Global Economics and Management

The Continued Rise of the Populists

One of the themes we explore in Global Trends is the rise of populism, particularly right-winged populism, in country after country in the last decades. The rise of this political movement culminated with the Brexit vote in the UK and the election of Donald Trump in the US. These events both occurred in 2016. Some might have thought that, by giving power to the populists in major countries, electorates would get to test a set of agendas which, some think, can only lead to disappointing results (by "some", here, I mean "global liberal elites" - among which I count myself). After all, protectionism and restricted immigration are not recipes for economic dynamism. So some expected the rise of populism to be a fleeting reaction against globalization that would subside as voters realized the folly of trying to return to a closed world.

But this proved not to be the case. This excellent article in the WSJ, by William Galston (a former academic at the University of Maryland, later an adviser to Bill Clinton and now a senior fellow at Brookings), sums up where we stand. In country after country, right-winged populists are reaching electoral heights never seen before. And in Italy, the ascent of Georgia Meloni represents the latest example of their rise to power.

In my view, this represents the culmination of a fundamental realignment of the politics of Western democracies. This process was explored in an excellent article by Thomas Piketty and his coauthors in a QJE paper earlier this year, although I believe the article did not draw the full conclusions from this trend. Indeed these political transformations involve the utter discomfiture of the redistributive left, which used to represent about half of the electorate, and now is reduced to a shadow of its former self. Leftist parties are increasingly the home of educated elites, not of the working class. They advocate such regressive policies as student loan forgiveness and the deductibility of state and local taxes - to take two examples from the US - both of which would have been anathema to left-winged parties even one or two decades ago. (Let me clarify that I strongly oppose both policies, even though they would both greatly benefit me personally).

Right-winged populists are increasingly capturing the working class, although they have not (yet?) adopted a redistributive agenda, preferring instead to focus on immigration and cultural issues. The problem that Galston identifies is that this is not a recipe for electoral success for the left, because there are many more working class voters than there are members of the educated elite. The populist right is on to something, and making steady electoral progress, while the rest of the political spectrum has not figured out an effective counter. Whatever comes out of this process, we are witnessing a fundamental and durable change in the nature of political cleavages in Western democracies.

China's Belt and Road Initiative is in Trouble

The Wall Street Journal has a great report on the growing wave of default from international infrastructure projects financed through China's Belt and Road Initiative (BRI). I have three quick observations:

1) It was natural for a country like China, with such a large current account surplus, to want to find international investments to finance with that surplus. The BRI was a way to do that in a way that could also advance China's strategic interests.

2) In a globalized world, it is hard to find projects that the vast global pool of private capital has not found profitable to fund, and to fund them nonetheless with capital channeled by a government rather than a profit-seeking private agent. 

3) As a result, the projects funded through the BRI were bound to involve unusually high default rates. You can call that a form of adverse selection. I have been saying for a long time that the BRI would lead to many defaults - including in the Global Trends class - and now this is indeed happening. 

The same sort of considerations apply to what is known as industrial policy: a policy to direct state resources toward sectors or projects that are deemed of special strategic or economic importance by some set of enlightened bureaucrats. Said bureaucrats should start by asking: what is the reason the private market has not already funded this wonderful sector or project toward which I am about to direct state resources? The reason better be convincing, or the subsidy may end up delivering disappointing results. In my experience, the stated rationales are rarely sound, but one can easily understand the political incentive that led to the misallocation of public funds: bureaucrats get to exert power by extending the reach of their office, they can skim some of the resources off the top for personal use, they can attract the political loyalty of those that they fund, etc. The political economy of industrial policy is that there is too much of it.

The Global Wealth Report

In an era of growing labor-replacing technology, it will become increasingly important to own capital relative to earning labor income: if a robot takes your job, you can still appropriate the fruits of that labor by owning the robot! But capital is even more unequally distributed than income. The lack of capital ownership by a large portion of the population poses a huge challenge as we enter a world of machine learning, artificial intelligence and robotization.

