Separating Productive Populism from its Worst Impulses
Ray Dalio, The Changing World Order: Why Nations Succeed and Fail
Charles Goodhart, Manoj Pradhan, The Great Demographic Reversal: Ageing Societies, Waning Inequality and an Inflation Revival
When Colorado Private Equity partners Chad Brue and Geoff Baukol invested in the mountains instead of their “usual” commercial work on the Front Range it was a big deal locally. They purchased and turned around Frost Creek outside of Eagle and came to speak to the town the day afterwards. Eventually they made other key real-estate investments in the Brush Creek Valley, one of which led to selling a long fought-over agricultural property to the county Open Space Program that fulfilled years of wishful Comp Plan language such as preserving view corridors, rural feel and agricultural land at the edge of town. Recently they entitled the largest rental property development ever in Eagle and sold it to a builder. Their PE firm has proven one of those elusive things, a developer aligned with a community’s land use goals. They replaced a landowner in Fred Kummer and Adam’s Rib which the community fought vehemently for 30 years against their plans to remake Eagle and the Brush Creek Valley into a massive, gated resort with 5 golf courses and a ski area. The positive community outcomes that seemed impossible since the 1980s turned on a dime with their entry.
Brue and Baukol host periodic Market Updates. A recent update included two book recommendations. The update and book contents so closely expanded upon themes brought up by the State Demographer, Elizabeth Garner at our Recent NWCCOG Economic Summit (Read: A State Losing its Mojo) through the perspective of investors and economists. There really is a shortage of workers. Globalization has displaced a whole lot of the workforce. Wealth inequality is structurally disruptive. We are in a debt cycle making our economy much weaker than the stock market or other traditional indicators make it appear. In short, we are entering a very dangerous time that is driving populism (though the structural issues have little to do with much of what is so hotly contested in the current Culture Wars). Their update and the books have me reading the news like these items below quite differently:
CPI is at a 40-year high of 8.5% (B&B Update)
Consumer Prices are rising at the fastest pace since 1981 (NYT, The Painful Path)
Corporate profits are at a 50-year peak (B&B Update) (I don’t hear that said much)
The “dependency” rate (unproductivity) in America is rapidly increasing (Rising)
Blame inflation on war, the President, the Saudis, but it is a structural, long-term cycle (Dalio)
Only a handful of corporate and governmental policy actions can alter these trends (Dalio)
The last time The Fed pushed interest rates to double digit levels in the early 1980s, in an effort to bring down rapid inflation, it set off brutal back-to-back recessions that pushed the unemployment rate to nearly 11 percent. (NYT, The Painful Path)
Separating the creatively destructive forces of populism from the dangerous fringes it encourages may be the challenge of our time. I’m still reading the first book, Ray Dalio, The Changing World Order: Why Nations Succeed and Fail which takes the confusingly granular news of our time about the economy, power, politics and class struggles, removes the emotion, the tribal spin and infuses an economic, historical perspective. Dalio’s theory of a nations’ evolutionary cycles and where the U.S is today is less than comforting. He estimates there is a 30% chance the US will descend into civil war in the next decade. If you read nothing else, and Dalio suggests reading his key points in bold to move quickly, I would read the first and last chapters in full, and bold skim the middle. The final chapter is taking his ideas and assessing the U.S. right now. For all the real violence and talked about possible violence, Dalio points out that US internal conflict metrics reveal that this is far from the most divisive time the country has endured. The economic forces at work are cyclical. Historically they do lead to painful, disruptive periods from which some economies, some nations don’t emerge. When Brue and Baukul say that COVID will be the dividing line between past 50 years of deflationary cheap labor and the next few decades of inflation and conflict unless we respond to wealth inequality (among other things) I take note. These are not crazy, conspiracy theorists. Dalio, as an economist, international investor speaks matter-of-factly of nations rising and falling with their economies
