The Levelling

by Michael O'sullivan

  We can take each option at a time, starting with infrastructure.19 In the period since 2011 the policy narrative has been dominated by the role of quantitative easing as a mechanism to support growth and raise inflation. It has succeeded in tranquilizing financial markets and lowering interest rates. But quantitative easing has not worked well in boosting economic potential. To be fair, the aim of quantitative easing has not been to change economic potential, but such has been the amplitude of quantitative easing and the power of central banks that many politicians appear comfortable in allowing central banks to underwrite risks. In the United States, at least, there has been a debate on the possibility of launching large-scale physical infrastructure projects. The poor state of roads, railways, airports, and telecommunication systems in the United States has been the impetus for focusing investment here. Several thorough and in many cases convincing books and studies make the case that infrastructure in the United States, as well as other countries, is in sore need of upgrading.20 Rosabeth Moss Kanter’s Move: Putting America’s Infrastructure Back in the Lead is worth a read in this regard. As someone who travels in the United States and who has seen the pristine and smart infrastructure in the emerging world (notably China and the Middle East), I agree that American roads, railways, telecommunication systems, and airports need an overhaul.21 A carefully considered infrastructure program would be a perfect response to the next recession in the United States, though the financial means to support such a program do not now appear to exist, given the aggressive tax cuts of the Trump administration, nor does there exist an overarching well-thought-out plan for American infrastructure.

  In addition, funding and timing pose two additional problems. With government debt in the United States now historically very high and with the fiscal deficit uncharacteristically large—imagine someone with a large mortgage and a very big credit card overdraft—there is little financial scope now to undertake a well-thought-out infrastructure program. Indeed, it is a surprise that so many traditional fiscal conservatives in Congress have permitted the deficit to grow like this. Further afield, many other countries also do not have the means to increase government spending, and the few that do, like Germany, do not appear to have the will.

  Another complexity with infrastructure projects is in timing. These projects take place with a great time lag (so to have a meaningful impact on growth in 2021, a project would have to have been conceived in 2018). Also, those familiar with Boston’s Big Dig will know that infrastructure projects are porous in terms of financial efficiency, and in this regard their governance needs to be stringent.22 Infrastructure projects are also notoriously prone to politically led decision making, so very often their ultimate impact is less powerful than initially expected. In that light, it is best that planned infrastructure spending be held in reserve for the aftermath of the next recession (in the early 2020s), where in the context of a dip in growth and some debt restructuring, the stimulus from such an investment will be more productive, efficient, and helpful in producing labor market stability. This approach would also allow more time to plan infrastructure projects, which are vastly complex and can invite corruption and incompetence.

  In this context, Minister Chidley is best advised to create a blueprint for her infrastructure needs but to wait to execute them. She will at the same time know that physical infrastructure is simply one approach to building a country and that most often the long-run rise and fall of a country depends not on the quality of its roads but on the quality of its people, on the building of institutions around them, on the decisions and laws they make, and on the ways in which they learn to adapt to change.

  Raison d’état

  A good starting point in understanding the rise and fall of nations is to look at some of the great cities of the world. In this light, I want to highlight a fascinating data set that is based partly on Ian Morris’s book Why the West Rules—for Now and partly on work by the demographer Simon Kuestenmacher. The data looks at the biggest cities in the world over the past four thousand years. Many of them—such as Babylon, Nimrud (south of Mosul), and Alexandria—were the focal points of great civilizations but, sadly, are now in the news for the wrong reasons. It is surprising how many Chinese cities have been “the biggest” through time, with cities like Nanjing, Xi’an, Hangzhou, and Beijing dominating the period from AD 600 to AD 1800. London briefly took over during the nineteenth century, and the biggest-city baton was then passed to New York. If we adjust for world population and perhaps level of development, Rome has a very good chance of being considered the world’s greatest city. At the time of the birth of Christ, Rome had one million inhabitants. Scaling for demographics, Tokyo, to match this, would need to have over seventy million residents today! Rome is also impressive in that it was the world’s dominant city for some five hundred years, though by AD 500 it was much diminished as a center of power and population.

  The examples of Rome, Alexandria, and Nanjing are very relevant today because, at a time when China is on the rise, the United Kingdom and the United States are going through political crises, and much of Europe is still bothered about its economic frailties, they remind us of the decline and fall of nations, a theme that is central to the idea of the levelling. This in turn should lead us to think of Edward Gibbon’s The History of the Decline and Fall of the Roman Empire, which is a reference point in economic history in general and in declinism in particular. Gibbon sought to explain why the Roman Empire disintegrated. His thesis is that Rome became complacent, its institutions were weakened, and the leaders in Roman public life lost their sense of civic virtue, or what Niccolò Machiavelli later simply called “virtu”—the good of the republic or common good.

