Politics makes a comeback

By Chrystia Freeland
December 13, 2012

Prepare for the revenge of politics. For the past few decades, the quants – mathematicians, physicists and technologists – and their younger brothers, the economists, have been in the ascendant. With their mathematical models and their ability to crunch vast quantities of data, they have shaped the way businesses understand the world and operate within it.

But politics is making a comeback. That was one of the persistent themes at an invitation-only high-powered international conference about systemic risk in the financial services convened by the Global Risk Institute in Toronto this week (I was the rapporteur). As one of the bankers put it, if you want to understand the world economic outlook for 2013, and where your company should invest, you can’t just talk to economists anymore: “You need to talk to political scientists.”

I tested that idea with two thinkers – one an economist, the other a political scientist – who make their living helping businesses understand the world. Perhaps not surprisingly, Ian Bremmer, the political scientist and founder of the Eurasia Group, instantly agreed.

“When I started the firm in 1998, I had to convince people about the importance of political science, and I was not always successful,” Bremmer said. Making that pitch is getting easier – Bremmer now has some 150 employees and 400 clients around the world.

That trend is growing, he believes, and he thinks a major driver is the rise of the emerging markets. Bremmer defines emerging markets as “countries where politics matters at least as much as economic outcomes;” he also points out that over the past five years emerging markets have been responsible for two-thirds of global growth. Put those together and you have a world in which politics matters more.

Bremmer has been betting since 1998, when he started his firm, that businesses should care about politics. Nouriel Roubini has no such professional stake in the issue. Roubini is an economist par excellence – he shot to international fame as “Dr. Doom” when his bleak predictions about the world economy came horribly true with the financial crisis, and his eponymous firm now boasts some 1,100 clients worldwide.

Even so, Roubini agrees with Bremmer’s thesis, and takes it one step further. “The emerging markets have emerged, even as the developed markets have submerged,” Roubini told me. “Politics have become more important for many advanced countries, too.”

Drawing on the thinking of the bank chief executives, fund managers and regulators who gathered this week in Toronto, and my conversations with Bremmer and Roubini, here are seven reasons that in the coming year politics will matter as much as economic projections for anyone running a business:

* Europe: This is the prime example of how, as Roubini puts it, the developed markets are “submerging,” or reverting to an emerging-markets-style world in which politics drives almost everything. Bremmer calls it “Europe’s existential moment,” and that is ultimately a matter for politicians.

* China: The world’s dominant emerging market, and maybe before too long its dominant economy full stop, also happens to be a communist state in which politics explicitly steers all business and economic decisions.

* The United States: In Toronto, there was a lot of discussion of the “fiscal cliff” and how it has politicized the U.S. economic outlook – one of the American visitors, a leading financier, devoted most of his presentation on the U.S. economy to the politics of the Beltway.

* The Global Balance of Power: As Bremmer put it, “We are living in a time of geopolitical creative destruction. Geopolitics are suddenly in play in a way that for the last half-century they haven’t been.” We are moving from the brief, post-Cold War Pax Americana to a new age of Metternich, and the economic implications are vast, fast changing and hard to figure out.

* The Old Economic  Tools Don’t Work Anymore: This was the argument of another smart and influential American speaker in Toronto. He believes the world economy operates in 60-year cycles, and that we are entering a new one, which is why the old rules no longer apply. Roubini makes a similar point. He argues that the familiar macroeconomic toolkit isn’t working anymore. That means we need to create one, an inevitably political process.

* Return of the Regulators: A dominant theme – or, more accurately, lament – in Toronto was that financial regulation is back. That is true – although perhaps both less than the bankers fear and than liberals would like – and it is another reason politics matters.

* Inequality: Income inequality is rising in most of the world and is being talked about everywhere, from China to Europe to the United States. But both Bremmer and Roubini question how real the political response will be – and hence how much true economic impact it will have. “This is an issue that is coming, but it is not there yet,” he said. “It is clear in the U.S. we are talking about inequality. It is not clear we will do anything about it.”

Now is a tough time to be a political scientist. Academia is suffering from the same fiscal squeeze plaguing all public institutions, and students of the humanities are being hardest hit as education wakes up to the triumph of the quants that business figured out long ago. The irony is that, in the meantime, business is rediscovering politics – so don’t drop out of that doctoral program in political science just yet.

2 comments

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If you think China is communist, you don’t understand China or communism. They’re abotu as communist as they are a People’s Republic, i.e. in name only.

They are closer to a fascist state at the macro level, as “the party” really is just the collection of corporate interests and oligarchs. At the small business level its closer to a libertarian model – very few regulations (and those poorly enforced), on everything from labor to the environment. Small businesses pay virtually no taxes, and are generally very easy to set up.

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Growth economy defects

Chrystia Freeland on ‘Up with Chris Hayes’ that aired on Saturday, December 29, 2012, stated that growth was necessary for improving the standard of living of people who are at the low end of the income scale or unemployed.

This correlation can be found where there is investment in an economy, such as extraction of natural resources, construction of infrastructure and new technology, whether in developing or third world nations or the USA during the Clinton era.

However, when the long-term outlook is exhaustion of key resources before we have scalable substitutes for them (edible seafood, drinkable and agricultural water, productive agricultural soil depth, helium and other rare elements) and environmental degradation that will require huge sums to either repair, remediate or forestall damage, then relieving population pressure as a factor in resource use and environmental degradation can have more beneficial effects than ‘growth.’

Birth rates below the replacement rate will result in fewer people. Fewer people will produce less waste, need less food, use fewer resources and put pressure on nations to educate youth, unemployed people and others who would be in the categories that Freeland posits are benefited by ‘growth.’ Lower resource usage rates will increase the number of years the resources will last. It may also lead to a higher median level of education and standard of living; both could have beneficial effects on crime reduction and improved family and community cohesion. A slow reduction in population will also reduce the number of people displaced by automation.

The downside in the USA and some other nations has to due with the redistribution mechanism that did not accommodate changes in longevity, demographics and inflation – Social Security for example. A decline in population could result in a reduction of taxes paid into the Social Security Trust Fund, if the earnings of the smaller better-educated future population don’t rise fast enough to make up the difference. Still, the Social Security structure needs revision for the long-term anyway.

Gary Landau

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