spectrum, leading to instability in electoral outcomes, political paralysis, and frequent changes in policy frameworks and direction.
This has several economic consequences. One is policy-induced uncertainty, which, by most accounts, amounts to a major impediment to investment. Another is the distinct lack of consensus on an agenda to restore growth, reduce unemployment, reestablish a pattern of inclusiveness, and retain the benefits of global interconnectedness.
On one level, it is hard not to see this as a self-reinforcing destructive cycle. Political instability reduces the likelihood of defining and implementing a reasonably comprehensive, coherent, and sustained economic-policy agenda. The resulting persistence of low growth, high unemployment, and rising inequality fuels continued political instability and fragmentation, which further undermines officials’ capacity to implement effective economic policies.
But on another level, these trends may actually be healthy, as they bring concerns about globalization, structural transformation, and governance – which have so far been expressed mainly in the streets – into the political process. This kind of direct connection between citizens’ concerns and governance is, after all, a core strength of democracy.
When a developing country gets stuck in a no-growth equilibrium, building a consensus on a forward-looking vision for inclusive growth is always the critical first step toward achieving better economic performance and the policies that support it. That is what the most effective leaders have done. The principle is the same for developed countries. Our best hope is that today’s leaders understand it and will adhere to it, thereby putting their creative energies to work on a new vision that places their countries on a path to greater prosperity and equity.
Comments
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Comment Commented Dean Raz
A company's CEO has to account to his shareholders every quarter so he has long term plans but also make sure that he is delivering in the short term. A government is elected for a period of 4-5 years with no calling to account at any time (usually) during this period. With digital technologies is it not possible to hasten the reckoning? Read more
Comment Commented harry wilkinson
One can always comment negatively about any situation, be it political or economical, but the fact is that governments have rushed pell mell into international trade agreements without setting in place programs to offset the damage done through unemployment to their own economies. In many cases, this damage is sometimes offset by a government promising to subsidize an industry , but this does little to offset the job losses sustained, and therefore the lost support for the economy by the loss of income to workers who are spenders.
Perhaps the way to go would be for a guaranteed annual income for all, as well as the support for industry. Read more
Comment Commented E Walker
TL;DR.
The rich take all the money. They subvert government so they can get even more. People get mad because they are getting hurt and it isn't their fault.
We economists barely can write in English. How can we possibly offer a sensible solution? Read more
Comment Commented j. von Hettlingen
Michael Spence and David Brady point out that economic growth and political stability go hand in hand, citing the "political instability" that has plagued the West in the past 35 years. The "frequent shifts in governing parties and their programs and philosophies" reflect the challenges it faces. On the one hand elected leaders have to meet their voters' demand and deliver on "economic performance." On the other hand they grapple with "economic transformation and hardship..... at a time when political instability is impeding effective policymaking." Consensus is badly needed to "restore growth, reduce unemployment, reestablish a pattern of inclusiveness" etc.
Indeed, "the correlation between rising political instability and declining economic performance" in developed countries is nothing new, but its pace and scale in recent years are unprecedented. Economic growth boosts political stability and a sluggish economy increases "electoral volatilaty," which in turn hurts the policy-making process. Leaders are under pressure to resort to myopic solutions to appease their disaffected voters, while investors sit tight, putting "industrial or manufacturing employment" on hold. For this reason many citizens resent the financial and political establishment, saying "powerful forces are operating outside the control of existing governance structures."
There is also a development in the "last 15 years" that raises concerns in the industrialised world - low birth-rates and the automation in manufacturing. While technologies and globalisation had brought huge benefits to many, "in the form of lower costs for goods and an expanded array of services," they are also seen as the curse of our modern society, cutting "white- and blue-collar jobs" and diminishing the living standards of the middle class. Manufacturers take advantage of cheap labour in low-cost countries abroad, while unemployment among the unskilled is high at home. An ageing population poses an enormous burden on the "social-security systems."
Until the 2008 global financial crisis Western democracies had been able to keep their electorates happy by means of "supporting household consumption and propping up growth and employment." When reckless government spending, coupled with external factors, sparked an economic breakdown, the political climate "deteriorated rapidly." In Europe we see the emergence of far-left and far-right parties, who put the blame on mainstream parties for their economic grievances, and the humiliation of austerity measures. These resentments foster nationalism and xenophobia, making such a toxic brew an economic poison.
Indeed, the economic development in recent decades is being seen as a disappointment, especially by the Generation Y. Given the achievements in the "post-war industrial era, one could reasonably expect to earn a decent living, support a family, and contribute in a visible way to the country’s overall prosperity." The first two decades following World War II were stable and prosperous - "growth patterns were largely benign from a distributional perspective, and political parties were largely organized around the interests of labor and capital."
Today income inequality and the lack of opportunities lead to "instability in electoral outcomes." Popular unrest causes "political paralysis, and frequent changes in policy frameworks and direction." The authors say "these trends may actually be healthy, as they bring concerns about globalization, structural transformation, and governance – which have so far been expressed mainly in the streets – into the political process. This kind of direct connection between citizens’ concerns and governance is, after all, a core strength of democracy." The authors hope that "leaders understand it and will adhere to it, thereby putting their creative energies to work on a new vision that places their countries on a path to greater prosperity and equity." Read more
Comment Commented jagjeet sinha
History provides enough examples of how successful templates that emerge after meltdowns, invariably OPENS rather than CLOSES.