  Since Gibbon, other writers have turned declinism into a cottage industry. Germany’s Oswald Spengler controversially wrote The Decline of the West in 1918, and in recent years in Europe we have had Thilo Sarrazin’s book Deutschland schafft sich ab (Germany gets rid of itself), followed by books like Eric Zemmour’s Le suicide français and Michel Houellebecq’s Soumission. In the United States, the Nation’s Tom Engelhardt, CNN’s Fareed Zakaria, and the Financial Times’s Edward Luce have all written on the coming decline of the United States. These books and others like them illustrate that the echo of declinism is becoming louder. In turn this points to the fact that we are on the cusp of the rise of some nations (India and China) and the decline of others (the United Kingdom, and some would say the United States) and raises the questions of how faltering countries can best revive themselves and how emerging nations can best manage the next stage in their development.

  Why Nations Fail

  Two important factors in the success or failure of nations are institutional quality and the need for a sense of civic ethic. Both of these chime through books that track the rise and fall of nations, from Alexis de Tocqueville’s Democracy in America to Daron Acemoglu and James Robinson’s Why Nations Fail. In the aftermath of Brexit, the 2016 US elections, and the continued stresses on the eurozone, I imagine that Why Nations Fail and Gibbon’s book will continue to make very lively, relevant reading for the Katherine Chidleys of the world.

  More broadly, these texts introduce two themes into the debate on international relations: the first is the desire of large countries with former glories and empires to become great again (we could call them the “again countries”), and the second, related one is the question, What makes a country successful? They lead toward two competing paths of national development. Some countries will take an elbows-out, nationalistic policy path toward being great again, whereas others will adopt an approach based on the quality of their institutions and structures, preferring to build strong institutions and stable economic growth. Russia is an example of the first; New Zealand, the second.

  There is another element that may help unite the notion of the rise and fall of countries and their enduring successes: the extent to which countries move in developmental, economic, and demographic cycles. Several books have explored
these themes: for example, Walt Rostow’s The Stages of Economic Growth, Alvin Toffler’s The Third Wave, and William Strauss and Neil Howe’s The Fourth Turning.

  One of the places where the rise and fall of nations is visible is in financial markets. Looking at long-term changes in stock market capitalization is one way of examining this. For example, in 1900 the proportion of the world stock market made up by the US market was 15 percent, Germany held 13 percent, Japan held close to none, and the United Kingdom held 25 percent. Today, the United States accounts for 51 percent, Japan has 8 percent, and the United Kingdom and Germany have shrunk to 6 percent and 3 percent, respectively.23 The implication here is that through financial power, we see how drastically the might of a nation can shrink or grow.

  An even more apt financial barometer of the decline and fall of a country is its currency. Intuitively, the decline of a nation, to use Gibbon’s term, is usually associated with a weaker currency. Switzerland, which has strong institutions and a very high level of GDP, is the only country whose currency has held its value in the past one hundred years. More recently emerging countries, from Russia to South Africa to Turkey, have seen their currencies drop as powerful political individuals have degraded institutions. (The decision of Turkey’s President Erdoğan to put his son-in-law in charge of the economics and finance ministry is one example. Imagine the market reaction if Jared Kushner were to be appointed to chair the Federal Reserve.) In general, political risk and lower institutional quality translate into enfeebled currencies. This should be a warning for the dollar.

  A country’s currency reflects its place in the world, and the dollar has risen to a very particular place as the linchpin of the financial system. Indeed, one of the most important tenets of the twentieth-century world order and the rise of globalization has been the position of the dollar as the international reserve currency. In the postwar period, the predominance of the dollar prompted France’s then minister of finance Valéry Giscard d’Estaing to pronounce the “exorbitant privilege” of the dollar that let the United States both print dollars and require the rest of the world to buy them, to put it very simply. When Giscard made this statement, the dollar was tied to gold, and the response from France and a number of other countries was to exchange their holdings of dollars for gold. This set the stage for the subsequent breaking of the dollar’s tie to gold by President Nixon. Since then the dollar has been first among equals in the currency world, and many developing nations have pegged their currencies to it.

  Currencies and their fluctuations are tough to figure out, and in my experience forecasting currency moves is one of the toughest analytical tasks in financial markets. One of the more original and interesting takes on the behavior of currencies I have recently read is a paper entitled “Mars or Mercury? The Geopolitics of International Currency Choice” by Professor Barry Eichengreen with two economists at the European Central Bank (ECB).24

  “Mars or Mercury?” describes two approaches to valuing currencies. First, there is the more conventional “Mercury” approach, which gauges currency strength by analyzing variables like interest rates and currency reserves. The second approach, “Mars,” sees a currency as reflecting the standing of a country in the world—the quality of its institutions and its alliances. Using data going back to the First World War, the paper finds that military and geopolitical alliances are a significant factor in explaining currency strength. The rationale is that a country that is geopolitically well placed is engaged with and trusted by its allies through trade and finance.