Economists Charles Goodhart and Manoj Pradhan in The Great Demographic Reversal: Ageing Societies, Waning Inequality and an Inflation Revival posit that the larger background trends of declining birth rate combined with the aging baby boomers, the cost of youth (college, parenting, debt) is drastically increasing the dependency rate in our society. Dependence is inflationary. We are hampering our ability to be productive which has implications for the economy, political stability and international standing. Those who produce (work) are a deflationary factor. Much of our recent wealth generation in this country had come from innovations and finance that has not benefitted small business or most citizens. Reminds me of my grandmothers point decades ago noting that we don’t make anything or grow anything around here anymore. Born in 1912 in the Willamette Valley of Oregon, she observed that when she passed in the 19902. Goodhart and Pradhan point to the “reversal” stemming from factors that have been developing since the 1970s or earlier. They outline a changing life-cycle in which fewer youth enter the work force older and older, are burdened earlier with higher costs, have fewer children. This is occurring as an increasing number of our population is aging out of the work force, while the costs of dependency, dementia and medical care increase. Their focus on the cost of dementia in Chapter 4 is fascinating. The result of prolonged dependency trends to individuals and families is a squeezing of the ability to save, less wealth, more debt. The result nationally is that we don’t produce enough to hold back inflation. There are actions the federal government could take which are unpopular, like raising interest rates which the Fed is doing currently, or raising taxes on those who can most afford to pay, who benefit most from the stability of the system and its existing legal structures. Or the people can demand that some of those structures be changed. If they only knew which actions would produce the change that would actually improve our collective situation. There are actions that corporations could take which are unlikely to take without pressure to do so—paying workers more, profit sharing, investing in innovation rather than stock buy-backs, choosing to produce domestically when it is more expensive to do so, curtail lobbying for their interests so effectively, or paying more in taxes (for more on that read Reimagining Capitalism in a World on Fire by Rebecca Henderson).
It is often noted that the peak of American wages occurred in the 1970s following decades robust federal activity and a powerful labor lobby tipping the scales towards the average worker. Dalio considers the New Deal to be a rare thing in history, a bloodless revolution at the end of a cycle. These higher wages and benefits were eventually abandoned as corporations globalized. The waning inequality referenced by Reversal refers to international wealth inequality. In the U.S. inequality has widened considerably. In the U.S. corporate, legal and global trends disempowered workers while making those with capital and corporate leadership fantastically wealthy. Through the 1980s and 1990s an artificial influx of labor to the market by China modernizing and joining the WTO, by Glasnost in Russia and the re-integration of Eastern Europe, combined with robust immigration masking the waning workforce within the country fueled corporate growth. America had the capital and the talent. Those who in a position to leverage these international opportunities profited greatly while conversely the average American worker, and family began a long, slow downward spiral. All that according to Reversal, and my layperson’s reading of it.
Though reading Dalio can make some of the forces sound mechanical, and therefore beyond our control; collectively they are not. History is not pre-written. Dalio writes, “the question is whether we Americans can face our challenges honestly and adapt and change to meet them,” (p485). Both books are a refreshing, if sobering, angle on what we are all experiencing today.
My readings tend to focus on what we are not doing to protect our Democracy. Politically we face a turning point, as the January 6th committee is meeting this month about whether we will take action to overcome the rawest impulses of populism. The far left and an increasingly closer to the middle portion of the right seem to think it is time to give up on our country, have a “civil war” by which they really mean revolution. Yes, January 6th was a coup attempt, or insurrection. Reversing an election by deceit or force to keep someone in power is exactly that. Yet the economists in these books note that it is possible to leverage populism to make changes to protect a democracy. It has happened. Now I have a somewhat better grasp of these trends from an economic perspective. It isn’t less disturbing, but it also doesn’t feel inevitable as reading The Next Civil War by Stephen Marche which should be read together with How Civil Wars Start by Barbara F. Walter.
Oh, and those handful of options? Well, you will have to read Goodhart, Pradhan as well as Dalio for yourself. If you want a governmental compliment to those books, read How Democracies Die by Stephen Levitsky and Daniel Ziblatt. That one has been haunting me since I read it nearly two years ago as the groundwork was being laid for what came to the surface January 6th. We have been so fortunate, but also very lazy as a people tending to our systems, economic and democratic. It’s time to change that.
