Rather than using the 2008 crisis to catalyse change, we rolled over and went back to doing more of the same
Once again, young people have gotten the short end of the political stick. The outcome of the United Kingdom’s Brexit referendum is but another reminder of a yawning generational divide that cuts across political affiliation, income levels, and race. Almost 75% of UK voters aged 18-24 voted to “Remain” in the European Union, only to have “Leave” imposed on them by older voters. And this is just one of several ways in which millennials’ economic future, and that of their children, is being determined by others. I am in my late fifties, and I worry that our generation in the advanced world will be remembered—to our shame and chagrin—as the one that lost the economic plot.
In the run-up to the 2008 global financial crisis, we feasted on leverage, feeling increasingly entitled to use credit to live beyond our means and to assume too much speculative financial risk. We stopped investing in genuine engines of growth, letting our infrastructure decay, our education system lag, and our worker training and retooling programmes erode. We allowed the budget to be taken hostage by special interests, which has resulted in a fragmentation of the tax system that, no surprise, has imparted yet another unfair anti-growth bias to the economic system. And we witnessed a dramatic worsening in inequality, not just of income and wealth, but also of opportunity. The 2008 crisis should have been our economic wake-up call. It wasn’t. Rather than using the crisis to catalyse change, we essentially rolled over and went back to doing more of the same.
Specifically, we simply exchanged private factories of credit and leverage for public ones. We swapped an over-leveraged banking system for experimental liquidity injections by hyperactive monetary authorities. In the process, we overburdened central banks, risking their credibility and political autonomy, as well as future financial stability. Emerging from the crisis, we shifted private liabilities from banks’ balance sheets to taxpayers, including future ones, yet we failed to fix fully the bailed-out financial sector. We let inequality worsen, and stood by as too many young people in Europe languished in joblessness, risking a scary transition from unemployment to unemployability.
In short, we didn’t do nearly enough to reinvigorate the engines of sustainable inclusive growth, thereby also weakening potential output and threatening future economic performance. And we are compounding these serial miscarriages with a grand failure to act on longer-term sustainability, particularly when it comes to the planet and social cohesion. Poor economics has naturally spilled over into messy politics, as growing segments of the population have lost trust in the political establishment, business elites, and expert opinion. The resulting political fragmentation, including the rise of fringe and anti-establishment movements, has made it even harder to devise more appropriate economic-policy responses.
To add insult to injury, we are now permitting a regulatory backlash against technological innovations that disrupt entrenched and inefficient industries, and that provide people with greater control over their lives and well-being. Growing restrictions on companies such as Airbnb and Uber hit the young particularly hard, both as producers and as consumers.
If we do not change course soon, subsequent generations will confront self-reinforcing economic, financial, and political tendencies that burden them with too little growth, too much debt, artificially inflated asset prices, and alarming levels of inequality and partisan political polarisation. Fortunately, we are aware of the mounting problem, worried about its consequences, and have a good sense of how to bring about the much-needed pivot.
Given the role of technological innovation, much of which is youth-led, even a small reorientation of policies could have a meaningful and rapid impact on the economy. Through a more comprehensive policy approach, we could turn a vicious cycle of economic stagnation, social immobility, and market volatility into a virtuous cycle of inclusive growth, genuine financial stability, and greater political coherence. What is needed, in particular, is simultaneous progress on pro-growth structural reforms, better demand management, addressing pockets of excessive indebtedness, and improving regional and global policy frameworks.
While highly desirable, such changes will materialise only if greater constructive pressure is placed on politicians. Simply put, few politicians will champion changes that promise longer-term benefits but often come with short-term disruptions. And the older voters who back them will resist any meaningful erosion of their entitlements—even turning, when they perceive a threat to their interests, to populist politicians and dangerously simplistic solutions such as Brexit.
Sadly, young people have been overly complacent when it comes to political participation, notably on matters that directly affect their well-being and that of their children. Yes, almost three-quarters of young voters backed the UK’s “Remain” campaign. But only a third of them turned out. In contrast, the participation rate for those over 65 was more than 80%. Undoubtedly, the absence of young people at the polls left the decision in the hands of older people, whose preferences and motivations differ, even if innocently.
Millennials have impressively gained a greater say in how they communicate, travel, source and disseminate information, pool their resources, interact with businesses, and much else. Now they must seek a greater say in electing their political representatives and in holding them accountable. If they don’t, my generation will—mostly inadvertently—continue to borrow excessively from their future.
El-Erian is chief economic adviser at Allianz, is chairman of US President Barack Obama’s Global Development Council and author of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.
(Copyright: Project Syndicate, 2016)