Monday, August 12, 2019

Economic Mega Trends: Myth or Reality?

It has become fancy to talk about mega trends in the economy, from "globalization" to "climate change", or "environmental degradation" as it is now called... Almost all of this mega-trend talk is nonsense. Almost all of it.

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Talking heads often like to blabber about mega trends in society. I still remember a particularly inept little character I went to college with, who was absolutely fascinated with so-called Kondratieff cycles. He even brought this obsession with him into our economics classes, where he dispensed his somewhat stumbling knowledge on the subject do anyone and everyone he could get hold of.

Kondratieff was an unlucky but well-meaning man who thought he saw decades-long patterns in economic activity. The scant support he enjoyed was dying out in the 1980s but got a revival (like so many other bad ideas) thanks to the internet. There is even a website devoted to this mega-trend theory

The problem with the speculations around Kondratieff cycles is not that he tried to capture long-term trends in the economy or in society in general. Such trends do exist, although they are rare and one has to be very careful with anchoring them in reality, lest you make yourself a scholarly tinfoil hat. 

Unfortunately, fascination with mega trends often exceeds the capacity that evidence provides for. The United Nations likes climate mega-trends, using them as a pretext to - surprise - grow government and move the world toward central economic planning. Another international institution, the Organization for Economic Cooperation and Development (OECD), is broadening the conversation to no fewer than four mega trends, listed and discussed - obviously without any evidence - in the 2019 issue of their Going for Growth report:
Globalisation, digitalisation, ageing and environmental degradation are the megatrends shaping tomorrow's living standards and well-being. The prospects look weak in the absence of renewed reform dynamism. The global economy is facing further headwinds, with growth weakening in the wake of high trade uncertainty. At the same time, gains in living standards, as measured by GDP per capita, have been much slower since the Great Financial Crisis. All this should prompt policy makers to implement necessary reforms to deliver on stronger, more inclusive and environmentally-sustainable growth and help people make the most out of opportunities created in this new world. 
Again, some mega trends exist. Not all mega trends exist. Some exist. Sadly, the ones the OECD talks about are not among them. In fact, globalization, digitalization, aging and "environmental degradation" are mostly the social-science equivalents of a mirage in the desert.

We will get back to the one mega trend that does exist, and for which evidence is aplenty. First, though, let us debunk the OECD trend mythology. 

I have heard about globalization in scholarly circles since at least the early 1990s. For sure, it does exist, but it is not new and not a mega trend. Globalization has been happening for about as long as man has been walking the Earth, meeting people from other places, fighting, trading and having kids with them. Globalization happened when Siberian tribes populated North America, when Vikings opened trade routes deep into Russia. Globalization happened when the Roman Empire spanned from the Euphrates to the Atlantic. It happened when the vortrekkers reached the southern tip of Africa.

In the Middle Ages economic globalization built trade routes for garments from rural farm villages in Bretagne, to city states in Italy - a breathtaking distance at the time.

Genghis Kahn was a globalist. So was Marco Polo. People like Leif Eriksson, Ferdinand Magellan, Christopher Columbus and the Mayflower pilgrims all pushed the boundaries of globalization. 

Long story short: globalization is neither new nor a mega trend. It is part of human nature. 

The digitalization trend is a bit more relevant. There is no doubt that computer technology has fundamentally transformed information sharing, communications and productivity in many parts of our society and our economy. The bulk of the transformation - so far - has taken place in the past 25 years or so, after the public internet became a reality in 1993. Anecdotally, this meant an explosion of information sharing and communications; according to someone I went to grad school (whose doctoral thesis I have unfortunately lost) there were 50 web pages on the internet in 1993; by 2000 there were 50 million.

Emails, cutting-edge technology 25 years ago, are almost ancient today compared to other forms of communication. My first cell phone could do far more as a computer than that Mac II or whatever it was that I owned back in college.

That said, we also should not over-estimate what the digitalization era - or the digitalized era - has done for us. On the one hand it has indeed transformed some parts of the economy, making it both easier, cheaper and faster to do business; on the other hand, it has also meant inefficiencies in other areas. Try have an online meeting with your co-workers instead of a meeting in person. Try get a Millennial to work eight full hours during a day without glancing at Youtube or social media. Try having a conversation with anyone under 40 without them constantly checking twitter or instagram.

What we gain in business productivity we lose in workforce productivity.

A more tangible problem is the allocation of venture capital into internet-based businesses. Despite the fact that very few of those businesses ever really turn a profit, venture capitalists have shoveled billions upon billions of dollars into the industry. It is almost like a gambling addict spending just one more buck to win that big prize.