  Eichengreen and his coauthors have set up a framework to capture the impact on the dollar of US diplomatic disengagement with the world. One of the main implications the “Mars or Mercury?” paper finds is that, in a scenario where the United States withdraws from the world and becomes more isolationist, its strategic allies no longer become enthusiastic buyers of US financial assets and long-term interest rates in the United States could rise by up to 1 percent because there would be fewer buyers of American government debt.

  Katherine Chidley, if she has the time to use the Bloomberg Terminal in her office,* might also plot the recent moves in the Turkish lira, which also fits the “Mars” hypothesis. She will find its volatility through 2018 sobering, but she might also recognize that the specter of declinism and the vogue for “great againism” are related and that financial markets are eager to express their views on this.

  If she is serious about arresting economic decline and getting back on the road to greatness or, better, to “being strong again,” she will ask what objectives and scorecards politicians should have in mind. One example that comes to mind is the European Union’s Maastricht financial criteria, but eurozone member countries usually ignore them. There are not many politicians today who explicitly set out scorecards, methods, and goals as to what they want to achieve. There is a good reason for this: many politicians give no more precise economic goals than “jobs,” “growth,” or, to use former British prime minister Harold Wilson’s phrase, talk of “the pound in your pocket.”

  “Growth,” “prosperity,” and “employment” are the most obvious and common goals a politician can expound, and at a high level they are easy to measure. The quality and durability of growth is an altogether more difficult promise. Political speeches are also often sprinkled with magical promises of prosperity, though here again, achieving stable, sustainable prosperity (in the sense of a durable increase in household net wealth) is hard to attain. If the future is to be characterized by lower growth, then clever politicians will spin their rhetoric around inequality, both within their own countries and among countries. Inequality can be a useful banner under which to shift the benefits of scarce growth from one social grouping to another. More careless politicians might engage in policy populism, which according to Juan Perón, the former Argentine president, has its appeal: “My dear friend: give the people, especially the workers, all that is possible,… there is nothing more elastic than the economy, which everyone fears so much because no one understands it.”25

  Another policy option, more in vogue but risky, is to address the idea of “happiness,” or rather, of ending “unhappiness.” What this translates into is keeping down inflation and unemployment (two contributors to misery). Happiness has become a fashionable political topic in recent years, though in practice few countries aim to foster it. Stable family life is one of the bases of happiness (there is even academic evidence to support this somewhat obvious statement).26 Another element of economic happiness is that it requires a fraternal and generally equal society (where people tend to have roughly the same level of prosperity as their peers). Karl Marx helped explain this when he stated that “a house may be large or small; as long as the surrounding houses are equally small, it satisfies social demands for a dwelling. But if a palace rises beside the little house, the little house shrinks into a hut.”27 On the basis of fraternity and equality, the Nordic/Alpine countries, are among the happier ones, where social structures and welfare systems are sophisticated. One important happiness-related area where policy makers in general do not dare to tread is mental health, possibly because of its complexity, its taboo status in many countries, and the low political rewards.

  Politicians do not typically like to be held to specific policy goals because they are hard to accomplish, requiring at the very least that the business cycle be on your side. Frankly, goals and objectives are far less fun than the cut and thrust of politics. The attraction of political declarations based on the idea of “being great,” “being great again,” and the “dream” is that they are grand promises, hard to identify, usually fulfilled at someone else’s expense, and drawing on nostalgia for justification.

  What is also striking is that relatively few politicians elucidate visions that are less glorious but more meaningful than greatness. For example, few politicians today make an active case for the virtue of public goods. In fact, in many countries the opposite is the case: education is steadily privatized, environme
nts are degraded, and health-care systems are crisis ridden. In an unstable world where austerity has become a commonplace policy, one source of stability is high-quality public goods. In this respect it is again surprising that more politicians do not see their virtues and are not more courageous in expounding their value. It may be that the value of public goods cannot be communicated via Twitter and that public goods are associated with the notions of higher taxes and flagrant government spending. This is a pity, because I suspect that many of the people who have voted for extreme political outcomes miss such public goods as high-quality education, livable urban spaces, and low-cost health care.

  “What Did We Do Right?”

  As she digests this, Katherine Chidley will begin to formulate a sense of how greatness, policy scorecards, and public goods intersect and will set about her aim of creating a workable plan for national development. This notion came to me while writing two previous books on Ireland. In 2006, before the onset of the collapse of Ireland’s economy, I wrote a book entitled Ireland and the Global Question. It dealt with Ireland’s position as a small, open economy that had benefited enormously from globalization and, at the time, from its membership in the eurozone. My aim was to outline how a country like Ireland might construct buffers against the negative effects of globalization, buffers such as strong institutions run by skilled people, decent public goods, and a sense of strategic thinking. At the time Ireland was enjoying its first (ever) economic boom and was unprepared for the suddenness and severity of the collapse that followed.