From Economic Analysis to Inclusive Growth


January 23, 2017

From Economic Analysis to Inclusive Growth

by Kemal Dervis

Most economies are seeking a recipe for inclusive economic growth, whereby high rates of investment, rapid innovation, and strong GDP gains are pursued alongside measures to reduce income inequality. Conservatives insist that growth requires low taxes and incentives such as flexible labor markets to encourage entrepreneurship. But reducing inequality requires higher levels of government spending and taxation (except when government is pursuing deficit spending to stimulate a depressed economy).

Related imageFree Education for All–Investment for an Educated Citizenry

The Scandinavian economic model is often invoked to bridge this gap. The Danish “flexicurity” system, in particular, has historically delivered solid economic performance alongside low inequality. Leading economists such as Philippe Aghion have published excellent analyses of how this model could balance growth, equality, and overall satisfaction of citizens elsewhere in the world.

These economists argue that labor markets with few restrictions on hiring and firing, low taxes on entrepreneurship, and generous incentives for innovation are compatible with a relatively equal income distribution, high social spending by government, and equalizing social policies such as universal free education.

This model has sustained an ongoing debate in Europe, one that is now relevant in the United States, because Donald Trump’s new administration has promised to help globalization’s “losers” while improving innovation and growth. But in the US, it is far more difficult, politically, to argue for generous public spending on education, health care, and financial security for retirees, because doing so always raises the specter of high taxes.

An inclusive growth model would seem to have to square the policy circle. It would have to increase substantially public spending, particularly on education, unemployment benefits and training, and health.

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Inclusive Green Growth?

It is useful to look at the numbers from the oft-cited Danish and Swedish examples. Generally speaking, these countries have excellent economic indicators. Although GDP growth is not higher than in the US, most people share a high standard of living, and surveys show that Scandinavians (particularly Danes) are some of the happiest people in the world. But, as the following chart shows, these countries also have some of the highest government spending- and taxation-to-GDP ratios in the OECD.

spending to taxation ratios

Hypothetically, if the US adopted Denmark’s universal free education policy, but kept its tax-to-GDP ratio unchanged, its fiscal deficit would exceed 6% of GDP. The US has run deficits that high only during World War II and the Great Recession of 2008-2009, when a huge stimulus package was implemented to spur recovery. So, just providing universal free education in the US would run the country’s deficit up to the highest level ever recorded in normal times.

In the context of this comparison, it would seem that the circle cannot be squared without a major macroeconomic shift. Scandinavian countries are smaller and can more efficiently collect revenues and administer public services. But even if the US approached this efficiency – a difficult feat in such a large and diverse country – social solidarity still would demand high effective taxes, as it does in Denmark and Sweden.

Another crucial component of the Scandinavian model is labor-market flexibility. On the OECD “Employment Protection Legislation” index, the US scores a 1.2 on a 0-5 scale, where zero indicates full flexibility. Meanwhile, France and Germany come in at 2.8, Italy at 2.9, and Denmark and Sweden at 2.3 and 2.5, respectively. This shows that, though Scandinavian labor markets are more flexible than elsewhere in continental Europe, the US labor market is far more flexible – and provides less security – than any of them.

Such broad static accounting suggests that we should proceed cautiously in applying lessons from the Scandinavian model to large countries like the US. Then again, to assess a model’s long-term impact on citizens’ welfare, we would need a more dynamic analysis over the course of at least a decade. Only then could we gauge how strongly investment and innovation would respond to incentives, how much free universal education would cost in the medium term, or how demographic structures would affect different social policies.

Economic analysis alone cannot settle the political debate between right and left. What it can do is help to narrow and focus that debate. The key is for participants on both sides to be more explicit about the values and objectives they believe that society should pursue, and to quantify their assumptions about how dynamic performance will respond to particular incentives. Only then can a democracy choose effectively between potential paths.

Good economic analysis can enable “constructive populists” to debate the “post-fact, fanciful populists” who seem to be on the rise, with a realistic alternative discourse – one that is transparent and based on credible expectations of economic policies and outcomes. In other words, economic analysis can facilitate good choices; it cannot make them.

