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There are two main issues. Firstly, there are areas of structural weakness – China, the eurozone, the US and so on. But overlying that is something different which is causing volatility and that is the enormous amount of political uncertainty and poor policy management in much of the world. We live in a world where a tweet can move a market 4%-5% in a day, so markets are constantly on edge.
The number one trade problem for the US right now is China. And you have to give Trump credit for calling China out. It is a bad actor on trade and intellectual property. But the US needs to join forces with the Europeans, Japan, Canada and others to pursue a multinational approach to China. The US can reduce their bilateral trade deficit with China, but will just end up having it with someone else. That is basic economics, but it is apparently lost on our leaders.
"If you want sustainable growth, you need to put a price on carbon and increase subsidies for new technologies"
There is a worry about major central banks playing a beggar-my-neighbour game with currency. The better route is to have policies that provide recession insurance and that focus on people left behind by globalisation.
There is an animosity towards trade from those who are feeling left behind and who want someone to blame. Our political leaders have not dealt with that. What is surprising is that it has taken so long for all of us to see it. In an introductory economics course we remind students that there are big gains from trade, but it doesn’t make everyone better off. The gainers have to compensate the losers. In most countries that has not been the case and the problem has festered.
Pat Buchanan challenged George Bush on the subject in the US presidential election back in 1992, but at that stage not enough people had been left behind for [the idea of compensating those who had lost out] to gain traction.
Looking at the UK, the people who voted for Brexit don’t care about being part of the EU because they felt like they never personally benefited from membership and being in the single market in the first place.
The bigger issue is technological change and the impact that has had on labour markets in much of the industrial world.
If you take the US as an example, we have labour policies designed for a world we no longer live in.
We have policies designed to protect people for a temporary period between losing a job and finding the same or a similar job in due course. They were designed to tide people over. But that misses the bigger problem that the job category doesn’t exist anymore.
The answer is to invest in people’s retraining through personal re-employment accounts or some sort of government scheme. We need a much bigger government commitment and the business community needs to understand that.
It’s not a problem that can be solved simply by raising taxes. The real challenge, the real problem, is that entitlement programmes – old age programmes, Medicare and other aspects of massive social spending – are eating all the budget pie. If you want to spend more on younger workers, then something has to give. But that would be politically unpopular, which is why we have not seen more done in this area.
You shouldn’t single out firms and industries if the tax system as a whole needs fixing. The problem is the tens of trillions of dollars in social spending. You have to start by scaling back benefits for the well-off.
Climate change remains one of the great social and economic challenges of our time. Governments have not made the case for most people that action has to be taken. If you want sustainable growth you need to put a price on carbon and increase subsidies for new technologies. I regret to say the US is not exactly leading the way in this area.
"In an introductory economics course we remind students that there are big gains from trade, but it doesn’t make everyone better off"
That is one of a number of mysteries of US policy. President Trump campaigned for those people, but has done very little that has actually benefited them. Instead, Washington has sought to blame someone else and tried to turn back the clock.
The worry in the US and other countries is that when people give up on populism, they then turn to the far left. Which begs the question: are we in a new normal? At what point do we shift back to the centre-left, centre-right, technocratic debate?
First, they have to improve productivity, particularly countries like Japan, but also in Europe and the US. That means introducing tax policies that encourage innovation. Second, they have to remove disincentives to work and provide a means for workers to be continually engaged. ‘Tiding-over’ polices to protect people between jobs are obsolete. That is not the way the world works any more.
Professor Glenn Hubbard teaches on the LBS EMBA-Global Americas and Europe programme and is Dean Emeritus of Columbia University Graduate School of Business, where he is also Russell L. Carson Professor of Finance and Economics