The dangerous contradiction between economic reality and political rhetoric
MANY political upheavals of recent years, such as the rise of populist parties in Europe, Donald Trump’s nomination for the American presidency and Britain’s vote to leave the EU, have been attributed to a revolt against existing elites. People no longer trust mainstream politicians, nor indeed the media that report on them. This of course has huge economic as well as political consequences.
Some populist political leaders try to exploit this climate of mistrust—and extend it to encompass foreigners and minorities within the domestic population. These people, it is alleged, intend to cheat, rob or sponge off the voters. By extension, international agreements, it is implied, are a betrayal of domestic voters—backroom deals cooked up by global elites looking after their own interests.
Trust is built into the heart of almost all economic activity. Once humans specialised, they required others to produce what they themselves did not—the farmer needed the blacksmith to produce his tools, the blacksmith needed the farmer to supply his food. A global trading system requires us to deal with complete strangers on a daily basis. We must trust companies to deliver the goods we order, our employers to pay our wages and the banks to keep our deposits safe.
Any hint of a general erosion of trust—of a retreat to the kind of economic nationalism that marked the 1930s—would be a very worrying sign. Already new trade agreements, such as the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership, face an uphill struggle to be implemented. As yet, however, nothing suggests that the angry political mood is being converted into boycotts of foreign goods or firms. Consumers seem to value their iPhones and Volkswagens too highly to deprive themselves of them on political grounds.
Yet complacency would be unwarranted. The 2007-08 crisis showed what can happen when belief in the financial system breaks down. Banks lost confidence in each other’s creditworthiness and refused to lend; a knock-on effect was that companies found it hard to get trade credit. Economic activity suffered. In 2011 investors lost confidence in the creditworthiness of some European governments; bond yields spiked, recessions followed.
Disaster was avoided with the help of immense efforts from central banks. As a result, bond yields have fallen sharply. Historically, this has been a sign that investors are less risk averse than before—they trust debtors will not default and that central banks will not stoke inflation.
Yet it is harder to argue that negative interest rates and bond yields are a sign of enhanced trust—instead, it seems that investors are so desperate to park their money with safe lenders that they are willing to pay a penalty to do so. Furthermore, central banks are in a vulnerable position. They have been able to act decisively in the past few years because they are free of democratic constraints. But their actions have attracted criticism—from the right in America and Britain and from all quarters in the euro zone. Central bankers were given policy freedom because they were perceived to be disinterested experts. Now both their impartiality and their expertise are in question. The powers that democratic governments bestow, democratic governments can take away.
The dependence on trust makes the global economy vulnerable in another way, too. Systems benefit from being more open; the more people that can take part, the more potentially profitable connections can be made. But open systems can be exploited by those with malign intentions. The laxity of boarding procedures on American domestic airlines was exposed by the 9/11 attacks.
Every system of exchange ever devised has been exploited; coins made of precious metals were debased; paper notes were forged; cheques bounced. Today money largely consists of bits on a computer, a staggeringly convenient system that allows people to pay instantly for goods (often denominated in different currencies) from all over the world. But it also causes immense frustration for consumers and retailers when systems are disrupted and internet connectivity breaks down.
Cyberwarfare is an increasingly tempting tool for the ill-intentioned; the source of an attack is hard to trace and responsibility is easy to deny.
That again brings the problem of declining trust into focus. Today’s economy and financial system depend on global co-operation; today’s political system is one where such co-operation is increasingly seen by voters as intrinsically suspicious. That is a dangerous disconnect.