Foreign Policy: ASEAN and The Trumpian New World Disorder


January 22, 2017

Foreign Policy: ASEAN and The Trumpian New World Disorder

by Dr. Munir Majid@www.thestar.com.my

Image result for Munir Majid

THE buzzword among think tanks on global strategy in the West is “World Disorder”. This follows, particularly, Donald Trump’s victory last November in the United States Presidential election – he will be inaugurated on January 20 – but also the British Brexit vote in June and anxiety over the possible triumph of populist right-wing parties, in France especially, this year.There is a common opposition in these developments to the global and local liberal order, to free trade and movement of peoples, and to the political value system that has characterised the West and, tangentially, the rest of the world.

However the reality for emerging and developing countries is likely to be different, and the stack of concerns over disturbance to the world order is not the same.

For the longest time those not in the West had been buzzing, if we remember, about a new world, particularly economic, order. There has been some little progress, notably establishment of the G-20 in 1999 whose leaders’ summit did not convene until 2008 following the Western financial crisis, but by and large the institutions of the international order set up at the end of the Second World War remained intact.

Developing countries nevertheless benefited immensely from the open system of trade of that international order – China, particularly, since its opening up in 1978 – as they were able to take advantage of their low cost of production to penetrate Western markets.

ASEAN countries have also been beneficiaries of this open trading system. Now ASEAN is on the path of greater economic integration to attract investment and to encourage trade, not just among member states, but also from and with the world. A number of them have moved or are moving up the economic ladder, aiming for greater productivity and higher value-added products and services – all predicated on the existing open global trading and economic system.

Now this system may be changed, or may not be as open. It would however be a mistake for ASEAN – and rising Asia more generally – to succumb to the doom and gloom that seem to have settled on the West. Now is the time for Asia and ASEAN to show their mettle.

Efforts at ASEAN economic integration should be redoubled to extract growth from regional economic activity. Intra-regional trade should be enhanced beyond the present 25% of total trade.

In its first year, the ASEAN Economic Community (AEC) did not show any spectacular rise in intra-regional economic activity, or any great push to address barriers to trade and investment.

Thailand, for instance, reported only a 1.8% increase in exports to ASEAN in baht terms for 11 months up to November in 2016. Yet the increase to CLMV (Cambodia, Laos, Myanmar and Vietnam) was 2.8%, with an expected 3% increase in 2017.

Related imageFocus  of Future Growth in  ASEAN–Cambodia, Laos,  Myanmar and Vietnam

This shows that where there is greater intensity of economic activity and integration – CLMV+T (Thailand) – there will be potential gains. Many barriers have come down and connectivity is improving. The CLMV+T sub-region is becoming the powerhouse of ASEAN growth, with the inclusion also of China’s Yunnan and Guangxi provinces. CLMV economic growth is actually 6-8% while the ASEAN average is closer to four.

The removal of non-tariff measures and barriers (NTBs) will help generate greater trade, investment and economic activity across ASEAN. Alas, there was no significant NTB action in 2016, despite agreement by ASEAN economic ministers that focused working groups start addressing the problem in four prioritised sectors.

The officials and private sector must step up the pace this year as ASEAN is increasingly challenged by the global post trade liberalisation environment promised by the Trump administration.

The Regional Comprehensive Economic Partnership (RCEP) is rightly seen as a further extension of the AEC and, with the impending demise of the Trans-Pacific Partnership (TPP), as its successor leading right up to the Free Trade Area of the Asia-Pacific (FTAAP).

The question is who will lead the charge as America shies away from free trade? The obvious – and ironic – answer is: China. Indeed, Xi Jinping was up to the challenge, going by his statements at the APEC summit in Peru last November.

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However, China itself has many adjustments to make such as opening its markets further and liberalising foreign investment in protected sectors. So there is plenty of negotiation to come. But it cannot take as long as the ten years it took to arrive at the TPP agreement.

The point is, alternative regional growth areas have to be founded. Asia’s rise, especially economic, that has been so much talked about, used to come easy in terms of the ready framework of free trade. Now it gets harder. Asia, including ASEAN countries of course, have to take the lead to fashion for themselves the rules and details of the order upon which they will plot their further progress.

