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From the Desk of
GARRETT D’ALESSANDRO, CFA, CAIA, AIF®
The American presidential election and the Brexit vote in the United Kingdom (UK) demonstrated the beliefs of millions of citizens in both countries that their governments were dominated by elites who were not attending to the interests of ordinary people. This view, generally known as populism, is driving policy in directions that are important for investors to understand.
As investment managers, it’s vital for us to reflect on and understand the economic and social impacts of populism and its policy ramifications, regardless of one’s political views. Consequently, we are studying the economic impact of government policies and the resultant distribution of incomes, wealth, and mobility for U.S. citizens.
The chart below illustrates how the U.S. and UK have performed in developing equal opportunity and/or equal wealth/incomes across the population. The fact that the U.S. and UK have the highest inequality and/or the least upward mobility helps explain what has driven the appeal of populism and populist candidates in both countries.
Focusing on the U.S., the data shows that, compared to other developed nations, our society has become less balanced in terms of the distribution of income and wealth and less able to offer equal opportunities to all Americans. While there are several reasons for this, the belief that the elites in positions of power throughout U.S. society have worked against the interests of the population as a whole is the essence of the populist appeal.
However, there are other factors at work. It’s true that the amount of U.S. GDP earned by workers has declined from 48% to 44% over the past three decades – a significant decrease. But globalization, which enabled businesses to shift jobs (and therefore wages) overseas, and technological advancements (automation, robots, etc.), which diminished the overall need for employees, played substantial roles in the declining share of GDP flowing to workers. In other words, the issues fueling the rise of populism cannot all be blamed on the elites.
In thinking about how well citizens in developed countries have fared, it’s important to note that there is a fundamental distinction between creating equal opportunity for all citizens and creating equal outcomes. The U.S. was founded on the premise – and promise – of equal opportunity, while Europe as a whole has preferred the ideal of equal outcomes. In some ways, the average European household has been taken care of better by its governing institutions. However, this comes with a trade-off.
Most European economies have become less favorable to business relating to global competitiveness and growth rates of real per capital incomes. Each country thinks about the kind of society it wants and then pursues those policies best suited to achieve that society. Adopting the populist concept of equality of opportunity would fundamentally align with the premise upon which the U.S. was founded.
Again, we are not taking a political view here. Our focus is on the data and the trends we project, the governmental policies that may be enacted, understanding how those policies could impact social, economic, and financial conditions, and making investment decisions according to the interests of our clients. In that context, here are some of the investment-related issues we are considering:
- Will the policymakers in Washington produce truly beneficial policies that address the major concerns of all Americans, or will there be no real change in terms of social mobility and economic well-being?
- How will these policies specifically benefit Americans – through better opportunities or through better outcomes?
- How much of each policy should be focused on economic affordability while preserving the well-being of all Americans?
While the process of developing these initiatives is unfolding, it’s clear who needs to benefit from the policies that will be enacted – middle-class citizens. Identifying and enacting healthcare and tax reform policies requires that compromises be accepted to bring about a more competitive U.S. worker and a more competitive U.S. economy.
Economic research has shown that areas best suited to creating long-term changes in productivity and competitiveness include improving education and creating job training programs, which are superior to short-term policies such as tax cuts for the wealthy or erecting trade barriers for uncompetitive industries. However, economists now agree that trade policies should measure their full impact and seek a better balance between profit maximization and social impact.
Current areas of legislation being considered include regulatory reforms, healthcare reforms, and tax policies. If Americans want a country that makes the lives of all citizens better, these new policies should have as a principal objective achieving a balance of offering better opportunities and better outcomes for middle-class workers.
All Americans – and the rest of the world – will be watching to see whether the new administration and Washington as a whole can bring about changes that make the lives of middle-class Americans better.
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