In this context, Credit Suisse just came out with their latest Global Wealth Report. It makes for fascinating reading. The table below contains many interesting statistics. What is striking is how much higher wealth per adult is in the US compared to anywhere else - and also how pronounced the growth in wealth was in the US in 2021. 

But these averages mask huge disparities. The second part of the report looks at global wealth distribution. The pyramid below summarizes the worldwide results. Only 1.2% of the world population owns more than a million dollars, and almost 40% of these are in the US. 53.2% of the world population own less than $10,000 (I'll let you dig into the report to see what precise measurement is used here, but the picture of extremely high inequality is unlikely to be affected by measurement issues).

As a result of this high inequality, median wealth is significantly lower than mean wealth. In North America, for instance, median wealth per adult was just $93,271 in 2021. The Table below has statistics by region:

Even assuming a real return of 5%, which is generous, median wealth of $95,000 can only generate $4,750 of yearly income - not even close to a decent income if you have to rely on capital income rather than labor income. In fact, to obtain a yearly income of $66,000 (US per capita income), and adult person would need to own 20 times as much in net wealth, so $1.32 million. We are far from there. 

Zooming in on the very top of the pyramid is instructive. What is striking is how small the numbers are. There are "only" 264,200 people with net wealth in excess of $10 million:

Overall, reading this report made me feel better about my own financial situation, and worse about pretty much everyone else's!

Geopolitical Developments

Recently, President Xi and President Putin met in Uzbekistan. The Chinese leader took this opportunity to quietly question Russia's actions in Ukraine. What was left unsaid there is more relevant than what was actually said: it is hard not to see this exchange as an expression of doubt and concern on the part of the Chinese. The Wall Street Journal has the details, which make for a fascinating read.

Then today, Prime Minister Modi of India issued a thinly veiled rebuke to Russia. Reuters reports. India had maintained a position of ambiguity regarding the Ukraine invasion. Indeed India owns a lot of Russian-made armament, and needs to maintain cordial relations with Russia in order to retain access to parts and maintenance, as well as future procurement contracts. India also was looking to import Russian oil at a discount. But if India is seen as being too close to Russia, it could have costs when it comes to its relationship with the West - and in particular the other three powers in the Quad. And if Russia fails in Ukraine, as seems increasingly likely, the reputation of those who stayed too closely aligned with Putin will suffer. You don't want to be seen as backing a loser.

The backdrop of these two developments, of course, is that China and India are themselves long-time strategic rivals. This consideration explains to some degree the hesitant and ambiguous positions that these two rising powers have adopted vis-à-vis Russia's actions in Ukraine. Their positions were always apt to evolve based on the situation on the ground in Ukraine - and it seems that this is indeed happening.

The growing pushback that Russia is feeling from India and China can be attributed directly to the setbacks experienced by Russia in Ukraine in recent weeks. In the WSJ, the great Yaroslav Trofimov describes the likely effects of a Russian defeat in Ukraine. The main effect, of course, is that Vladimir Putin could lose power. A continued decline of Russia's strategic standing in the world could also lead to bad outcomes for Russia - already humiliated by its defeat in the Cold War, the progress of NATO in the years that followed, and now by a possible defeat in Ukraine. If there is regime change in Russia, it will be essential for Western powers to adopt a smart approach: engaging with the new Russia to make sure prosperity returns to this great country, that it can be welcomed back in the concert of nations on the basis of commerce and peace. Russia will need to be more firmly tethered to the world economy, and perhaps receive financial transfers from rich countries to aid in this endeavor - as in the Marshall Plan after WWII. This is, of course, much easier said than done.

Jeffrey Sachs on the Global Economy

This interview by my former professor, Jeffrey Sachs (now at Columbia University), is well worth the 24 minutes it will take to watch it. It discusses many of the themes we recently discussed in Global Trends: the current economic situation in the world, the issue of inflation, of debt overhang, etc.