There are some among the 11 TPP Remainers who argue for its resuscitation, even if it is without the US. It is, however, going to be a complex exercise. Dropping the entry into force provisions is easy enough, but would it make economic sense without the US? Would China be invited to join? Would the provisions in the TPP form the basis of the FTAAP or should they be introduced in the RCEP which was supposed to have been concluded at the end of last year but is now going full speed ahead for completion this year? Certainly, increased complexity would push it back.

It might be better, therefore, to work on what is there in RCEP and add to it later. Who knows, America may, after Trump, want to join the regional grouping.

So Asian and ASEAN countries must now take the lead in free trade arrangements, regionally to begin with, but with others as well. This is the main challenge they face from the “world disorder” being widely discussed in the West.

Asia – and ASEAN – are less troubled by the two other components of global liberal order threatened by right-wing populism in the West. First, between individual rights and state control, they are far closer to the latter. Thus the threatened values such as equal justice and tolerance are of less concern to them as they found their legitimacy on economic satisfaction – at least for now.

Second, apart from Japan and Korea, they range from agnostic to hostile on security arrangements and alliances. As the wheels come off Barack Obama’s pivot to Asia-Pacific, they will just wait to see what takes its place. The loose screws were to be tightened by the TPP.

With the TPP as good as gone, what has been lost is meaningful US strategic commitment to the region. But it would be wrong to assume America has gone isolationist.

With the rise of China, belief in the region in manifest American destiny – if ever it existed to any degree – has receded. Some ASEAN countries may have wanted greater US commitment in the region as a balancer – but at no time as Roman Consul.

Think tanks in the West, with their affinity to American leadership and commitment, are greatly concerned with the uncertainty that will be caused by Trump’s transactional approach to security. In Asia, even Japan and Korea have come to learn that their security can be exposed to transactional risk. There is no certainty about their security. It is constantly being tested. They see variable results, in the Middle East, with Russia in the Ukraine and Crimea. With this realism they see less movement towards “world disorder”.

Of course, Trump will be more nakedly transactional. In Asia and ASEAN the gravest danger, as they see it, is to their trade. They see that Trump feels the cost of the series of transactions has been too high for America.

But it should not be concluded Trump will abandon American leadership. In fact he is making it more muscular, in his way, whether short-sighted or not. For ASEAN – and Asia generally – the main concern is its ramifications in trade and economy. Less so grand and emphatic recoiling from the threat of “world disorder.”

Tan Sri Munir Majid, Chairman of Bank Muamalat and Visiting Senior Fellow at LSE Ideas (Centre for International Affairs, Diplomacy and Strategy), is also chairman of CIMB ASEAN Research Institute.

Economic Crises and the Crisis of Economics


January 17, 2017

Economic Crises and the Crisis of Economics: Economists should learn to be humble and accept their own limitations

by Paola Subacchi@www.project-syndicate.org

Paola Subacchi is Research Director of International Economics at Chatham House and Professor of Economics at the University of Bologna. She is the author of The People’s Money: How China is Building an International Currency.

Image result for Quotes on Economists

 

Is the economics profession “in crisis”? Many policymakers, such as Andy Haldane, the Bank of England’s chief economist, believe that it is. Indeed, a decade ago, economists failed to see a massive storm on the horizon, until it culminated in the most destructive global financial crisis in nearly 80 years. More recently, they misjudged the immediate impact that the United Kingdom’s Brexit vote would have on its economy.

Of course, the post-Brexit forecasts may not be entirely wrong, but only if we look at the long-term impact of the Brexit vote. True, some economists expected the UK economy to collapse during the post-referendum panic, whereas economic activity proved to be rather resilient, with GDP growth reaching some 2.1% in 2016. But now that British Prime Minister Theresa May has implied that she prefers a “hard” Brexit, a gloomy long-term prognosis is probably correct.

Unfortunately, economists’ responsibility for the 2008 global financial crisis and the subsequent recession extends beyond forecasting mistakes. Many lent intellectual support to the excesses that precipitated it, and to the policy mistakes – particularly insistence on fiscal austerity and disregard for widening inequalities – that followed it.

