This is the first of a three-part series.
Given the current global turmoil, it is all the timelier to ask: “What will world politics and economics look like by 2030?”
· Will the dominant narratives still be the interlocking realms of free market capitalism and liberal democracy?
· Could 2030’s political and economic menus offer new options for the nations of tomorrow’s world to follow?
· Which options might be most popular?
· By 2030, could there even be more favoured alternatives to today’s made-in-the-West duo?
Free market capitalism and liberal democracy
This decade starts with free market capitalism and liberal democracy still occupying the global driving seat.
But it is an uncomfortable occupation: both systems needed root-and-branch repair even before the Covid-19 crisis vividly exposed their Achilles’ Heels. Cracks were widening, even – indeed especially – in the US, ‘the arsenal of democracy’.
Since 2010, the US has fallen from 17th to 25th in The Economist’s Democracy Index, reclassifying it as a ‘flawed democracy’ rather than a ‘full democracy’. Its standing dropped in three out of five categories: ‘functioning of government’, ‘political culture’ and ‘civil liberties’.
More women in politics boosted its ‘political participation’ category. Its ‘electoral process and pluralism’ standing remained unchanged despite only 40% of US voters – 1% above Turkey – believing elections to be honest.
Western commentators, travelling beyond their traditional geographic comfort zones, encounter serious pretenders to the free market capitalist and liberal democratic systems. These alternatives have been delivering socio-economic improvements to their nationals far faster than in the West. Nowhere is this more so than in Asia.
No more royal ‘we’
Before getting into the body of this essay, here is a suggestion. We need to drop the current usage of a particular word by 2030 and, deliberately and provocatively, to illustrate why, I opened this sentence with this seemingly innocuous word: ‘We’.
Even the FT, the world’s best English language newspaper, regularly indulges in this royal ‘we’. Neo-Proustians on its op-ed pages cherish it, yearning for an age that is, daily, receding into the mists of time. In a 2019 opinion, David Helvey, the acting US Assistant Secretary of Defence, used this royal ‘We’ 11 times.
The conventional wisdoms championed by Western elites employing this ‘we’ favour the perceived all-conquering virtues of free market capitalism and liberal democracy. Not only are these ‘virtues’ increasingly questioned due to shortcomings arising from their real-world application and ossification, this old world of ‘we’ is being challenged by alternative models emanating from the non-Western world.
Perhaps the only ‘we’ that can still legitimately be used today is the ‘we’ that refers to humanity as a collective…as in “We humans can no longer ignore the consequences of our behaviour on climate change.”
Why has the West’s crown slipped?
Ninety One’s five 2020’s mega themes – technology, demographics, debt, the rise of a China-centred Asia and managing the environment ‘we’ inhabit – provide most of the answers:
The Scylla of disruptive technology has conspired with the Charybdis of a rising China to destabilise the Western blue-collar worker’s world. Many ‘left behinds’ have sunk to the level of the ‘never caught ups’. With AI’s advancement and the spread of automation into higher value-added professions, certain white-collar workers now face similar challenges: call centres are being replaced by AI-enabled exchanges.
Income and wealth inequality has soared: in the US, the top 10% of households earn 47% of national income and own 84% of the stock market. Middle classes have been eroded in society triggering the near-collapse of the middle ground in politics. Electorates have polarised between hard left and hard right parties like Italy’s 5 Star Movement versus its La Liga or stratified by class like France’s under-siege elitist ‘énarques’ versus its anti-elitist ‘gilets jaunes’. In the US, reflecting a rich vein tapped into by Bernie Sanders, this has left 40 million living in poverty, 87 million uninsured or under-insured and 500 000 homeless.
Bernie Sanders during a debate against Hillary Clinton in New York. (Justin Sullivan, AFP)
Growing income and wealth inequalities in the West are juxtaposed with an economic system seen as rigged by demographics in favour of the older generation, a system offering scant hope to today’s young unless their parents inhabit today’s elite. In the US, as never before, tomorrow’s generation does not expect to be wealthier than today’s. Since 2002, American university fees have risen 70% above inflation leaving the average student with a debt of $29 000. And with their education completed, first time home buyers face daunting property affordability challenges.
In addition, demographics are upending Western political systems. Pension-short Baby Boomers expect Millennials and Gen Zs to sustain their lifestyles. The Old Order’s electoral influence – writ large in today’s US Senate with its distinct age as well as, race and gender biases – gives greater political power to fewer, older, often rural, Midwestern voters than more numerous younger, urban, bicoastal voters.
Societies with aging demographics are witnessing ballooning budget deficits. Even before 2020’s Covid-19 cataclysm, US Medicare spending was forecast to double to $1.7 trillion by 2030, with Social Security outlays rising 72% to $1.9 trillion. These debts will be inherited by today’s young, plus those who cannot yet vote or are even unborn.
These transfers are stoking intergenerational tensions, best captured by the young New Zealand MP who quipped ‘OK, boomer’ in response to an elderly colleague’s heckle. It would be funny were it not so serious: the intergenerational transfer of debt – debt raised by today’s voting generations to fund today’s consumption yet still to be shouldered by non-voting generations tomorrow – is modern liberal democracy’s most profoundly undemocratic characteristic: burdening young or even unborn Peter with the debts of old Paul. President Macron’s pension reforms specifically aimed to address this “intergenerational injustice”, hardly surprising since 68% of France’s current workforce save nothing for their retirement. It is worse in the US: the bottom 90% has a negative savings rate. Could liberal democracy falter because today’s spendthrifts over-mortgage their grandchildren’s future earnings?
