In this year of elections and political turmoil, Diane Coyle writes for The Herald Business about the rising support for extremist parties creating policy instability, low investment and slow growth, and the need for stability for higher productivity and living standards.
In the 1992 US presidential campaign, Bill Clinton‘s election strategist, James Carville, famously explained: “It’s the economy, stupid.” He meant that the recession the country was then experiencing was helping tip voters towards Clinton and against then-President George H. W. Bush.
The picture has reversed now. The US economy is performing strongly, more so than many others, but American voters are not inclined to give the credit to President Biden. Opinion polls slightly favour his challenger, Donald Trump. A campaign strategist today might well say, “It‘s the politics, stupid.” The American electorate is deeply divided, and the state of the economy looks unlikely to be decisive.
For in many countries in this year of elections, extremist parties seem likely to do well, and the centre is collapsing. This is very apparent in some European countries. For instance, in France, Germany and the Netherlands, centrist parties or coalitions have lost ground to the extreme right in particular. There are some counter-examples, such as the UK and India, but in general democratic politics has become far more polarised and volatile than in the past.
What are the economic implications of this political tumult? Businesses prefer moderation and stability, albeit with an inclination towards parties of the right that seek to reduce taxes. One immediate reason for this preference is that contentious politics imply policy instability, which creates a risk premium. The environment for investment is therefore less favourable. Global economic growth this year is already expected to be low, with the prospects for the next five years the weakest in decades, according to the International Monetary Fund. One major contributor to the dismal outlook is the sustained slowdown in business investment. Increasing political uncertainty will only weigh down even more on investment plans and the outlook for growth.
This reluctance on the part of investors could have significant long-term consequences. With two major technological transitions, AI and green energy, under way, investment decisions now will set the path for growth potential for decades to come. Both digital and zero carbon technologies require substantial investment―all the estimates for green transition alone are in the trillions of dollars a year, adding up to perhaps $100-$300 trillion by 2050.
The trend toward an increasing number of extreme weather events underlines the present and future costs of failing to invest in green transition technologies. But green policies have become politically contentious in many places. Extremist parties are aligning around anti-environmental positions, and their supporters are at least partly motivated by wanting not to bear extra costs for everyday necessities like heating and transport. The French ‘gilets jaunes’ movement in 2018 was an early example, motivated by opposition to increased fuel duties. The German government in 2023 had to weaken its targets to require the installation of heat pumps in housing, when the far right Alternativ für Deutschland led a political backlash against the policy. In the UK, the backlash has affected local government policies introducing lower speed limits or limitations on traffic in residential neighbourhoods. In general, public support for many environmental policies remains reasonably solid but green transition has become an issue that increasingly splits people along partisan lines. This significantly raises the uncertainty around policies, discouraging businesses from investing in relevant technologies.
The issues are different when it comes to investment in frontier technologies such as AI and biomedicine. Global AI investment is lower than its 2021 peak but still about $100bn last year, while investment in generative AI has rocketed. Debates about regulating AI tend to be technical and complicated. The big tech companies are lobbying intensively against stronger competition enforcement in the US and EU, arguing that anti-trust policies will inhibit their future investment; but for now, at any rate, it is not a hot button issue for the voting public. In this case, the question may be more about the types of innovation that get funded, in the context of unstable domestic politics and increasing geopolitical tension. For example, investment in AI is already heavily concentrated in the US and China. Will it tilt increasingly toward innovation in weapons systems rather than, say, domestic robotics? Defence budget purchases of AI-powered innovations may look more secure and less prone to regulatory intervention than the alternatives.
Slow growth globally is worrying for two reasons. One is that living standards for many people are stagnating, which itself can contribute to political discontent. The other is that it limits the scope governments consider there is to raise public investment spending, and limits the capacity of macroeconomic policy to respond to future economic shocks. There is a risk of a ‘doom loop’ of slow growth leading to lower revenues and budget cuts, leading to slower growth.
Increasing productive investment, by both public and private sectors, is a priority for governments everywhere. This is a structural as well as a cyclical phenomenon. There is a need for a short-term recovery after the recent inflation shock. But more importantly, the fact of the twin technological transformations, in energy and in AI, means there is a window of opportunity to shape decisively an economy‘s long-term comparative advantage and growth prospects. In both areas of technology, the identity of the winners and losers will be determined in the next few years.
History doesn‘t repeat itself, but it rhymes: the combination of substantial technological transitions and unstable political environments is reminiscent of the 1920s, when the spread of electricity use and the new media of radio and telephone were reshaping industries and changing the information environment. That was certainly not a stable period for the world economy, even though it eventually paved the way for higher productivity and living standards. Will governments be able to take such a strategic view, and create sufficient national consensus across partisan lines, for the kind of market-shaping needed now? The answer varies a great deal in different countries, but in some obvious cases the extent of polarisation and voter discontent makes it seem unlikely.
Source: The Herald Business
The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.