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Some economists have been led astray by intellectual arrogance: the belief that they can always explain real-world complexity. Others have become entangled in methodological issues – “mistaking beauty for truth,” as Paul Krugman once observed – or have placed too much faith in human rationality and market efficiency.

Despite its aspiration to the certainty of the natural sciences, economics is, and will remain, a social science. Economists systematically study objects that are embedded in wider social and political structures. Their method is based on observations, from which they discern patterns and infer other patterns and behaviors; but they can never attain the predictive success of, say, chemistry or physics.

Human beings respond to new information in different ways, and adjust their behavior accordingly. Thus, economics cannot provide – nor should it claim to provide – definite insights into future trends and patterns. Economists can glimpse the future only by looking backwards, so their predictive power is limited to deducing probabilities on the basis of past events, not timeless laws.

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And because economics is a social science, it can readily be used to serve political and business interests. In the years leading up to the financial crisis, global economic growth and profits were so strong that everyone – from small investors to the largest banks – was blinded by the prospect of bigger gains.

Economists employed by banks, hedge funds, and other businesses were expected to provide a short-term “view” for their employers and clients; and to dispense their “wisdom” to the general public through interviews and media appearances. Meanwhile, the economics profession was adopting more complex mathematical tools and specialized jargon, which effectively widened the gap between economists and other social scientists.

Before the financial crisis, when so many private interests and profitable opportunities were at stake, many economists defended a growth model that was based more on “irrational exuberance” than on sound fundamentals. Similarly, with respect to Brexit, many economists confused the referendum’s long-term impact with its short-term effects, because they were rushing their predictions to fit the political debate.

Owing to these and other mistakes, economists – and economics – have suffered a spectacular fall from grace. Once seen as modern witch doctors with access to exclusive knowledge, economists are now the most despised of all “experts.”

Where do we go from here? While we should appreciate Haldane’s candid admission, apologizing for past mistakes is not enough. Economists, especially those involved in policy debates, need to be held explicitly accountable for their professional behavior. Toward that end, they should bind themselves with a voluntary code of conduct.

Above all, this code should recognize that economics is too complex to be reduced to sound bites and rushed conclusions. Economists should pay closer attention to when and where they offer their views, and to the possible implications of doing so. And they should always disclose their interests, so that proprietary analysis is not mistaken for an independent perspective.

Moreover, economic debates would benefit from more voices. Economics is a vast discipline that comprises researchers and practitioners whose work spans macro and micro perspectives and theoretical and applied approaches. Like any other intellectual discipline, it produces excellent, good, and mediocre output.

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But the bulk of this research does not filter into policymaking and decision-making circles, such as finance ministries, central banks, or international institutions. At the commanding heights, economic-policy debates remain dominated by a relatively small group of white men from American universities and think tanks, nearly all of them well-versed devotees of mainstream economics.

The views held by this coterie are disproportionately represented in the mass media, through commentaries and interviews. But fishing for ideas in such a small and shallow pond leads to a circular and complacent debate, and it may encourage lesser-known economists to tailor their research to fit in.

The public deserves – and needs – a marketplace of ideas in which mainstream and heterodox views are afforded equal attention and balanced discussion. To be sure, this will take courage, imagination, and dynamism – particularly on the part of journalists. But a fairer, more pluralistic discussion of economic ideas may be just what economists need as well.

The Abandonment of Progress


January 4, 2016

 

Image result for obama hope posterGoodbye to Audacity of Hope

In 2008, US President Barack Obama campaigned on “hope” and “change we can believe in.” The substantive response to the reactionary revival must be to give content to this largely unfulfilled promise.

The Abandonment of Progress

by Jean Pisani-Ferry

Jean Pisani- Ferry is a Professor at the Hertie School of Governance (Berlin) and Sciences Po (Paris). He currently serves as Commissioner-General of France Stratégie, a public policy advisory institution.

https://www.project-syndicate.org/commentary/populism-and-abandonment-of-progress-by-jean-pisani-ferry-2017-01

Image result for reagan and thatcher

Welcome to Strange Brew and Nostalgia

Margaret Thatcher and Ronald Reagan are remembered for the laissez-faire revolution they launched in the early 1980s. They campaigned and won on the promise that free-market capitalism would unleash growth and boost prosperity. In 2016, Nigel Farage, the then-leader of the UK Independence Party (UKIP) who masterminded Brexit, and US President-elect Donald Trump campaigned and won on a very different basis: nostalgia. Tellingly, their promises were to “take back control” and “make America great again” – in other words, to turn back the clock.

