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Baking an enormous cake

 Salomons Judgement

The rise of populism is proof that economics is more than just numbers on a spreadsheet. Ultimately, it comes down to the division of scarce resources, and the fight for a slice of them. It’s high time more attention was devoted to ensuring growth of the cake we all need to share.

A few months ago, I was asked to participate in the debate on the relationship between growing populism, the economy and the financial markets. The request initially appeared to be financially motivated. How can we maintain assets at the same level in the midst of concerns about low growth, higher taxation and the return of inflation? Yet the request was really about deeper questions, what the economy always comes down to: the division of scarce resources and the morality involved.

Technological progress and globalisation are causing higher growth and lower inflation. Inequality between countries has declined as a result, but has in fact increased within countries. As a consequence of low interest rates and rising financial asset prices, the division of labour and capital has never been so one-sided. Frustration about this is being expressed at the ballot box. According to political scientist and expert on populism Cas Mudde, low income growth combined with social factors, such as a lack of confidence, pride and identity, are the ideal breeding ground for populism.

This column is too short to cover answers to all the challenges posed by populism. My answer would start with the message that globalisation and technological trends cannot be reversed simply and painlessly. That reforms are needed to maintain healthcare, education and pensions at the same levels. As well as the recognition that the division of labour and capital is unhealthily one-sided and profit maximisation should not be a race to the bottom, with the objective of low wages and paying as little tax as possible. Concerns about immigration also need to be addressed. This list is not exhaustive, nor is it without value judgement.

If it is expensive to come good on past promises, then additional income is required. Not via higher taxation or further division, but by ensuring that the cake grows. The challenges we face are tough, but the optimist in me does see change. In business, the focus is shifting from short-term profit maximisation to long-term value creation for all stakeholders. Academics and policymakers are focusing on the division of labour and capital as well as growth. Central bankers and politicians are arguing in favour of higher wages.

The trend of increasingly liberal markets, less regulation and lower taxation is likely to come to an end. Governments will play a greater role in the economy. In the circles in which I move that is akin to swearing in church, but that doesn’t necessarily mean it is wrong. Government intervention aimed at breaking up monopolies is economically sound, and creating a social safety net for those people who temporarily find themselves excluded is socially justifiable. If no market solution is available (yet), the government can temporarily provide an additional impetus for addressing major social problems.

A comparison can be made with the period of 1930 – 1960, when governments sought to combat the deterioration in growth and the inequality caused by the Depression. During that period, governments initiated major infrastructure projects, innovation, education and the welfare state. It is not difficult to draw parallels with today’s challenges relating to the energy transition, the ageing population, lifelong learning and infrastructure. Investing in these challenges yields a larger cake for us all to share. Now and in the years to come.

I am and always will be an economist. If we can achieve nominal growth and tackle the redistribution problems we face, we can reduce the risk of a world of rising populism, higher taxation and protectionism. I am convinced that this is in the best interests of us all.

The author

Roelof Salomons


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