Planetary Outlook

August 10, 2010

The situation we face as a planetary economy is clear.

Many countries face many complex problems. The American trade and fiscal deficits continue with no plan in place to address either. The absence of a plan is, of course, more of a concern than the deficits themselves. And the fact that Congress seems almost incapable of creating a concise, coherent plan for anything is the greatest concern of all.

China, for all its growth dynamic, faces its own list of compelling challenges. Only half playing by the rules of the WTO, its currency remains seriously undervalued. Its banking sector is opaque, poorly regulated and riddled with conflict of interests. Most importantly, China’s market economy is distorted by the continuing presence and prominence of its state enterprises.

India’s potential continues to be limited as long as its public services remain chaotic and inefficient and until it can broaden  the reach of its educational institutions.

The European Union is a diverse set of economies with governments of diverse persuasions and an awkward overall governing structure. It struggles to accommodate the disparity between the strong economies of the north and the weaker economies of the south, never mind its new entrants in the east. It is prematurely established common currency, the euro, continues to wobble.

That is merely a short list of some of the problems facing only some of the key economies of the planet. Moreover, all of these problems occur against the backdrop of our first planetary recession. (Yes, this is the first global recession because the reality of the global economy is barely 15 years old.)

Thus, the outlook is clearly and highly uncertain. The conflicting predictions of either solid growth or apocalypse are either really hopes or fears. Let us try logic and evidence instead.

The outlook cannot be anything other than uncertain because there are so many things that could go wrong. It is implausible in the extreme to expect that all of the principal challenges facing the industrial world will be solved in time to avoid further adverse consequences.

Even if one could get correct solutions underway at once, it would still take time for them to come into effect. Nothing will overcome most of these problems instantly. The time it will take for the economies to adjust to new circumstances alone means that some issues will be addressed more quickly and others will be delayed. In other words, there will be major bumping and grinding as the economies in effect lurch forward. A smooth, consistent, sustainable growth path is extremely unlikely.

As a result, as we have pointed out in this space before, expect a long series of disruptions and dislocations as various players with various degrees of effectiveness push and shove their way forward.

There will be little bursts of growth and little bursts of slowdown or stagnation. Each of these “impulses” will set off giddy optimism or profound pessimism. In other words, people will continually over-react and in doing so undoubtedly aggravate the situation they face.

An exception to this great pattern is undoubtedly Canada. The Canadian economy remains remarkably strong across a wide range of characteristics because  this country does not over-react to new developments. (Actually, it barely reacts at all to many issues.)

But in a dynamic and nearly chaotic environment, this calmness of culture may be extraordinarily helpful. It certainly has since the mid-nineties, when Canada avoided the destructive internet bubble that finally set America off its stride.

Furthermore, as the actual economies of the industrial world produce erratic impulses of growth, causing disruptions and dislocations both economic and social, it is inevitable that the financial markets of the world will be highly volatile. Of all the species of humanity investors are the most prone to over- reaction.  And now, of course, such reactions are facilitated by the trading programs that exaggerate the investors’  impetuous and inopportune judgments.

Those who argue that we are  poised on a precipice, about to fall down into an abyss of perpetual economic stagnation cite the above arguments as their justification. They note that should too many of these problems go unresolved, a circumstance they think likely, a critical mass of stupidity will drive the system down into the depths of distress.

However, these doomsters omit several compelling counter arguments. The presence of a planetary economy dramatically increases the number of opportunities available. The economic environment is now more diversified than ever. With more opportunities in more places, there are more avenues for useful and sustaining enterprises and employment. We have put in place a market economy for the principal countries of the industrial world and we should recall we did this in the expectation that markets fundamentally work. Or at least they work better than any alternative we have ever imagined.

They work because they mobilize talent and resources effectively and efficiently and the reach of the market has never been greater. That means their ability to mobilize has never been greater. It is what we need now in particular and what of course we have always needed. 