As Columbia University’s Mark Lilla has observed, the United Kingdom and the US are not alone in experiencing a reactionary revival. In many advanced and emerging countries, the past suddenly seems to have much more appeal than the future. In France, Marine Le Pen, the nationalist right’s candidate in the upcoming presidential election, explicitly appeals to the era when the French government controlled the borders, protected industry, and managed the currency. Such solutions worked in the 1960s, the National Front leader claims, so implementing them now would bring back prosperity.

Obviously, such appeals have struck a chord with electorates throughout the West. The main factor underlying this shift in public attitudes is that many citizens have lost faith in progress. They no longer believe that the future will bring them material improvement and that their children will have a better life than their own. They look backward because they are afraid to look ahead.

Progress has lost its shine for several reasons. The first is a decade of dismal economic performance: for anyone below the age of 30, especially in Europe, the new normal is recession and stagnation. The toll taken by the financial crisis has been heavy. Furthermore, the pace of productivity gains in the advanced countries (and to a large extent in emerging countries) remains disappointingly low. As a result, there is very little in the way of income gains to distribute – and even less in aging societies where fewer people are at work and those out of work live longer. This grim reality may not last (not all economists agree that it will); but citizens can be forgiven for taking reality at face value.

The second reason progress has lost credibility is that the digital revolution risks undermining the middle class that formed the backbone of the post-war societies of the world’s advanced economies. As long as technological progress was destroying unskilled jobs, the straightforward policy response was education. Robotization and artificial intelligence are destroying medium-skilled jobs, leading to a polarized labor market, with jobs created at the two ends of the wage distribution. For those whose skills have lost value and whose jobs are threatened by automation, this hardly counts as “progress.”

A third, related, reason is the massively skewed distribution of national income gains that prevails in many countries. Social progress rested on the promise that the benefits of technological and economic advancement would be shared. But recent path-breaking research by Raj Chetty and his colleagues shows that whereas 90% of US adults born in the early 1940s earned more than their parents, this proportion has steadily declined ever since, to 50% for those born in the mid-1980s. Only one-quarter of this decline is due to slower economic growth; the remainder is attributable to an increasingly unequal distribution of income. When inequality reaches such proportions, it erodes the very basis of the social contract. It is impossible to speak of overall progress when children have an even chance of being worse off than their parents.

Fourth, the new inequality has a politically salient spatial dimension. Educated, professionally successful people increasingly marry and live close to one another, mostly in large, prosperous metropolitan areas. Those left out also marry and live close to one another, mostly in depressed areas or small towns. The result, reckon the Brookings Institution’s Mark Muro and Sifan Liu, is that US counties won by Trump account for just 36% of GDP, whereas won by Hillary Clinton account for 64%. Massive spatial inequality creates large communities of people with no future, where the prevailing aspiration can only be to turn back the clock.

Faith in progress was a key provision of the political and social contract of the post-war decades. It was always a part of the left’s DNA; but the right embraced it as well. After what happened in 2016, support for a concept forged in the Enlightenment can no longer be taken for granted.

For anyone who believes that progress should remain the compass guiding societies in the twenty-first century, the priority is to redefine it in today’s context and to spell out the corresponding policy agenda.

Even leaving aside other important dimensions of the issue – such as fear of globalization, growing ethical doubts about contemporary technologies, and concerns about the environmental consequences of growth – redefining progress is a challenge of daunting magnitude. This is partly because a sensible agenda must simultaneously address its macroeconomic, educational, distributional, and spatial dimensions. It is also because yesterday’s solutions belong to the past: a social compact designed for an environment of high-growth, equalizing technological progress won’t help address the problems of a low-growth world of divisive technological innovation.