The 1945-2015 era created this new narrative best described as THE WEST - where The Anglosphere combined with West Europe.
Just like post The US Civil War, 1870 - 1945 The British Empire combined with USA to create The Anglosphere.
And before that, Britain escaped Europe to combine with India - and create The British Empire to begin with.
So, The Trump Template needs to keep America OPEN and find the New Alliances that lead to a winning combination.
There are never any permanent enemies - only permanent interests.
Migration has been the greatest macroeconomic motor - in Europe, America, China.
By allowing cross border migration - America created perhaps the best testament for OPEN society.
By allowing unbridled internal migration - China created the Macroeconomic model base on Urban migration.
By allowing unbridled European migration - Europe sought to enable South + East Europe to succeed along with its West + North.
So, The Trump Template needs a better comprehension of The DNA that enables successful positioning.
Remaining engaged is essential, remaining the unquestioned leader in technology is essential.
Race Religion Region - the three eternal constituents - is best eschewed to keep INCLUSIVENESS paramount.
Inequality can be neutralized - but neutralizing entrepreneurship itself, has grave consequences.
Fortunately Nobel minds are available to assist in this effort - and their contributions must be respected.
There is enough BIG DATA available to precision guide the Economics of sustainable success. Read more
Comment Commented Vinny Catalano
The potentially positive conclusion must be tempered with an even greater destructive outcome of societal decision-making that puts the wrong person(s) in charge. Witness the US presidential race and what has become known as Trumpism - a world where "building a consensus on a forward-looking vision for inclusive growth" does not come before chaos. Read more
Comment Commented Zsolt Hermann
I am afraid the article portrays the usual upside down worldview which is causing all our problems.
Life cannot be measured through economic performance, our "pulsating" heart is not the production/consumption paradigm.
Biological and human societal life depends on connections, circulation, communication.
For an organism to stay alive, survive and develop it needs positive, mutually complementing cooperation, perfect multi-dimensional communication aimed at the wellbeing of the whole collective.
Humanity from nature's point of view is a single, interconnected and inter-dependent organism whether we like it, accept it or not.
The global, integral world we live in shows us this fact very clearly.
Trade and economy is simply the external representation of the mutual interconnections in between people.
Governing, political structure is simply an external tool for safeguarding the prevalent trade and economy system within society.
Thus the basic foundation is the interconnections in between people. Trade, economy and the political system is simply the derivatives of those connections.
Nothing can be changed from "top down", any change has to start from below, from within the human interconnections.
Today our interconnections are corrupt, they are selfish, egocentric and greedy. We build our economic and trade relations on ruthless, exclusive and exploitative competition, on the success at the expense of others.
This is why we are on crisis and this is why economy and the political systems above are collapsing.
It is our interconnections that we have to change. They have to become mutually complementing aimed towards the benefit of the whole collective exactly like any living system in nature. Read more
Comment Commented Tonu Pavel
First workers were forced to compete with eachother untill they learn to organise themselves, later globalisation came and workers were forced to compete with other workers outside of theyt comuninity untill the wages in the developing countries started to grow. Now a new trend is emerging where workers will be forced to compete with machines they are creating. There is no posibility to win because the wealth created in form of capital and technologies is always used against the people who are creating it. it's good to reinvent old fashioned concept of citizen and move away from view of human as replaceble RESOURCE on a liberal market. Read more
Comment Commented Michael Public
My suggestion is to retain the best of the right wing - the power of individuals and entrepreneurs should be set free and supported - with the best of the left wing - redistribution of money to where it is needed most. One way to do this is to increase death taxes to 100% of everything over $10M while keeping income tax rates low. Read more
Comment Commented Jose araujo
I despise this idea that automation is pushing total wages down, its total rubbish and biased.
Capital is plentiful, interest rates are near zero so the same argument made in favor of lowering the wage contribution can be made to capital contributions... or does it only work against the workers?
We are at this stage because we forgot that if we want something, we have to fight for it. So we workers slacked and allowed for the diminishing of our rights, yes our rights, and now we are paying for it.
We has economists slacked and allowed for the re-emergence of absurd economic theories that were disproved decades ago, we allowed for the ones like Fama, Lucas and many that share Ricardian Vision of the world, a world where wages are at subsistence level and we are in permanent war with each other. Read more
Comment Commented Howard Johnson
It is less in the robots than it is companies with Billion $ valuations but only a few hundred or less employees (Tech companies are uninterested in problems that will not scale because that would involves labor), Finance that is less about investing than extracting, companies that forgo investment for stock buy-backs, all of it driving down what once passed for a thriving economy. The invisible hand has been reaching into our pockets Read more
Comment Commented Howard Johnson
It's not just one thing but a perfect storm. A agree there is less Read more
Comment Commented Michael Public
Capital is only plentiful when you speak to economists. When you ask the bank for a loan it is in massive short supply. Bank are lending their capital to central bank. It is round tripping. This is why QE did stimulate a new era of prosperity. Read more
Comment Commented Curtis Carpenter
To my view, an excellent analysis. My only criticism would be that it attributes too much of the current effects on technology.
