Populism And The Need For A New Social Contract

The Western world is at the gates of a deep and prolonged political convulsion. What connects apparently isolated developments such as Brexit, the rise of the Front National in France, or the nomination of Donald Trump as Republican candidate to the presidency of the United States, is a broad breakdown of trust in the liberal order and the elites that represent it. This loss of trust has empowered populists from the left and right and is a direct reaction to a deep and structural shift in the way wealth is generated and distributed in our societies. Unless this underlying structural rift is addressed head on, the very foundations of our political order will be shaken. What will be needed in the next decades is, therefore, for a new social contract to emerge, one in which a majority of our citizens feel they are getting a fair share of the opportunities and prosperity generated in our societies.

The liberal order, constituted by free markets, free trade, porous borders, and the rule of law is a tremendous generator of prosperity. If one looks at any measure of material prosperity the data could not be more compelling: we have never been more prosperous. This is definitely true at the aggregate global level where GDP has gone from $1.1 trillion in 1900 to $77.9trn in 2016 (both in 1990 USD). It is also true at the national level. The United States, for example, returned to pre-crisis GDP levels in 2012, meaning it is today wealthier than it has ever been. GDP per capita in the US stands today at $53,000, well over ten times more than in 1960. One finds similar growth figures in the United Kingdom, Spain and other Western countries, which are, nonetheless, experiencing deep political turmoil. The fact that the liberal system is being questioned by a rising tide of populism is therefore a failure of intelligence, or to put it differently: a manifestation of our inability to govern prosperity.

Technological development and the increases in productivity it has brought with it have been behind the explosion of wealth described above. And yet, it is also behind what is fuelling our current troubles. Technological change led to the substitution of human and animal physical force for machines during the First Industrial Revolution. Since the advent of advanced computers, however, it is processing power which has started being replaced in the workplace; in essence were are now substituting human brains for advanced robots and algorithms. A recent report by the Oxford Martin School estimated that close to 50% of all current jobs are at risk of automation in the next two decades. Many of those jobs are in the services sector, including, for example, in the legal profession, accounting, transportation and others. Self-driving vehicles, something we know will be a reality by the 2020s, put at risk around three million jobs in the US alone. Moreover, we now know that from the early 1970s to today productivity of goods and services has increased by close to 250% while labour wages have stagnated. This is an extremely significant development: our main redistributive tool, prosperity trickling down from productivity to labour wages, has ceased to function.

Higher productivity, lower incomes

The decoupling of productivity and wages is the explanation behind the structural stagnation of salaries of the middle class and the increase in inequality within our societies. Wealth is being concentrated in the hands of those that invest in and own the robots and algorithms while most of those living off labour wages are struggling. The McKinsey Global Institute recently reported that over 80% of US households had seen their income stagnate or decline in the period 2009-2016. This was also true of 90% of households in Italy and 70% in the UK. Stagnation of income combined with rapid economic growth produces inequality. The US is today more unequal than in the last 100 years and one would have to go all the way back to the middle of the 19^th century to find a more unequal UK.

The people most negatively affected by these trends are the abandoned of our time, the ignored, and are beginning to constitute a new political class. The embodiment of this new class is not just the unemployed but also the underemployed and the working poor – people who have seen economic opportunity escape from them over the last few decades. Their reaction to a situation they consider sustained injustice has been to vote for more and more radical political options. And not only that: many citizens within our societies are starting to question democracy as a system of government. World Values Survey data over decades shows that fewer Americans say today that living in a democracy is “essential” for them than at any point in recent history; and over a third are willing to support an authoritarian government.

A useful historical comparison one could draw to understand what we are living through is to the early 1900s and the period that followed the first industrial revolution. Then the world also experienced an important shock to its economy, and to the way wealth was generated and distributed. The contact point of that disruption was then, as it is today, the labour market, with the destruction of almost the totality of jobs in the agriculture sector. Jobs and labour income is, it seems, where the metal meets the meat. Just over a century ago, economic disruption led to the emergence of a new political class, the proletariat, which eventually manifested itself politically and demanded a new social contract. After significant political convulsion, including the rise of fascism and communism and two world wars, a new equilibrium was found: the extension of the suffrage and the emergence of the welfare state.

What made the convulsion necessary at the beginning of the last century was the rigidity of our political systems. Very few people in 1900 were willing to accept that the state would have to increase its income and redistribute more, but that was precisely what ended up being agreed a few decades later with the establishment of public health and education systems and other social support schemes. This new consensus required significant levels of political and economic pain to build up and to some extent the flattening of institutions through conflict.

Revising the state

The appearance and design of the new social contract that we need is only now starting to be discussed. What is clear, however, is that it will require a big change in the way the state procures its income, possibly through a reinvigorated industrial policy, large public venture capital investments and others. In essence, if wealth is concentrated in capital some form of democratisation of capital holding will be required. On the spending side, changes will also be required. This might adopt the form of negative income taxes, the establishment of a universal basic income, or the launch of public employment schemes.

In terms of the private sector we will have to see an expansion of the concept of sustainability to include the friendliness of the political environments where business operates. The narrow notion of maximizing profits is slowly being rendered insufficient in a world were companies can grow exponentially without generating jobs. Unless corporations embrace much more comprehensive social responsibility stances they are bound to find themselves in an ever more hostile political environment, rising regulation, trade barriers, higher taxation and possibly intra and inter-state conflict.

The truth of the matter is that we simply do not know what will work, or what the full benefits and drawbacks of the policy options delineated above are. What we are starting to understand, however, is that the current trend is unsustainable and that new forms of public and private wealth redistribution will need to be put in place. That there is a need for a new social contract is evident. The length and depth of the political convulsion we are currently entering will be dependent on our agility and collective intelligence when finding a solution.