In short, social justice is not a matter only for fair-weather environments. For several decades, growth has served as a substitute for sensible social cohesion policies. What advanced societies need now are social compacts that are resilient to demographic shifts, technological disruptions, and economic shocks.

In 2008, US President Barack Obama campaigned on “hope” and “change we can believe in.” The substantive response to the reactionary revival must be to give content to this largely unfulfilled promise.

 

PS Most-Read on Economics & World Affairs 2016


January 4, 2017

PS Most-Read on Economics & World Affairs 2016

https://www.project-syndicate.org/onpoint/ps-ten-most-read-commentaries-on-politics-2016-12

Image result for Project Syndicate.orgPresident-Elect Donald J. Trump

Political rage went global in 2016, fueling a populist backlash across the democratic world and appalling terrorist violence in the Middle East, Europe, and beyond. Here is a selection of commentaries – of the year’s 1,140 published by Project Syndicate – on the global political upheaval of the last 12 months, and its economic causes and consequences, that resonated most with our online readers. http://www.project-syndicate.org

The Age of Trump


January 2, 2017

The Age of Trump

by Joseph E. Stiglitz

http://www.straitstimes.com/opinion/the-age-of-trump

NEW YORK • On January 20, Mr Donald Trump will be inaugurated as the 45th President of the United States. I would hate to say “I told you so”, but his election should not have come as a surprise.

Image result for joseph e. stiglitz globalization and its discontents

As I explained in my 2002 book, Globalization And Its Discontents, the policies we have used to manage globalisation have sown the seeds of widespread disaffection. Ironically, a candidate from the same party that has pushed the hardest for international financial and trade integration won by promising to undo both.

Of course, there is no going back. China and India are now integrated into the global economy, and technological innovation is reducing the number of manufacturing jobs worldwide. Mr Trump cannot re-create the well-paying manufacturing jobs of past decades; he can push only for advanced manufacturing, which requires higher skill sets and employs fewer people.

Rising inequality, meanwhile, will continue to contribute to widespread despair, especially among the white voters in Middle America who handed Mr Trump his victory. As economists Anne Case and Angus Deaton showed in their study published in December 2015, life expectancy among middle-aged white Americans is declining, as rates of suicides, drug use and alcoholism increase. A year later, the National Centre for Health Statistics reported that life expectancy for the US as a whole has declined for the first time in more than 20 years.

In the first three years of the so-called recovery after the 2008 financial crisis, 91 per cent of the gains went to the top 1 per cent of earners. While Wall Street banks were bailed out with billions of dollars in taxpayer money, home owners received only a pittance. President Barack Obama saved not only the banks, but also the bankers, shareholders and bond holders. His economic policy team of Wall Street insiders broke the rules of capitalism to save the elite, confirming millions of Americans’ suspicion that the system is, as Mr Trump would say, “rigged”.

Though Mr Trump ran on a pro-growth platform, the economic agenda he has professed could be undermined if he exacerbates inequality through his tax proposals, starts a trade war or abandons America's commitments to reduce greenhouse gas emissions, sa

Though Mr Trump ran on a pro-growth platform, the economic agenda he has professed could be undermined if he exacerbates inequality through his tax proposals, starts a trade war or abandons America’s commitments to reduce greenhouse gas emissions, says Prof Stiglitz. PHOTO: AGENCE FRANCE-PRESSE

Though wealthy, Mr Trump is clearly not a member of the traditional elite, which lent credence to his promise of “real” change. And yet it will be business as usual under Mr Trump, who will adhere to Republican orthodoxy on taxation and, by appointing lobbyists and industry insiders to his administration, has already broken his promise to “drain the swamp”.

Mr Obama brought “change you can believe in” on certain issues, such as climate policy; but with respect to the economy, he bolstered the status quo – the 30-year experiment with neoliberalism, which promised that the benefits of globalisation and liberalisation would “trickle down” to everyone. Instead, the benefits trickled up, partly owing to a political system that now seems to be based on the principle of “one dollar, one vote”, rather than “one person, one vote”.

