Strangely, there was only one panel today at the World Economic Forum that piqued the interest of the 'finance guy' in me. That is a first. And I also must admit that the agenda almost struck out completely. Normally a panel of global elites pontificating about How to Fix the Middle-Class Crisis wouldn’t attract my attention, but once I saw Ray Dalio and Larry Summers on the speaker list, I was all in. Even if nothing earth-shattering was said, at least I knew I'd be entertained.
Undoubtedly, 2016 was a year where the middle class roared at the ballot box. That the middle class and populism reigned supreme certainly came as a shock to most in Davos, but not International Monetary Fund Managing Director Christine Lagarde. In her speech at Davos in 2013, Lagarde warned about the perils of income inequality. "I believe that the economics profession and the policy community have downplayed inequality for too long," Lagarde warned. She went on to say, "Above all, inclusive growth must also be job-rich growth. This is really a symbiotic relationship—we need growth for jobs and jobs for growth."
So today was Lagarde's turn to say "I told you so" and re-visit the topic in a time when everyone now better undertands the threat of income inequality and the ramifications of populism.
“This is the first year where populism is the most important issue globally," Dalio explained. "Protectionism is part of that mix. Before, it used to be central banks, [but] central banks don’t matter as much [anymore]. The number one issue as a market participant is how populism manifests itself over the next year or two.”
Summers believes much of the populism at play these days is borne from people at the center of society, rather than the fringes. They believe their governments are looking out for everyone else - elites, immigrants, minorities, etc. - but not them. To that end, Summers warned the Davos audience to be carfeul about conflating the poor and populists.
“When you say ‘inequality’, the first thing you think about … is the poor and what you are going to do to support the poor," stated Summers. "But a lot of the people who voted for Brexit and a lot of the people who voted for Donald Trump think too much is being done to help the poor, not too little.”
Such a paradox is probably part of the reason pundits and forecasters got 2016 so wrong. It is hard to predict what a group of people are going to do when, especially when the "experts" don't understand those people or fail to validate them. Or as Dalio stated rather bluntly, “Populism scares me. … It is the extreme and it goes to more extremes.”
Pier Carlo Padoan, Italy's Minister of Economy and Finance, was a little more nuanced and cautioned against dismissing populists out of hand.
“We have to take populists seriously," said Padoan "Not all populists or those who vote for populist ideas are the bad guys. In most cases, they are the good guys. They are our fellow citizens. They have real concerns about the future of their children, job opportunities and about security. These are real concerns and policymakers need to take them very seriously.”
What are the solutions?
So amid all this talk about the "squeezed and angry" middle class, what can be done to right the ship? After all, there are important elections looming in places like France and Germany and it remains to be seen whether policymakers - both incumbent and aspirant - will truly be able to cook up a recipe for long-term prosperity across all classes.
Dalio believes solutions may be hard to come by because the spread of populism has been powered by factors beyond just political idealogy. “The forces behind this are things that we like. In other words, technology is causing this. Globalization is causing this. These are forces that we don’t want to do away with. … What are you going to do? Are you going to lessen technology that creates a polarity in income? Are you going to lessen globalization that has these effects?”
Ever the pragmatist, Largarde outlined some of the not-so-simple steps she believes need to be taken. “There are things that can be done; fiscal, structural and monetary policies … But it needs to be granular, it needs to be regional and it needs to be focused on what will people get out of it. And it probably means more redistribution than we have at the moment.”
Lagarde's hat tip toward economic redistribution brought a quick retort from Summers. “It is important to distinguish between redistributionism and populism," the former US Treasury Secretary said. "The United States has just elected the world’s most visible symbol of conspicuous consumption. That is a bizarre manifestation of a concern about inequality.”
Dalio said predicting policy reactions are difficult at the moment because there is so much uncertainty about just who the policymakers will be and what kind of approaches they will adopt. “The policymakers are changing and they have different agenda. … So in 5 years, will we be more collective and international in our approach? Or will policymakers be more nationalistic? I think the trends are clear in terms of the pressures. … The question is: can the middle be cohesive enough that the extremes are not in control.”
When asked if a leader like President-elect Donald Trump would be able to craft the kinds of policies that would help the middle class and assuage the populists, Dalio demurred and noted that the answer was complicated. Summers countered that the answer isn’t so complicated. “The lesson of history is overwhelming that classic populism is invariably counterproductive for those in whose name it is offered as a policy regime.”
Dalio said he has confidence in many of the people tapped to take leadership roles in the Trump administration, even if their overall direction remains to be seen. “I think Donald Trump is aggressive," Dalio explained. "Is he aggressive and thoughtful or is he aggressive and reckless? We are going to find that out in time.”
Ultimately, Lagarde was the one with the most sobering, though unlikely, assessment. “Policies can insert themselves and can do so with courageous leaders. … It will take time. It’s going to be difficult. Implementation will not be glamorous … but we need to go through it in order to get to a better place.”
Some Fondue for Thought
Going back to Dalio's "Populism scares me" comment; isn't it interesting that the terms "populism" and "populist" have such a prejorative connotation? After all, they are rooted in the word "popular" and there are few people on the planet more concerned with being popular than politicians and the global elite gathered in Davos.
I would submit that the term I heard Raghuram Rajan, the former governor of the Reserve Bank of India, use a couple of months ago is more accurate: insurrectionist. Seems to me all leaders want to be popular, but those riding the wave currently sweeping global elections are the ones looking to lead insurrections.