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The sweep of history

The chief positive that Bearbull digs out is the rapidity with which the forces of equality have fought back against the forces of freedom. Apologies if that sounds a bit theoretical, but it’s real enough, as I’ll explain. It’s also important to grasp that its consequences are more likely to benefit Investors Chronicle readers as wage earners than as investors of capital. In addition, it’s a scenario that will play out over, say, the next 10 to 20 years, so plotting its progress in any 12-month period may sometimes be guesswork.

Besides, the coming 12 months may be especially fraught, making it harder to judge where we are on the long-term course. However, these impending difficulties may also render the eventual ending – that returns to labour will rise at the expense of returns to capital – more likely.

Chief among them – and most loaded with scatter-gun consequences – is whether the world will flip into recession. Perhaps that should be ‘when’. To the extent that the US still leads these things, then its current expansionary phase is both one of the longest in its history and getting overheated.

The US has been out of recession for almost 10 years – 2009 was the last time real GDP fell two quarters running (the conventional definition of a recession). For much of that period expansion has been at a sedate pace. Lately, however, and boosted by the Trump administration’s tax cuts, the pace has picked up – 4.2 per cent annualised in the second quarter of this year followed by 3.5 per cent in the third. That has coincided with the unemployment rate falling to its lowest levels this century (3.7 per cent of the labourforce compared with over 9 per cent eight years earlier), inflation stirring just a little and the US central bank continuing its three-years-old policy of nudging interest rates upwards.

Apart from the fact that expansion gets tougher as the comparatives become more demanding, something somewhere will prompt the flip – a minor policy mistake in the White House that becomes major, a local difficulty in the Middle East that gets out of control, who knows. But the thing to worry about is what happens in response, especially as the boss in the Oval Office believes that economic co-operation between competing nations is for losers and that the world order, as exemplified by, say, the World Trade Organisation or the G20 talk shop, is there to be gamed, dismantled or maybe both.

It is easy to construct a sequence where, for instance, China abandons its de-facto peg against the US dollar in order to boost flagging domestic demand. When, as a result, the US trade deficit with China balloons further then a purple-faced Mr Trump, raging against the export of more American jobs to Guangdong province or wherever, turns up the trade sanctions several notches. You can guess the rest.

The concern is that the willingness among political leaders to prevent these things from spinning out of control, the readiness to take mutually helpful measures – as demonstrated by a handful of post-war agreements from Bretton Woods through to the Louvre Accord – is much diminished. Thus we may think it’s easy to see where the major threats to future growth lie – rising US interest rates hammering the developing world; an Italian debt crisis endangering the euro; Brexit – but it looks especially difficult to predict their course once things get nasty.

Linked to those threats and others, directly or indirectly, are the rising forces of economic nationalism and its close relation, populism. It is through understanding these that we see – or, at least, we conjecture – that the returns to labour are likely to grow in the coming years at the expense of returns to capital; that there will be more to the 90 per cent and less to the disliked 10 per cent and possibly much less to the hated 1 per cent (though that may be my wishful thinking).

There is even a bigger theme against which these forces can be highlighted; one that can be labelled ‘equality versus freedom’. Too often the mistake is made that these two concepts are inseparable, that you can’t have one without the other. Sorry, that only exists in the popular imagination and the philosophy of Jean-Jacques Rousseau. It should be pretty obvious that equality can exist without freedom. Some of the most equal nations in recent history have been notable by their lack of freedom – just think of eastern Europe during the Soviet era.

For freedom – of a sort – to exist without equality is also easy enough since, before too long, freedom undermines equality. Begin at the theoretical point where freedom needs equality since without it freedom would be unable to express itself. That, if you like, is the freedom of equality of opportunity. But as soon as one equal opportunity is played out it leads to an unequal outcome, so equality as a whole becomes eroded and freedom suffers too, since future opportunities become restricted to the winners of the previous rounds (I simplify, but you get the drift).

This is more than just a semantic exercise because it describes a process that does not have to be understood intellectually. It’s perfectly easy to understand it instinctively; the process goes against the grain, it’s unfair.