Rising inequality, an unfair political system and a government that spoke as if it was working for the people while acting for the elites created ideal conditions for a candidate like Mr Trump to exploit. Though wealthy, Mr Trump is clearly not a member of the traditional elite, which lent credence to his promise of “real” change. And yet it will be business as usual under Mr Trump, who will adhere to Republican orthodoxy on taxation and, by appointing lobbyists and industry insiders to his administration, has already broken his promise to “drain the swamp” in Washington, DC.

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The rest of Mr Trump’s economic agenda will depend largely on whether House Speaker Paul Ryan is a true fiscal conservative. Mr Trump has proposed that large tax cuts for the rich be combined with massive infrastructure spending programmes, which would boost gross domestic product and improve the government’s fiscal position somewhat, though not nearly as much as advocates of supply-side economics hope. If Mr Ryan is not as concerned about the deficit as he says he is, he will rubberstamp Mr Trump’s agenda and the economy will receive the Keynesian fiscal stimulus that it has long needed.

Another uncertainty relates to monetary policy. Mr Trump has already spoken out against low interest rates, and there are two vacancies on the US Federal Reserve’s Board of Governors. Add to that the large numbers of Fed officials itching to normalise rates, and it is a fair bet that they will do so – perhaps more than offsetting Mr Trump’s Keynesian stimulus.

Mr Trump’s pro-growth policies will also be undermined if he exacerbates inequality through his tax proposals, starts a trade war or abandons America’s commitments to reduce greenhouse gas emissions (especially if others retaliate with a cross-border tax). Now that Republicans control the White House and both houses of Congress, they will be relatively free to weaken workers’ bargaining power, deregulate Wall Street and other industries and turn a blind eye to existing antitrust laws – all of which will create more inequality.

If Mr Trump follows through on his campaign threat to impose tariffs on Chinese imports, America’s economy would probably suffer more damage than China’s. Under the existing World Trade Organisation (WTO) framework, for every “illegal” tariff that the US imposes, China can retaliate anywhere it chooses, such as by using trade restrictions to target jobs in the congressional districts of those who support US tariffs.

To be sure, measures against China permitted under the WTO framework, such as anti-dumping tariffs, may be justified in some areas. But Mr Trump has enunciated no guiding principles for trade policy, and the US – which directly subsidises its automobile and aircraft industries and indirectly subsidises its banks through ultra-low interest rates – would be throwing stones from a glass house. And once this tit-for-tat game begins, it could very well end in the destruction of the open international order created since World War II.

Similarly, the international rule of law, which is enforced primarily through economic sanctions, could fare poorly under Mr Trump. How will the new president respond if Russian-aligned troops escalate the conflict in eastern Ukraine? America’s real power has always derived from its standing as an inclusive democracy. But people around the world have now lost confidence in democratic processes. Indeed, throughout Africa, I have heard remarks such as “Trump makes our dictators look good”. As American soft power continues to erode, the future of the international order will become more uncertain.

Meanwhile, the Democratic Party will surely be conducting an election post-mortem. Mrs Hillary Clinton undeniably lost because she failed to offer voters a convincing vision that was markedly different from the neoliberal agenda that her husband Bill Clinton embraced in the 1990s. Having pursued a political strategy of “triangulation” – adopting versions of its opponents’ policies – for more than a generation, the party of the left could no longer present itself as a credible alternative to the party of the right.

The Democrats will have a future only if they reject neoliberalism and adopt the progressive policies proposed by leaders such as Mrs Elizabeth Warren, Mr Bernie Sanders and Mr Sherrod Brown. This will put them in a strong position against the Republicans, who will have to figure out how to manage a coalition of evangelical Christians, corporate executives, nativists, populists and isolationists.

With the arrival of Mr Trump, and with both major parties now redefining themselves, the coming year may well be remembered as a turning point in US and world history. PROJECT SYNDICATE

• Joseph E. Stiglitz, a Nobel laureate in economics, is university professor at Columbia University and chief economist at the Roosevelt Institute. His most recent book is The Euro: How A Common Currency Threatens The Future Of Europe.

A version of this article appeared in the print edition of The Straits Times on January 02, 2017, with the headline ‘The age of Trump’. Print Edition