There is even more tangible evidence that our economic foray into the digitalized era is morphing from "better" into "different, not better". Our GDP growth does not seem to benefit from digitalization; quite the contrary, in fact. Looking strictly at statistical correlation - implying no causality - the Western world has actually experienced weaker economic growth in the past 20 years, the height of digitalization, than in the last two decades of the past century.

As for the aging "mega trend", there is some very good research that essentially reduces it to a statistical myth. In his excellent The Future of the Welfare State sociologist Francis Castles boils down the "aging crisis" to the minor proportions it deserves. It would also be interesting to hear how China has been able to sustain exceptional growth levels over the past three decades when their demographic-control policies have actually been unrelentingly aimed at shrinking their population.

The last of the OECD's mega-trend myths is called "environmental degradation". This term is used to incite even more panic than the environmental movement has been able to using the term "climate change". I will not go into the intricate evidence against climate environmental degradation change, evidence that has been presented by common-sense climate scientists and other scholars. Suffice it to say that those of us who are old enough to remember the panic about an "ice age by the turn of the millennium" have a pile of reasons to not accept the current strain of climate panic as anything but just that - unwarranted panic.

Another reason is the Climategate scandal at East Anglia University. I have absolutely no respect for people who purposely manipulate data to get the results they want. 

So why, then, does the OECD talk about these mega trends? There are two reasons, one being that it is easier to come across as a scholar if you can talk a lot, than if you have to read a lot and write a lot. The Going for Growth report is a fluffy product that smells of scholarly indolence and even makes erstwhile OECD research look high-quality by comparison.  

The second, and probably at least as important, reason for mega-trend table talk is political. Hardly a surprise to anyone, the OECD quickly shifts focus to policy reforms (p. 22):
The global growth slowdown is largely a cyclical development. However, the slowdown and increasing uncertainty come at a time when globalisation, digitalisation, demographics and environmental degradation are key forces shaping economic developments. To make the most out of these challenges policy makers need to address domestic reform priorities, with a tailor-made structural reform agenda. Such an agenda requires packaging and sequencing policies to offset potential short-term costs, particularly on the most vulnerable and to build support for reforms. 
Specifically:
Going for Growth identifies Top 5 structural reform priorities to boost growth in an inclusive way in OECD countries and key non-member economies. 
The key term here is "inclusive". It is really synonymous with "redistributive": aggregate income must grow, but that growth must be spread out across all income layers - and that must be done by means of government intervention. 

Right here the OECD demonstrates what happens when analytical substance is replaced with mega-trend fluff. Economic growth and economic redistribution are mutually exclusive policy goals. To redistribute income governments create large spending programs that provide lower-income households with money and services they are said to be entitled to. To fund their spending programs, governments all across the Western world have imposed high taxes on their private sectors. 

The combination of the entitlements and the taxes has brought long-term growth down and is slowly grinding the European economy to a halt. The U.S. economy still has the ability to grow, but it is fighting desperately to even reach the three-percent level. It will not take much entitlement expansion to bring the U.S. economy down into the quagmire of European economic stagnation.

None of this has made its way into the intellectual circuits of the Going for Growth authors. This is telling, because it demonstrates that their interest in mega trends is not analytical - it is just a narrative they decided on as a framework for their report. As face evidence, they actually, and of course unintentionally, merrily talk about how many European countries suffer from "low labor utilization" (p. 27):
Low hours worked often reflect policy impediments or disincentives to full-time work, especially for lone parents and second earners. For example, some features of tax and benefits systems, related to joint income taxation of spouses or high implicit marginal tax rates due to the withdrawals of benefits as hours worked increase, can result in lower hours worked.
Right here, they lay bare the evidence that the welfare state, created to promote inclusive growth, causes the economic stagnation problem that the OECD wants to solve with inclusive growth. 

This kind of scholarly short-circuit happens when you put focus on mega trends as a conversation topic, not a research agenda. The problem, again, is not the mega trend idea per se; the welfare state is itself a mega trend, the existence and influence of which is documented in a vast body of credible research (to which I contribute on a regular basis). The problem is that you cannot approach a mega trend from the top down; it is documentable that the welfare state is a mega trend because its institutional structure, macroeconomic influence and policy consequences all match evidence on the ground. However, that connection is built from the ground up, not the top down as the OECD tries to do with its chat about mega trends.

So long as intellectual fluff is confined to the hallways of think tanks and academic institutions, it really does not matter. The problems begin when those who market mega-trend myths as some sort of reality want to influence economic policy. That in turn means they want to change the economic conditions of our lives, which in turn means that we as taxpayers have to hold the mega-trend pundits to a higher standard than they hold themselves to.

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