This does not mean that the marketplace works perfectly. It is often slow and often overshoots its mark, ricocheting its way to a solution. Finding answers by multiple iteration is inherently a messy and somewhat unpredictable business. Yet the iterated solution does indeed usually occur, eventually.

The practical problems of this adjustment appear to be unknown to the pure market theorists who, in defiance of centuries of historical evidence, continue to counsel us to let the market proceed with minumum intervention. Confidence in the marketplace, however, does not mean blind confidence in its success nor a naive belief that it cannot be effectively facilitated.

How exactly to facilitate the marketplace is not as contentious as commonly supposed. The overall environment of the marketplace is and always has been a creation of the state and without the overall overarching regulation of the state, marketplaces barely function. The state provides a regulatory environment for everything from weights and measures to standards, from interchangeability to honestly-enforced transparent civil law. It also provides such social goods as education and basic research. Without those state interventions, we would continue to live a primitive lifestyle in subsistence villages.

Instead of well reasoned arguments, many on both sides of this debate invoke ideology, half-baked science, personal prejudice or conspiratorial paranoia. The realities are all shades of grey.

Thus, in this messy reality,  governments, both democratic and authoritarian, feel their way forward. There will be mistakes, corrections, over-corrections, a few fiascoes, one or two disasters and improvements also. Equally certain is the fact that many will suffer severe disadvantage, particularly the poor, the already disadvantaged and the less educated around the world. Societies will struggle to save even a few of its lost souls.

The gloomsters, boomsters and prophets offer competing visions of what to do. The boomster sees success as already on its way. The gloomsters want you to adopt their simple solution to avoid the disaster they have forecast, or to show you how to “profit” from the coming collapse. The prophets want the government to either retreat from the marketplace or to aggressively advance into it.

But the doomsters and prophets are all united in a single belief. There is a magic bullet to fix our troubles. The dispute is only about who has the bullet.

The reality is that there is no bullet, magic or otherwise. There is only the brutal work of building a better society, one painful step at a time. Did we really think that building a global economy could be achieved without such effort and struggle?

That is the only realistic outlook for the next year and the next century.

Does this mean that governments and individuals cannot find opportunities in this dynamically chaotic situation? Of course not. Remember that the planetary economy offers more opportunities than ever before.

First, governments need to simply and consistently apply the textbook recommendations of counter-cyclical policy. They need to spend aggressively when the economy is seriously underperforming (as they recently have), retreat when growth is reasonable and intervene when growth is becoming unsustainable. Operationally that means a deficit on occasion (not all the time) and surpluses when the economy is accelerating. That is exactly the policy Canada has pursued with considerable success and why it is well-positioned for the next decade.

One must accept that, in many cases, such policies are politically difficult. Of course, the uninformed public is happy to have stimulation when the economy is in dire straits. But the public can become used to the stimulation and then they are reluctant for it to be  withdrawn. Indeed, in periods of growth, they expect government spending to rise because “we are all getting richer”.

In addition, there is the political dynamic of governments trying to win elections by offering an accelerating menu of expensive, public-spending bribes. This is  not an argument against public spending; it is an argument against public spending without raising the requisite tax revenue in anything other than recessionary or near recessionary times.

The governments of the industrial world plainly need to educate their reluctant publics. It can be done. The Canadian political culture, for example, evolved to the degree that it was insisting on deficit reduction, not merely accommodating it. Yes, it must be admitted that this argument was easier to advance in the culture of Canada.

Canada is a small state with no delusions of overwhelming power. It is rich,but tends to run scared, legitimately so. So it was easier to scare Canadians with the spectre of the deficit than it may be elsewhere.

Yet the logic is relentless and with enough effort it can be advanced in other places. It does take political leadership, which is to say political courage. But then in these tumultuous times could you possibly have imagined that navigating through them could be done without courage?

It is an unfortunate circumstance of our times that the still largest and richest economy on this planet, the United States of America, possesses a culture hostile to economic reality, and a political environment hostile to any logical argument of any kind.

In addition, Mr. Obama exhibits America’s natural tendency to believe that there is nothing America cannot do, apparently simultaneously. But no, it certainly cannot.

