LONDON – The politics of economic anxiety has now driven the electorates of the United Kingdom and the United States into the hands of populists. If only, so the received wisdom goes, economies could get back to a more “normal” rate of GDP and productivity growth, life would improve for more people, anti-establishment sentiment would wane, and politics would return to “normal” as well. Then, capitalism, globalization, and democracy could continue their forward march.
But such thinking reflects an extrapolation from one largely aberrant period in history. That period is over, and the forces that sustained it are unlikely to align again anytime soon. Technological innovation and demographics are now a headwind, not a tailwind, for growth, and financial engineering can’t save the day.
The aberrant period in history is the hundred or so years after the US Civil War, during which breakthroughs in energy, electrification, telecommunications, and transportation fundamentally reshaped societies. Human lives became markedly more productive, and life expectancies rose dramatically. The global population grew over 50% between 1800 and 1900, and then more than doubled over the following 50 years, with economies growing much faster than in previous centuries.
By the end of the 1970s, growth began to slow in many of the developed Western economies, and US President Ronald Reagan and Federal Reserve Chair Alan Greenspan ushered in a debt cycle that supercharged activity. The US, until then a net creditor to the world, became a net borrower, with China and other emerging markets benefiting from America’s rising trade deficit. Financial leverage drove global growth onward for almost another 30 years.