As capitalism ceases operating within a fairly regulated framework, it corrupts Adam Smith’s free market dream even where a capitalist veneer still masks this grim truth. Underneath the surface gloss is a quasi-monopolistic world where goods and services are increasingly supplied by zombie companies, surviving on artificially low-cost debt, rarely covering their true costs of capital. In large part today, as in 1776 when Smith noted in The Wealth of Nations, “Monopoly of one kind or another, indeed, seems to be the sole engine of the mercantile system.” Furthermore, protected by copyright, patent and other forms of state-enforced intellectual property law, many of the ‘icons’ of the modern corporate era are as much licence monopolists as was the East India Company in Adam Smith’s time.
Worse still, government is increasingly seen as a co-conspirator in this warped capitalist world. During the 2008 GFC, where governments intervened so that the miscalculations of financial institutions were not punished by market forces, charges of crony capitalism arose. The phrase “privatised gains, socialised losses” was used to describe this injustice. This meant a company’s earnings were protected as the sacred property of shareholders, whereas losses were treated as a burden that society must shoulder. State-backed bailouts were the most egregious example of this behaviour. In the wake of the Covid-19 pandemic, with the state throughout the West having to bail out a number of industries – for example airlines – de facto nationalisation of parts of the private sector is now happening.
Political short-termism stores up long-term complications. Consumers are stampeded into a world of ‘I want it and I want it now’. Mounting personal debt results, though much of this has, since 2009, been obscured by being transferred onto national and corporate balance sheets. When overconsuming today precludes saving for tomorrow and insufficient retirement savings result, pension shortfalls are inevitable. The mirror of this fact is that nearly 100% of net US savings are made by the top 20% whereas over half of Americans had no emergency savings when the Covid-19 pandemic hit.
Inability to fund such liabilities out of current revenues causes governments to forsake fiscal prudence – often miscast as ‘austerity’ – for a ‘spend, spend, spend’ culture that inexorably adds to government debt. This approach has long been a standard Keynesian prescription on the progressive left but is now commonplace on the new right as well. The Covid-19 crisis has now thrown any lingering debt caution to the wind: even frugal Germany has suspended its Black Zero fiscal rule.
The new right champions tax cuts even though they end up being unfunded as ‘trickle down’ benefits fail to materialise thereby exacerbating fiscal incontinence and further bequeathing debt to future generations. These tax cuts further compound inequality: 65% of the US’s 2017 tax cuts benefited the wealthiest 20%; add in corporate tax cuts that facilitated higher share buybacks, and the wealthy 20% captured over 100% of this windfall.
Continuing high expenditure coupled with tax cuts magnifies budget deficits and so adds to government debt. In 2019, America’s ‘greatest economy ever’ needed a $1 trillion deficit to facilitate a 4% nominal (2.9% real) GDP growth of US$835 billion: a Dollar of new debt generated but 84 cents of new GDP. 2020’s spending was initially set to rise 17%, yet the budget deficit rose 25% in the first 4 months ending 31.01.20. Now, with multi-trillion dollar bail-outs occurring, the CBO estimates the deficit to 30.09.20 to be $3.7 trillion (18% of forecast 2020 GDP); Goldman Sachs see it at $2.4 trillion in 30.09.21 (10% of forecast 2021 GDP). The on-balance sheet liabilities of the US Government will easily exceed 100% of GDP by the end of fiscal 2020.
These deficits exclude rises in off-national balance sheet entitlements, a gross total that already exceeds $128 trillion, thereby increasing the debt that will fall due to future generations.
Western governments are now addicted to quantitative easing. Their Treasuries finance debt mountains at ultra-low – sometimes zero or even negative – interest rates, a key feature of financial repression that erodes real savings, reduces funds available for investment and thereby inhibits growth.
Short termism compounds the demographic challenge by spawning an upside-down Malthusian monster: if children are seen to cramp today’s expansive lifestyles, population growth stalls and even reverses. Worker dependency rises. Exhibit A: Japan; Exhibit B: Italy.
As demographic aging grows, generating productivity improvements becomes harder: old dogs do not easily learn new tricks.
Together, GDP growth’s two essential ingredients – demographics and productivity –shrink towards zero and may eventually turn negative.
As financial demands of a demographically aging society rise, funds reserved for R&D or improving infrastructure get squeezed, forestalling GDP growth. Before the pandemic, US non-defence discretionary government spending was at 1962 lows.
Combined, these factors corrode that precious thread holding the West’s fabric together: trust in its essential fairness and faith in its politics. The unsettling result has been dubbed ‘Westlessness: the widespread feeling of uneasiness and restlessness in the face of increasing uncertainty about the enduring purpose of the West’.
Furthermore, there is a risk the Western symbiosis of capitalism and democracy has become unaffordable. Without the tailwind of positive demography – where larger numbers of workers tomorrow repay ever-larger sovereign debts created today – it is questionable as to whether Western governments can continue to run ever-mounting deficits, deficits that allow them to paper over today’s widening cracks of inequality that arise from the hijacked and bastardised construct of so-called ‘free market capitalism’.
Michael Power is global strategist for Ninety One. Views expressed are his own.