Policies for Populists (That Won't Kill Growth)
When they were opposition figures, populists could content themselves with provocative slogans. Once in office they must produce concrete policies. The challenge for them -- and for those incumbents trying to hold onto office -- is to preserve the real gains of globalization while addressing the concerns of the new radical majority. Here are some policy directions that may be palatable to populists but can be done without undermining market and democratic freedoms.
Encourage high-skilled immigration.
Silicon Valley stocks fell on the news of the Trump victory as investors anticipated they would have a more difficult time recruiting skilled labor. Post-Brexit, the tech industry in Britain has worried about the same thing. Companies need high-skilled labor. The introduction of an employer tax for immigrants, such as the one used in Singapore, can encourage the recruitment of high-skilled labor while favouring local hires and discouraging low-skilled immigration.
The late Nobel economic laureate Maurice Allais argued that to compensate for the use of the public infrastructure, such a tax should total about four times the average annual wage - several thousand dollars per employee per year - for a number of years. The proceeds would go toward a public infrastructure fund aimed at maintaining the level of public services despite the increased demands on the system from immigration. The higher employer cost would bring reduced immigration for low-skill jobs but not impact higher-skilled, high wage jobs. It would also increase wages for the lowest earners by reducing the competition from immigrants.
Externalize Borders and reduce incentives to migrate.
The squalid Calais "jungle" of refugees, and the pile-up of refugees in camps in Greece and Italy, amply illustrate the futility of attempting to stop the flow of refugees by simply corralling them into enclosures or building walls. A better response would be to pursue more robust deals with bordering countries that are a conduit for illegal immigration, where necessary offering the carrot of market access or development support, as with the recent deal with Turkey.
Spain has done this particularly effectively, setting up joint patrols with Mauritania and Senegal, focusing on the return of illegal migrants from the point of entry, coordinating border surveillance and establishing up triage centers in the countries where migrants gather and try to cross into Spain. As a result, Spain has seen a much lower share of illegal migrants than Italy and other European countries.
While "externalizing" borders and strengthening controls, Western democracies can reduce incentives for illegals by tightening access to the legitimization and services they seek. A system that legitimizes and gives access to benefits for illegal immigrants is fundamentally unfair to legal immigrants and ultimately be unsustainable.
Rethink public accounting to allow for more infrastructure projects.
Governments have been struggling to make basic infrastructure investments under the weight of fiscal deficits, high levels of public debt and election cycle politics. By changing the vernacular and seeing infrastructure and education as investment rather than spending, it can be treated differently in accounting terms.
Public investment stands at 3 percent of GDP or lower in advanced countries. In the meantime, our central banks have become the largest owners of government debt. It now makes sense to consolidate the balance sheets of the central banks and the government, a move that would put the national debt in a completely different light, revealing it to be a fraction of what it is under current accounting conventions. This renewed transparency will free considerable resources to boost infrastructure and human capital formation, creating the basis for stronger growth in the future.
Embrace a "Tax Shift"
In most Western democracies, one worker supports two non-workers, whether because they are not of working age, studying, unemployed or unable to work. The public transfer for this support is mainly through income tax and social security taxes on wages, often paid by employers. For advanced economies, these charges represent an average of about 35 percent of labour costs. Taxing production for social security raises labor costs. An alternative would be to finance more of social security through a surcharge on consumption, as Belgium has done with its "tax shift" policy. While there would be a political price to be paid for increasing prices at the till, the lower non-wage labor costs allow for both increased wages and improved balance of trade. The regressive nature of consumption tax can be addressed by exempting basic products and focusing consumption tax increases on specific ranges of products (Belgium increased taxes on tobacco and electricity consumption, for example), and by the resulting net wage increases.
The U.S. Treasury has over the years published a watchlist of "currency manipulators," countries with persistent high current account surpluses, yet seemingly weak or weakening currencies. The lack of normal currency adjustments is effectively putting the global trade edifice at risk. As illustrated in the euro zone, persistent balance of payment surpluses in core countries can limit growth for the countries unable to devalue -- particularly in the absence of reforms to the supply side of the economy. Donald Trump, like European populists, argued for penalizing free-riders. While this must not degenerate into protectionism or neo-mercantilist policies, he has a point. Using existing rules to suspend market access or impose tariffs on those countries could help reinforce the rules for all.
Western leaders are paying the price for ignoring how globalization imposed costs on the middle-class and pain on those with lower skill levels. The answer isn't isolationism, but smarter policies to correct these imbalances.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Jean-Michel Paul at JPaul@acheroncapital.com
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