The authors write "Our best hope is that today’s leaders understand it and will adhere to it, thereby putting their creative energies to work on a new vision that places their countries on a path to greater prosperity and equity." I agree. But our worst nighmare is that today's leaders will simply choose to exploit the situation in a hard turn to the right -- regardless of any understanding or lack of it.
Read more
Comment Commented Michael Public
Agreed - the technology effect will be mostly for the next generation - unless you a taxi driver or fill orders in warehouses. The real issue is of economics - our current theories were great for getting us from the the great depression to 2008 and exactly no further.
Read more
Comment Commented yw yap
Agreed with CC: most political leaders are short-termists and will exploit the situation just to hold onto to their seats; sad but true. Read more
Comment Commented William Spence
Canada may provide clues on how this can he done. Read more
Comment Commented Michael Public
More info please. Read more
Comment Commented Carl Gercke
Very interesting and timely article. Can you provide examples of when policy-based uncertainty resolved into consensus. Or, on the contrary, when it devolved into...whatever?
I would note that negative campaigning, having proved its effectiveness, is unlikely to go away, even though it makes consensus more difficult. I would note also that the media appears now fully invested in the profit potential of polarization and negative discourse, and that will be difficult to dislodge as well. Read more
Comment Commented dan baur
Low growth and high unemployment are much more EU that US problems. Obviously socialism doesn't work.
The inequality is between the older generation that has jobs with benefits and don't want any adjustment, and the young generation of unemployed. There are no rich that you can milk.
EU will fail for the same reason USSR failed - to much government sclerosis. Read more
Comment Commented Michael Public
edit: ...has nothing to do with unemployed people taking from wealth from employed people... Read more
Comment Commented Michael Public
You obviously don't know the statistics. In the US about 35% of all wealth is owned by the top 1%. Inequality has nothing to do with unemployed people employed people's jobs. I can see now why you feel so threatened - you simply have the wrong end of the stick of this inequality thing. Unless you are worth a billion dollars upwards you should not feel threatened. Read more
Comment Commented Jose araujo
Have you ever been to Europe?
Do you actually understand that the standard of living in Europe is higher than on the US? Read more
Comment Commented stephan Edwards
If you think these trends are healthy your smoking something awfully funny. Citizens concerns have become totally irrelevant to the political process. The people in a position to actually push for change aren't interested their doing quiet well as things are. So why change. Their is no consensus and there isn't going to be. Neither party has the power to force through changes but they do have enough power to keep the other party from doing so. Vision our beloved "Elites" only vision is how can I get richer. We have the finest government the rich can own. The so called "Elites" don't give a damn for anyone who works for a wage and it shows. The banks and the rich got a bail out a FED policy that made them even richer. The poor we got a lecture on "Moral Hazard" apparently helping us would be bad for us Tough shit. This will end one of two ways. One: With a man on horseback fascism most likely. Second: Anarchy people get so frustrated they smash a system that by and large would prefer they just die and cease making a nuisance. My money is on the losers of "Globalization" smashing the system in frustration they have nothing to lose. The "benefits" of Globalization have pretty much gone to the rich. The poor's hand is so bad we have little to nothing to lose. Has for vision the US hasn't had leader with vision in nearly 70 years. I'm not holding my breath. Read more
Comment Commented stephan Edwards
Now that my temper is under control a little better. Some realities of the the State of labor in the US for you. Half the jobs were I work have gone to the 3rd world or just gone. The unemployment level in my state is well above 5% if they bother to replace me it wouldn't be hard. There is no protection if I walk out on strike single handed I am fired for walking off my job. I live in a right to work state. Walking off my job means I can't even collect unemployment. Unions are very very dead in this country. Striking would gain WHAT? A faster trip to the unemployment line? Read more
Comment Commented stephan Edwards
On strike ? Let me give you a hint about the labor market. I go on strike I am unemployed PERIOD Unions are very very dead. Welcome to the world of at will employment Read more
Comment Commented Jose araujo
Stop blaming politicians, if you don't fight for your rights,why would someone else do it?
When was the last time you were on strike? Read more
Comment Commented Steve Hurst
A significant proportion of the public consider guvnt has capitulated to raw capitalism and guvnt has done little to ameliorate that situation. If you dont believe your elected leader is acting on your behalf why should you believe in them
'Our best hope is that today’s leaders understand it and will adhere to it, thereby putting their creative energies to work on a new vision that places their countries on a path to greater prosperity and equity.'
Why should this happen, following the largest financial disaster in history there still has been no effective reform in the financial system Read more
Comment Commented Michael Public
It takes time for change - if Trump or Sanders wins - tell me there will not be changes? And if Cruz or Clinton wins the frustration will continue and the next election will be even closer. There is a new political line being drawn here - nothing to do with left and right - everything to do with the elites and their candidates (Clinton/Crux) and the people and theirs (Trump/sanders). Read more
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