Without a strategic vision, Mr. Obama has still not begun the education of the American electorate. He continues to believe there is a middle ground of compromise and concession, a set of policies that accommodate conflicting interests and produce satisfactory solutions. But the curse is that in these disruptive and intensely-competitive times, an adequate solution is by definition inadequate.

So, Congress passes health-reform legislation that finally promises broader access to healthcare and does so without a  credible funding model in place. And the financial reform bill is a complex document that will produce unintended consequences and leaves the fundamental power of the U.S. financial system still able to wreak havoc on the planetary economy. The risk of another financially-induced global recession is only slightly reduced by this wildly complex piece of political compromise. It is indeed a compromised piece of legislation.

China presents a different picture. It does not have trouble being decisive — the advantage of an undemocratic state. However, it practises a mercantile policy from days gone by. In this policy, private corporate entities, or quasi private entities, are designated agents of national advantage and the government uses its full power to expand their activities domestically and abroad.

The result is that a private company anywhere in the world can find itself competing with a Chinese enterprise that is a surrogate for the Chinese state.  By no stretch of the imagination is this consistent with the spirit of the World Trade Organization and its predecessor the General Agreement of Tariffs and Trade. 

Of course, the lust of the world’s private enterprises for access to the Chinese markets is so great that they abstain from speaking the truth. They know well enough that speaking the truth to the Chinese government sets off an immediate  reaction of indignant hostility.

Moreover, China’s mercantile policy does not serve the Chinese people’s best long-term interests.  By emphasizing manufacturing of ever more sophisticated products, China plainly sees itself as the manufacturing engine of the planet.  But this is a startling headlong rush into the past. For China to expect that manufacturing alone will give it the prosperity to which it aspires is a mistake.

China believes as an article of faith that manufacturing is the heart of all economies and that the service sector is merely a set of parasites feeding on the host. It is a view common among engineers around the world and so it infects the engineers who are the members of the Standing Committee of the Politburo of the Communist Party of China.

Engineers have trouble believing that anything other than a physical thing could have “real’ value. They do not notice that marketplace empowers humans to bestow value wherever they wish.

Perhaps it is better to see China’s single minded pursuit of manufacturing dominance as its headlong rush from a primitive agricultural society to the 1950’s.

Nevertheless, anything that limits the potential of China limits the potential of the world. That is quite apart from the instability that its mercantile policy creates with respect to the imbalance of the trade flows of the planet.

What should the world’s governments do once appropriate fiscal policies are consistently in place?  Basically, they need to help their societies adapt both to the present disruptions, the underlying and continuing increase in competitive pressures and the revolutionary changes being created by innovations of all kinds.

This would involve policies to reorient educational and training institutions and curricula, to support enterprise formation and to conduct a wide range of basic research. Unfortunately, most contemporary respones to these issues are inadequate to present needs, never mind to those of the future. Such policies of the degree necessary are unlikely to occur. As a result, more opportunities and talent will be wasted.

Individuals in the first half of the twenty-first century will have little choice but to take ever greater responsibility for their competitive advantages. They understand that they cannot rely on their schools or their employers to build mobile, world-class skills. They understand that their schools not only lag reality, they organize their teaching into categories already obsolete.

They recognize that their employers train only for the employers’ needs, and most certainly do not intentionally create mobile skills transferable to other domains. They understand that unless they cross discipline boundaries they cannot create true innovations. Unless they create such innovations, they will be nothing more than an educated commodity, bid down to lowest wage on the planet for their “professional” specialty.

And they most certainly understand that unless they inherently love what they do, creating an innovation of great advantage is impossible.

Unfortunately those who understand and take action to become planetary warriors will be relatively few in number. Most persons with post-secondary education will continue to believe that their education and experience with their employer is all they need to sustain themselves for the next fifty years. (Those significantly older may hope to reach retirement in order that they may collect a pension fed by low investment returns.)

Of the few who recognize the problem, even fewer will have the initiative to take action. Or is it the courage they lack?