Some Items We Discussed Today

In class today I mentioned a few news items relevant to the topics we discussed:

1) The debt forgiveness plan announced by President Biden last week comes with a reform of Income Based Repayment (IBR) plans. These plans open the door for universities to game the federal student loan programs to their advantage. I first read about this in Marginal Revolution. This linked to an excellent article by Matt Bruenig. This article itself linked to a 2013 post in a law blog that goes through the example of Georgetown Law School, which I mentioned in class. So you have to dig a bit to get all the details. I want to be totally clear that I do not favor this behavior. In fact, I think the steep rise in tuition that institutions of higher learning have imposed in recent decades is a big problem - one major theme of Global Trends is that a lot of the world's problems problems would be alleviated if we increased access to education. But people and institutions respond to incentives, and the debt forgiveness plan does nothing to address the fundamental problem of college affordability. On the contrary it is likely to exacerbate these problems, by making students more price insensitive.

2) Senator Warren said today that Fed policies (raising interest rates) could tip the US into a recession. She is correct. As I mentioned in class, that is the point of these policies - to tamp down demand so that price increases moderate. More precisely, it would be nice if we could tame 9% inflation without throwing the economy into recession, but the lessons of history suggest that would not be possible, because the slowdown in demand that would be required to reduce inflation from 9% to (say) 3% is likely to be big enough to imply a recession. When Paul Volcker took a similar policy decision in 1979-1980, the US experienced a very severe (though short-lived) recession. To this day we refer to it as "the Volcker Recession". The alternative might be sustained inflation for a period of time - choose your poison.

3) Relatedly, I mentioned an academic article presented at the Jackson Hole central bankers' symposium, pointing to the fact that a successful taming of inflation would likely require action on both the monetary and fiscal fronts. Here is Bloomberg's coverage of this paper. Here is the paper itself. Here is broader coverage of the Jackson Hole symposium.

Two Geopolitical Updates from Foreign Affairs

The latest issue of Foreign Affairs features two excellent articles providing updates and analysis of some salient geopolitical issues. Both are relevant for our discussion at the next meeting of Global Trends. 

1) The first article is on US-China relations, by Jessica Chen Weiss. This article seems to me to carry the voice of reason. It calls for a more measured and intelligent approach, on the part of the US foreign policy leadership, to its relationship with China. US policy is too reflexively anti-China. China-US economic relations are characterized by much interdependence - most of it for the good of both countries. China-US strategic relations feature numerous points of contention that could degenerate into conflict and will require consultation and discussion. Placing the US in a mode of systematic opposition to China carries dangers from the perspective of its own national security - and economic prosperity. The US needs to tread carefully - and of course, so does China. The article provides a great opportunity to learn about the myriad issues that characterize the most important bilateral relationship in today's world.

2) The second article is on the status of the Russia-Ukraine conflict, by Dara Massicot. The article highlights the difficulties faced by the Russian military as it tries to advance in Eastern and Southeastern Ukraine. I am sure people will disagree on the extent of the challenges faced by Russia, given the fog of war. And I have yet to see a similar assessment of the difficulties faced by the Ukrainians. What seems increasingly clear, however, is that this conflict is likely to drag on for many more months, if not years. Time will tell if both sides have the stomach for such a protracted conflict.

Business in an Age of Political Polarization

Module 8 of the class deals with the rise of new interests. Unusually for Global Trends, the focus will be mostly on the US, though the lessons apply more broadly. We will discuss the emergence of new voices in a society that is growing more diverse. We will discuss whether there is a growing cultural divide in the US - along lines of gender, race, national origin, religion, political affiliation, etc. The answers may sometimes surprise you. But when it comes to politics, there is an undeniable increase in political polarization. This polarization is most pronounced in Congress, for reasons that have to do in part with the manner in which candidates are selected. But it is also visible among the population itself. Growing political polarization in the US has profound ramifications for politics, but it also has major consequences for business.

