In the summer, as life slows down, there is space to reflect on fundamental issues. One of the key puzzles occupying my mind of late is the disconnect between widespread political dysfunction and relatively strong economic and financial-market performance.
Today, the world’s major economies are experiencing a steady recovery, despite the occasional setback. To be sure, economic performance is far from reaching its full potential: depending on where one looks, one can find output gaps, excess leverage, fragile balance sheets, under-investment, and unfunded longer-term non-debt liabilities. Still, financial markets show no signs of convulsion, even as monetary stimulus is gradually withdrawn.
Yet, at the same time, political conditions seem to be deteriorating. Polarisation has intensified, owing partly to growing resistance to globalisation and the unbalanced growth patterns that have resulted from it. In the United States, for example, the Pew Research Center reports that people not only disagree vehemently with their compatriots on the other side of the aisle; they also don’t like or respect them.
The political gridlock long fueled by America’s right-left divide has now become entrenched within the Republican Party, which controls both houses of Congress and the White House. So far, President Donald Trump’s administration has only exacerbated this internal turmoil, while offering none of the hoped-for economic-policy shifts that might elevate investment and growth and boost quality employment. While it is hard to detect the Trump administration’s priorities at this point, it would be hard to argue that they include a concerted and narrow focus on policies designed to make growth patterns more equitable and sustainable.
In the United Kingdom, last summer’s vote to leave the European Union surprised many, and concerns across the EU were heightened when Prime Minister Theresa May took over and committed to securing a “hard” Brexit. Now that British voters have stripped May of her parliamentary majority in June’s snap general election, the outcome of the coming withdrawal negotiations – and the fate of the post-Brexit UK – has become even more uncertain.
Leaders in Europe, as well as in a number of emerging economies, have now concluded that both the UK and the US are unpredictable and unreliable allies and trading partners. Asia, with China in the lead, has decided to go its own way. International cooperation on economic and security matters – never easy – seems to be unraveling.
In this context, the global economy’s resilience – at least so far – is all the more remarkable (though it is of course impossible to know how the economy would be performing in a more stable political environment). There are several possible (and non-mutually exclusive) explanations for this counterintuitive state of affairs.
For starters, institutions built over time now limit the capacity of political leaders and legislators to affect the economy. While these institutions can impede the implementation of positive policies, they also serve to minimize economic and investment risk.
Particularly on the international front, politicians cannot easily bring about a dramatic and immediate reversal of the patterns of globalisation that have been established in recent decades. Any attempt to do so – undoubtedly fueled by intensifying populist and nationalist pressures – would cause serious economic damage, ultimately depleting the political capital of those who spearheaded it.
Another, more worrying possibility is that risks are rising faster than perception of them. If this seems implausible, consider the 2008 global financial crisis, in which lax regulation and informational asymmetries led to a pattern of rapidly rising risk and deepening imbalances that were, for the most part, obscured from view.
In the current context, the cumulative effect of rising geopolitical tensions, loss of trust, and disrespect for key institutions could produce either a large shock or just deteriorating conditions for investment. But it is harder to construct concrete scenarios than it is to ignore the potential risks we face.
Having said that, there is a more hopeful explanation, to which I subscribe, at the risk of being labeled an irrational optimist. The inequality of opportunity and outcomes that have fueled popular discontent and political polarisation are very real, and, after years of neglect, they are finally getting the attention they deserve.
More concerted attention to social cohesion will not bring quick results. But, over time, it can help to reduce partisan intensity, refocus citizens’ attention on their common values, and restore their leaders’ capacity to deliberate responsibly and implement policy. As always, there will be disagreements – sometimes sharp disagreements – about how to achieve shared goals. The key is to address them in a context of relative mutual respect.
This scenario is far from guaranteed, but it is by no means impossible. After all, Emmanuel Macron’s election as France’s president, May’s setback on hard Brexit, and a near-universal rejection of the Trump administration’s stance on climate change and a rules-based global economic order, both within and outside the US, suggest that the center may be holding.
In the meantime, national and international institutional frameworks must continue to guard against destructive actions by political leaders. In the final analysis, confidence in these institutions’ resilience – and in an eventual end to the current political dysfunction – is what markets seem to be banking on.