What sticks in the craw most of all is not that the outcome is unequal, but that the scale of its inequality far exceeds the excess ability of those who took the opportunity. Let’s put that into context – there are few complaints about the outsized rewards to top sports people (although the rent extraction of Premiership footballers might be an exception) since their superior ability can be so clearly measured in games of clear rules and unambiguous outcomes. Yet everyone knows – everyone can see – that the excess ability of, say, the average director of a FTSE 350 company is much less clear and that his or her rewards are as much to do with good luck as ability. Enjoying good luck is fine, but only so far. Take excessive rewards and outsiders just get angry.

These are the feelings that stoke the rage of populism. It is the same rage that, after 100 years of civil war, destroyed the republic of Ancient Rome; the rage that ripped apart the Ancien Régime of 18th century France and replaced it with The Terror and, within 20 years, war across much of Europe.

Okay, what I’m really saying is that we’ve seen all this before and, hopefully, it won’t come to anything like that this time around. Plausibly, there is even an optimistic message contained in the current infatuation with populism across much of the developed world. The point here is the speed at which resentment has grown against the rich. A feeling that in the past could take generations to work itself up into a movement has emerged in just the historical blink of an eye.

Go back only 40 years and the western world was still living in the era of equality, redistribution and recovery that followed the second world war. As thanks for their war effort, Britain’s workers had been given a proper welfare state and more besides and, as a result, their wealth had risen perhaps faster than ever before. But by the late 1970s that process had pretty well exhausted itself – not just, though especially, in the UK.

Then along came the forces of liberalisation, which were accepted without too much struggle, did their work and now – in their turn – look tired and corrupted. They rode in on the notion that economics is not a zero-sum game and that rising wealth at the top of the distribution curve will somehow trickle down to the rest. They limp out bearing the judgement that, actually, economics feels very much as if it’s zero-sum much of the time; that trickle down is just a mask for rent extraction and that liberalisation has morphed into a con trick because the developed world’s economic growth has slowed down since the 1970s, not accelerated.

Yet also in the past 40 years the rich world’s middle class – now about 80 per cent of the population – have developed the confidence and the sense of self-entitlement that has quickly prompted them to rage not just against the stagnation of their own net income, but especially against those who grab more than their fair share.

It may be about more than that, too. It is now fashionable to stress the importance of feelings of belonging, of being in control (however illusory) and of being listened to. Whether these emotional factors are more important than money and economic wellbeing is guesswork. My guess is that, by and large, the money comes first and, if it’s not there, people look around for someone – something – to blame. If that’s right, then the best way to mollify that feeling is to drop more money – in one way or another – into net pay.

Which brings us full circle. In broad terms, this is why wages will rise faster than company profits in the coming years. Why the productivity gains of two decades that were siphoned off by owners will be diverted to employees; in the process, squeezing profit margins and return on capital. It will be a secular movement – the great change that put company profitability in particular and returns to capital in general on an upward swing from the late 1970s has run its course.

The incongruously high returns to capital since the 2008 financial crisis were the final binge. They were made possible – whether by design or accident – by central bankers who, in quantitative easing, came up with the ultimate tool to benefit their pals in the capital markets. In a way, quantitative easing (QE) is brilliant in its madness, a grotesque parody of sensible banking, which offered the illusion that it was consistent with central banks’ independence and their commitment not to stray into government fiscal policy.

If central bankers come up with creative versions of QE in the coming recession, their pay masters in government should forbid it. Better to admit that central bank independence was only ever conditional and give away in tax cuts what would have been given away by phoney monetary policy. At least that way the newly minted money gets spent rather than boosting the net assets of those who are too rich to spend much of their income.

Take the positives, I said at the outset. Think of the current pull of populism as the cue for democracy’s response, and the consequent cut to capital returns and the boost to labour as the purgative. True, for the many affluent but not-so-wealthy investors who read this magazine this won’t be much fun – I know, I count Bearbull as one such. Yet do as I intend to – think of these likely cuts as the deferred charge for all those good years since the 1980s and soldier on into 2019.