The Collapse of the Center

It’s the politics, stupid?

Credit Writedowns is back. And right now, it’s the politics that are on my mind more than the markets or the economics. I have had a long while to sit and think about what’s been happening and where we’re going. And what stands out for me on the economic front is just how measured the changes are from day to day, week to week and month to month. I think it’s steady as she goes.

Some are calling this the best of times. But, the best of times for whom? If you look at the politics, the center is collapsing everywhere in the developed world. And increasingly, big emerging markets like Brazil, Turkey and India are seeing the same populist shift that western Democracies are seeing too. What the hell is going on?

Massive change

At the risk of being simplistic, I would boil it down to this: for large swathes of the world’s population, globalization means insecurity. That’s because it creates more change than we can handle; and that’s cultural change, economic change, and all manner of changes that increase insecurity and fear.

At the weekend, I was explaining gentrification to my son. We were talking about a 19th to 20th century Black American community in the DC area that was overrun by the outward expansion of wealthy enclaves within commuting distance of the city center. In the late 19th century, this community was chased out of an area now called Tenleytown, where Blacks had lived since the Reconstruction era that followed the US Civil War. Developers who bought lots in Reno City, the part of Tenleytown where the Blacks lived, attached restrictive covenants on the sales that excluded Blacks from buying or renting property. So they picked up and moved further out into what is now Bethesda, near where I live today.

Montgomery County, Maryland had created a ‘separate but equal’ school system for Blacks. And, so many residents from Reno City moved down the road to Bethesda that, by 1912, the county was forced to build the River Road Colored School to serve the community separately from the White pupils. Unfortunately, the march outward of wealthy commutable enclaves continued and these families were again displaced, dispersing altogether, their graveyard paved over underneath an asphalt parking lot.

I explained to my son that this is gentrification. And gentrification equals displacement. It means the destruction of a community, its way of life and the social bonds that give it life. They are replaced by a new community, a new way of life and new social bonds. But for the people involved from the original, displaced community, it is a calamitous experience that is life-changing.

That’s the kind of change that is happening globally. For example, Amazon is moving to Arlington County, Virginia, just outside of DC. And already, house prices are rising. A massive influx of wealthier, younger Amazon workers is expected. And this will have consequences, the most important of which is insecurity.

Change is good but a lot of change can be destabilizing, leading to feelings of insecurity.

Globalization equals insecurity

Think for example about this whole pivot to the Gig Economy, for example. Some people are touting the changes as liberating, ostensibly because people have more freedom to structure their work according to their needs. But the reality is that the Gig Economy creates a host of economic insecurity issues. And so, while people with these self-employment type jobs are technically employed, they are often more insecure, lacking healthcare options, vacation benefits, and retirement benefits. The need to pay the bills makes the so-called liberating work schedule an illusion, a fiction.

This is a part of a massive risk shift in which workers get ‘control’ over their benefits – vacation, retirement, health care.  No longer are these benefits provided by the employer. Instead, workers control their own destiny. They make their own decisions on how to invest for retirement, which healthcare to choose, and when to pause for vacation. And while, again, this change is touted as giving control to workers, the reality is it is a de facto cut in pay and it also means insecurity.

And this is happening in an environment in which an increasing number of workers in western countries can be fired at any time without cause. In the US, it is called “At Will” employment. In the UK, there’s zero-hour contract employment, which gives employers similar leverage in dialing back hours for employees, reducing the employees’ leverage in asking for higher wages and increasing the leverage of employers in conjunction with their ability to completely offshore employment via globalization

So, when you think about globalization, do it in the context of this article: What Happens to a Factory Town When the Factory Shuts Down?

Mary Barra, the chief executive of G.M., announced that the company would unallocate four other North American plants and cut roughly 6,000 unionized hourly positions and 8,000 salaried positions. The largest affected plants manufactured sedans, and sedans would no longer be a major part of G.M.’s domestic production; instead, the company would focus on building S.U.V.s and trucks, which generate much higher profits. Manufacturing trade publications like IndustryWeek heralded Barra’s “willingness to wield the ax,” while Wall Street investors cheered the shedding of the “legacy” costs — pensions, health insurance — associated with G.M.’s American workers. On the day of Barra’s announcement, the company’s stock closed nearly 5 percent higher.

Barra’s decision reflected many trends: declining small-car sales, an increasingly overvalued dollar that makes American exports more expensive and the continuing rise of American automobile manufacturing in Mexico, where autoworkers make an average of $2.30 an hour (last year, G.M. became that country’s largest vehicle manufacturer). It was yet more evidence of G.M.’s retrenchment from American manufacturing; since 2005, the number of states with active G.M. assembly plants has fallen to seven from 16. With the idling of Lordstown’s plant, Ohio became the latest casualty on that list.

[…]

For the residents of Lordstown and the surrounding area, Barra’s decision promised disaster. A recent study by the Center for Economic Development at Cleveland State University estimated that the elimination of all three shifts at the plant would ultimately cause the loss of nearly 8,000 jobs and more than $8 billion in economic activity in the regional economy. And since the 2008 financial crisis, wages in the area have fallen by 6 percent, even as they have risen nationally by 11 percent. “They’re scraping out what’s already been hollowed out,” Green said. “We need G.M. It’s the last thing standing around here.”

That’s globalization, right there.

The Best of Times

So people feel lied to when you tell them it’s the best of times. The charts may show wages increasing and unemployment decreasing. Nevertheless, the sense of economic insecurity is palpable everywhere I have been in Europe and North America since the economic crisis. The insecurity was there before the crisis, but it was less palpable. The crisis crystallized this sense of insecurity. And it has not gone away.

And so, when, as a journalist or as a political or economic expert, you tell people it’s the best of times, they don’t believe you. In fact, it gives them every reason to doubt anything else you say. It makes it easy for demagogues to point the finger and scream ‘fake news’ about any- and everything – because experts have been discredited.

As a result, increasingly, voters are taking their frustrations out at the ballot box. That’s what we saw at the weekend in Europe. Particularly in Europe’s largest democracies, France, Germany, Italy and the UK, the populists were ascendant. The message: center parties have lied to us and continue to lie to us. And we are going to vote them out and continue to vote them out until we dial back the insecurity they have created for us and our communities.

The economics of populism

None of this has led to a massive change in economic fortunes… yet. And I don’t think it will until the economy turns down. We are still operating largely in the same political economy we have been using for decades. Sure, the rhetoric against immigration has led to action on many fronts. And in the US, people are talking about ‘Medicare for All’ as one solution to the still-chronic healthcare crisis. On the trade front, at least Donald Trump is pushing the envelope on protectionism.

But, these are changes that will have only marginal impacts economically. Medicare for All won’t happen. There isn’t enough backing from incumbent politicians in Congress. Even the incremental impact of a trade war between China and the US is over-estimated. And so, despite the rise in the populists, I do not anticipate anything drastic happening on the economic front. We’re basically on auto-pilot.

But, when the economy turns down, I believe populism will take on a very different character because politicians will have nothing to lose. The more extreme populist rhetoric on economic matters will then become action. And the tide will turn against the open and globalized trend that got us to this point. And we’ll just have to see what impact it will have.

As I watched the news flow, that’s what I have been thinking about these past two weeks. I think the center is collapsing as we speak. But it’s only when the economy turns down that we will see how much impact this collapse will have.