A Decade of Uncertainty

It has been almost a decade since beginning of the last financial crisis, yet the world economy is in greater uncertainty than ever before. While central banks have decreased interest rates to historically low levels and countries such as US, UK, Japan and more recently the EU have introduced massive Quantitative Easing (QE) programs, none of these policies are working. At the beginning of this year RBS sent a message to its clients, warning them of a ‘cataclysmic year’ and a global deflationary crisis.[1] The IMF said that the global economy is ‘highly vulnerable’ and has decreased its growth forecast. Despite the records on Wall Street and low unemployment, things are not much brighter on the other side of the Atlantic – ‘the US economy is in uncharted waters’ as Nell Kashkari, Minneapolis FED president said this year. The prospects do not seem optimistic.

There are two questions which we need to ask ourselves in order to solve this jigsaw. Firstly – what are the causes of our problems? Depending on our answer to the first question we will be able to tackle the second, crucial issue – what are the solutions to the current difficulties, since our usual tools do not seem to be working?

Of course, the answers depend on whom you ask – left-leaning economists such as Piketty or Harvey blame inequality or even the capitalist system itself, while more orthodox economists point towards high budget deficits during better times and slow global economic integration. Thus, a whole palette of different solutions which are proposed- ranging from greater public spending and higher taxes on the rich to reduce inequality, to greater austerity just like the UK has done, or changes in labour law leading to a more flexible job market, which are currently introduced in France. There is a common point in both schools of economic analysis – uncertainty. The Eurozone is in near deflation and investment is low in nearly all developed economies and this is caused by lack of optimism for the future, both from ordinary citizens and businesses who are afraid to invest.

However, can we be really surprised by these reactions? The voices of modern Cassandras outlined in the first paragraph seem to be accompanied by changes in business models and worrying political developments. Focusing on the first issue it is crucial to note a neologism which we are starting to hear more often with almost every passing day- ‘Uberization’. This new term, inspired by an American start up currently conquering its industry, leaving little room for the traditional taxi corporations, shows a lot about the situation in which many people find themselves in. As is widely known, instead of having a regular contract with fixed working days and times, Uber’s drivers are more like freelance sub-contractors (a trend seen previously in the IT sector) than employees. While this has a number of advantages – lower prices and service on demand for the customer and give the drivers a chance to earn extra money after ‘regular’ work, it creates other problems. People who face the Uberization of their work must be prepared to deal with uncertainty. Their job and wages wholly depend on the dynamics of supply and demand. This is not completely new of course, the labour market has always followed the laws of supply and demand, yet before the current decade having a job meant a relatively stable and secure source of income, giving people a sense of security arguably necessary to making steady investments (eg. buying a house) and spending.

Your opinion on this new trend probably depends on your worldview – while neoliberals hail it as a more effective, cheaper way of providing services, the left sees it as another problem for the working class. In my opinion, this model, if regulated sufficiently, can be used very effectively in certain industries, such as the taxi industry. However, regulators need to make sure that ‘Uberization’ does not go too far, affecting the most vulnerable members of our society or leading to a drop in consumer spending and investment.

While many ordinary people may be affected by the above trend, businesses are also facing significant political uncertainty. Brexit, with all the unknowns about how it will happen, is the most obvious and recent example. It has not only questioned the narrative of a ‘linear progression’ towards integration, which had already been cracked when France and Netherlands decided to reject the EU constitution, it has also made it much harder to put up the EU as a model of regional integration. While in the past faith in an ever growing integration of the world economy – starting with regional cooperation first, going to more global levels later on – was seen as almost (using Marxist rhetoric) a ‘historic necessity’, now it seems just as uncertain as anything else. For example, the Transatlantic Trade and Investment Partnership (TTIP) faces strong opposition and has had little progress with negotiations.

This feeling is also reinforced by other worrying international developments – Russia’s annexation of Crimea and war with Ukraine, South China maritime dispute, tensions in the Middle East to list a few. Furthermore, the rise of political extremism in the developed countries is certainly worrying all liberals and many businesses, where unpredictable individuals are close to winning elections in many countries. There is a sense of irreversible change in liberal democracies. ‘The Economist’ recently described this trend as a divide between the open and the closed.[3] Amongst the most critical issues are immigration (both legal and illegal) and free trade. It seems that the current mainstream economic paradigm- neoliberalism- is being questioned by the voters. This would not be anything extraordinary – economic thinking changes from time to time – but the problem is that while those opposed to neoliberalism are good at criticising it, they are much weaker at coming up with viable alternatives. As a result, businesses are forced to accept the reality of uncertainty – both geopolitical tensions between States and domestic politics, where many political candidates promise to change the current system without stating what that change would look like.

To conclude, it is worth pointing out the irony of the situation we are currently in. Just before the financial crisis, of 2008, many economists and presidents of central banks claimed that we have mastered the economy, learned to manage its cycles, and it seemed as if the economic world entered a new era of stability. Now, experts and investors tell us to expect a new crisis. Perhaps the hubris of some thinkers and policymakers, who seemed to think that we have reached some kind of an economic end of history and found the keys to an everlasting stable development, was a cause of the current situation. While in the past people listened to economists, at least to some degree, many people are ready to support political candidates facing strong opposition from economists. This is not as irrational as it seems, since the public prestige and trust towards economists have decreased since their failure to predict the last financial crisis. People feel cheated, and a growing number of them seem to believe in conspiracy theories about ‘the establishment’ or greedy elites allying keep the power and riches to themselves, exploiting everyone else.

Strong, visionary and brave political leadership is needed in order to reverse that trend. Each country needs different solutions, and it is difficult to generalise about domestic policies, but more cooperation in the international sphere, such as in forging (reasonable) free trade agreements and in eliminating negative phenomena like money laundering and tax evasion should improve the situation for everyone. Only such visionary, but realistic leaders will allow for solutions that will hopefully make our times a little less uncertain than they are currently.

Szymon Daniluk is the President of the Business & Economics Policy Centre.

[1] http://www.cityam.com/232162/rbs-urges-clients-to-sell-everything-except-high-quality-bonds-ahead-of-cataclysmic-year

[2] http://www.marketwatch.com/story/feds-kashkari-says-us-economy-in-uncharted-waters-2016-04-18

[3] http://www.economist.com/news/leaders/21702750-farewell-left-versus-right-contest-matters-now-open-against-closed-new

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