Four years after the annus horribilis the Western order finds itself at another crossroads. In his latest book, Financial Times editor Martin Sandbu explains why our current economic order isn’t living up to our expectations and what can be done about it.

My not so sweet 16

2016 was the annus horribilis of Western social order: In June, British voters chose Brexiteers’s “Vote Leave” over Remainers’s “Britain Stronger in Europe”; in November, American voters chose Donald Trump’s “America First” over Hillary Clinton’s “Stronger Together.” For Martin Sandbu, these are the two prime examples of a bigger trend toward increasing social and political illiberalism in Western democracies. As he finds a strong correlation between the rise and fall of populist movements and the ups and downs of the economic cycle, he contends that the illiberal trend is the result of a broken economic bargain:

“The Western social order no longer fulfils its promise of an economy that offers a (good) place for everyone.”

In his book, “The Economics of Belonging” he tracks down the causes of this erosion of confidence and offers remedies to restore trust.

A tale of places, not individuals

So, who is to blame? For Mr. Sandbu, the major culprit is technological transformation or, to be precise, the failure of Western policymakers to correctly address the huge social and economic implications thereof. Thanks to human ingenuity, automation has started to increase productivity and output all over the West since the 1970s. The flipside: It has erased thousands of good-paying factory jobs.

The result: Many disenfranchised workers who must contend with low-productivity and (consequently) low-wage service jobs. This development has hit the uneducated, the rural, the immobile and men disproportionally hard. As “people seem to take the economic condition of their local community as a proxy for the nation’s economic status”, people in places with rising unemployment and declining wealth start to question of their country is still on the right trajectory.

Three crucial missteps

Going into the details of the causes, Mr. Sandbu identifies three critical mistakes by Western policymakers:

First, they have mismanaged structural change by changing tax policy away from redistribution, by weakening labor unions, and by failing to adapt social safety nets toward new less stable and permanent work patterns.

Second, they caused the recession of 2008/2009 by encouraging financialization and failed to respond to its magnitude with adequate stimulus: “incontinent policy before the crisis brought a financial collapse, and timid policy afterwards amplified the suffering it caused.”

Third, they missed out on preparing for the accelerating digital transformation which is likely to cause similar problems to the previous automation wave – but on a much larger scale.

Why globalization is not the problem

Mr. Sandbu argues that globalization is not to blame. While increasing trade may have exposed the places that were hit hard by the automation even more, offshoring labor-intensive production has helped to save a lot of jobs because it has taken pressure from companies to invest more in labor-saving technological upgrades.

In addition, most of the rise in inequality in the West preceded the era of integration of developing or emerging economies. Moreover, there is little evidence that migration is bad for the economy or for public finances. To the contrary, cross-border networks can help boost international.

Finally, while growing transnational capital mobility has helped to reduce union bargaining power and complicated monetary policy, it is very hard to distinguish which destabilizing effects in our societies come from financialization and which from financial globalization.

How Globalization can be a solution

Instead of scapegoating globalization, Mr. Sandbu highlights the opportunities it offers in creating an economy of belonging. He points to example of the Nordic countries to demonstrate that economic openness and social cohesion reinforce each other – not exclude each other mutually. They can do so even better when economic integration considers national preferences and values as much as possible.

The pragmatic and conventional option is to add more social and environmental clauses to free trade agreements. The more radical and revolutionary approach means more political integration on the global level, or in other words, a globalization of the political model of the European Union. Here, Mr. Sandbu is more skeptical on whether there is a chance for meaningful change apart from certain, very specific policy areas, such as multinational corporate taxation.

Power to the left-behind

Overall, however, Mr. Sandbu is optimistic that Western countries can restore an economy of belonging. However, in his view, some minor repairs won’t do. Instead, they need nothing short of FDR-like boldness to turn the tide. It starts with dramatically reshaping the power relations in the economy. Here, Mr Sandbu worries about two in particular:

First, capital vs. labor: A universal basic income (or a negative income tax) and welfare entitlements which are portable to other jobs would give workers more leverage in the labor market and thus undercut unethical work practices.

Second, digital platforms vs. consumers: Digital monopolies should be curtailed with a combination of traditional competition policies (including company breakups) and stronger data ownership rights for consumers.

Stimulus for the left-behind

With Covid19 plunging the world economy into recession, Mr. Sandbu’s focus on macroeconomic recommendations could not be timelier – even though the book itself does not reference the crisis as it was published at the outset.

“The cost of mismanaged aggregate demand fall disproportionally on those on the margins of the economy” and “[l]onger recessions (…) plant the seeds of permanently greater inequality.”

These lessons from the 2008 and 2009 financial crisis should be on the forefront of policymaker’s minds when designing adequate stimulus packages for the 2020 crisis: Too little, too late will exacerbate inequality.

In addition, Mr. Sandbu also urges to take regional disparities more seriously. Investment in financial, physical and human capital should be place-specific and targeted to regions which have been left behind but have promising fundamentals. Case studies and experimentation are the best way to identify them and see what works and what does not.

Reboot 2020?

Four years after the annus horribilis the Western order finds itself at another crossroads.

Will Joe Biden fundamentally change course toward more bipartisanship and international collaboration in tackling big transformational challenges?

Will we be able to avoid a hard Brexit – and will Europe and the United Kingdom develop a mutually beneficial and sustainable partnership?

Will the policy responses to Covid19 avoid another spike in inequality and nationalism – and will they address the underlying challenges of the digital and ecological transformation?

If so, 2020 could – against all odds – become an annus mirabilis for the Western social order.