This is to introduce a far-ranging article on the politicization of business, which appeared in Newsweek recently. It's a fascinating read and deals with many issues we have discussed in Global Trends in the past. The article focuses on the rise of "right-winged" business, and in this sense it may seem a bit one-sided. My view is that in a polarized society, there is growing pressure for businesses to align with one or the other side of the political spectrum - this is a pretty symmetric game. As some businesses align more with either side, there is growing social pressure by the other side to create brands and services tailored to their political preferences. Hence the fascinating example of Harry's razors versus Jeremy's razors that the article describes. 

Is it a good idea for companies to take political positions? My personal view is that they have to tread carefully. There are issues of basic social justice and environmental responsibility that companies cannot avoid getting drawn into - justifiably so. But when corporations become perceived as too politically aligned, the risk of a backlash exists. The business world runs the risk of becoming politically bifurcated. Personally, I would not want to live in a society where all my consumption choices are politically patterned - where I have to choose between a right-winged razor or a left-winged razor. Razors should not have a political alignment. Neither should blue jeans, coffee, fried chicken, or sporting goods. Beyond consumers, corporations themselves should not want to be backed into a political corner: whatever your point of view, about half of society aligns with the other point of view! It seems problematic for companies to give up on half of their potential customer base, which is what we would end up with if all of business became politically patterned (look at what happened to cable news for instance - with CNN now trying to extricate itself from this self-defeating equilibrium). This is a great debate, and one that I am sure we will have a chance to revisit in class.

PS: The Newsweek article cites two UCLA Anderson affiliated scholars: my colleague Valentin Haddad, who teaches finance at our school, and Vanessa Burbano, who obtained her PhD with us. 

The Coming War in Taiwan?

This is the first of several posts I plan to write on the themes of Part III of Global Trends. The first module of this part of the course concerns the rise of new powers, and the concurrent geopolitical uncertainties that will result. In the past, we discussed China's territorial claims in the South China Sea as an example of the growing clout of new powers. Last February, I switched the case to the Russia-Ukraine conflict, for obvious reasons. Right now, that conflict is still very much in the news as Ukraine launches a counteroffensive. But the issue of a possible invasion of Taiwan by mainland China is at the forefront of observers' concerns. 

Is China likely to make a move on Taiwan anytime soon? A pair of articles in the WSJ and in Bloomberg make the case for alternative points of view. In the WSJ, Hal Brands and Michael Beckley, two academics, argue in the affirmative in the journal's latest Saturday Essay. They point to the urgency of making plans for the worst - in particular to help Taiwan build up its military capabilities, to prepare for a war involving the US in the Pacific, and to start designing economic sanctions against China in case of an attack. 

Over at Bloomberg, Admiral James Stavridis, a former supreme allied commander of NATO, thinks instead that we are years away from a conflict involving Taiwan. He goes through five major reasons for why this is the case. 

These two articles illustrates the old Latin adage "si vis pacem, para bellum": if you want peace, prepare for war. They both agree that aggressive contingency planning needs to occur now to deter a conflict. They agree that a reunification with Taiwan is resolutely part of China's ambitions. They agree that if such a reunification occurs through conflict, it will be an immensely costly affair for China, for the US and for the world. Their disagreement is mostly over the timing of a possible attack, and over the urgency of the situation. However your views align, there is no doubt that this issue should be a major source of concern for the months and years to come.

An Interview with UCLA's Oleg Itskhoki

Bloomberg today features a great interview with one of UCLA's rising stars in economics - Oleg Itskhoki. Oleg won the Clark Medal this year, an award given annually by the American Economic Association to the best economist under the age of 40 - and a frequent harbinger of a future Nobel Prize. The interview touches on many themes that we discuss in Global Trends - maybe I should ask Oleg to co-teach the class with me!

UCLA is fortunate to have economists of Oleg's caliber on its faculty.