The pendulum of power swings back towards the state

Three reasons to expect a shift in the balance between governments and markets, predicts Zanny Minton Beddoes

http://www.theworldin.com/edition/2018/article/14387/pendulum-power-swings-back-towards-state

LEADERS

If 2016 was the year of shock populist victories, 2017 brought a surprisingly placid response. There was plenty of anguished rhetoric. Commentators (including this one) fretted about the liberal world order. Mainstream politicians promised a reboot of globalisation that addressed the anger of left-behind voters. But in practice remarkably little changed.

The world economy accelerated to its strongest pace since the start of the decade; stockmarkets hit record highs and measures of financial risk were unusually low. In the two countries where populists had most dramatically upended the status quo, the immediate policy consequences were both modest and strikingly backward-looking. Britain’s Brexit vote was followed by an election that left the Conservative Party enfeebled, whereas the Labour opposition soared with a 1970s agenda of nationalisation, union power and higher taxes. In America President Donald Trump took potshots at globalisation (cancelling a trans-Pacific trade deal and promising that America would pull out of the Paris climate accord). But his main economic focus was on deregulation and tax cuts: the standard Republican fare since the 1980s.

Even Emmanuel Macron, who surged to power in France with the promise of a new kind of pro-globalisation social contract, began with reforms to the labour-market that most other European countries had enacted years ago. If populism is remaking capitalism, it seems so far to be a modest recalibration.

It is unlikely to stay that way. As 2017 draws to a close, the strong performance of insurgent parties in elections in Germany, Austria and the Czech Republic shows that the rich world’s populist wave has hardly dissipated. In Italy, the elections in 2018 might give the anti-establishment Five Star Movement the largest number of seats in Parliament. Some emerging markets will also see a populist surge, notably Mexico, where Andrés Manuel López Obrador, a seasoned firebrand, has gained from Mr Trump’s anti-Mexican rants.

More important, history suggests the upheaval has barely begun. Consider the turn of the last century, another era of rapid globalisation and dramatic technological change. The internet of things and artificial intelligence are remaking economies much as electricity and the railways did then. The scale of wealth creation and the degree of inequality are similar. Then, as now, anger from those left behind spawned rampant populism, in the form of hostility towards both immigrants and the elite. In the late 19th century the Progressive Era ensued. It took years, but popular demand for change translated into a radical remake of the balance between state and market, from the introduction of progressive taxation and greater social protection to antitrust legislation.

Here comes the techlash

In 2018 such events will feel eerily familiar, as three separate forces cause the modern balance between state and market to shift, each with an uncanny historical echo. The first is the “techlash”. Across the rich world, politicians will turn on the technology giants—Facebook, Google and Amazon in particular—saddling them with fines, regulation and a tougher interpretation of competition rules. It will be the 21st-century equivalent of the antitrust era, with the tech giants vilified as malevolent quasi-monopolists whose behaviour is weakening democracy, suppres­sing competition and destroying jobs. There will even be talk of breaking them up.

The pace will be set by the European Union, which has already gone after Amazon and Facebook for tax avoidance and Google for the unfair suppression of competition. A sweeping new privacy law, the inelegantly named General Data Protection Regulation, will decisively shift the power over personal data from tech firms to individuals. It will limit what tech companies can do with data and impose huge fines for violations. Business practices and even business models will change as a result.

But it is in America that the techlash will seem most dramatic, a reversal of years in which Silicon Valley was a byword for brilliance and progress. Shocked by the scale of Russian interference in the election in 2016, Congress will consider requiring Facebook and others to reveal who purchases political ads. And that will not be the end of it. There will be broader pressure for transparency about the origin and accuracy of online content that will strike at the heart of these firms’ commercial model. Their acquisitions will come under scrutiny, as antitrust authorities take a harder line on attempts to squash would-be competitors by buying them. As mid-term elections approach, both Republican and Democratic voices will call for an overhaul of antitrust rules themselves; some for a break-up of the tech giants. That will not happen in 2018, but the seeds will be sown. The 21st-century trust-busting era will eventually lead to a rewriting of its legal antecedents.

Macronism on the move

The second force of change will be Mr Macron, who, notwithstanding his incrementalist start, will emerge as a modern-day equivalent of Teddy Roosevelt, the American president most associated with the Progressive Era. There are strong similarities between the two men: both wrap a reform agenda in the rhetoric of national renewal and greatness. Like Roosevelt, Mr Macron is pushing a new kind of social contract, one that boosts competition and entrepreneurship while protecting workers who lose out. The scale of the French president’s ambition will become clearer in 2018, as the details of his plans are fleshed out. From pension ­reform (where he wants to replace France’s 35 separate schemes with a single pension that encourages job mobility) to worker training (where funds will be assigned to individuals) and education (more experimentation, less rigidity), he wants to equip people with the tools they need for the 21st century. If he succeeds—still a big if—Macronism could become a byword for a modern kind of Progressivism.

The third force will be changing attitudes to China, the rising power of the 21st century. Much as the fear of a rising Germany shaped European policymaking in the late 19th and early 20th centuries, so worries about China’s growing clout, and its intentions, form the backdrop today. In China itself, the balance between state and business will remain lopsided. Businesses, whether private or state-owned, will remain under the thumb of the Communist Party; as junior partners in Xi Jinping’s project for Chinese greatness. Even with his power entrenched after the quinquennial party congress, Mr Xi will not reinvent himself as a bold economic reformer. Rather than freer markets in China, the balance will shift towards state intervention by other countries to control China’s activity abroad, as the world grows queasy at China’s swagger.

From Australia to Europe, rules on foreign investment will be tightened, with the goal of deterring Chinese takeovers. Mr Mac­ron will become a cheerleader for investment regimes that protect European interests. America will impose tariffs on Chinese steel and will levy sanctions for intellectual-property theft. The norms of the World Trade Organisation will be weakened. Pro­tectionism in pursuit of restraining China will be condoned.

A new progressive era?

Taken together, the techlash, Macronism and greater suspicion of China point to a decisive shift in the West’s balance between the state and the market. Where this ends up is not yet clear. At worst, it will be a back route to a more regulated, defensive and pro­tectionist kind of capitalism. But with luck, the new balance will be marked by a broader embrace of competition as the best way to counter the power of entrenched elites, and involve an imag­inative rethinking of the state’s role in protecting the individual. That would make it a progressive era to be proud of.