Karen Harris: Post-globalization

KAREN HARRIS: One of the questions our clients ask us most frequently is about today's geopolitical situation, the unexpected results of everything from Brexit to Trump's victory to the elections in Europe: politics beginning to feel more and more uncertain. And we get asked a lot, when is this going to go back to normal? Is this the new normal? What does this mean?

In order to answer that question, we have to go all the way back to World War II and look at the growth environment. After World War II, the world's productive capacity was wiped out. The US was really the only major producer left standing. And that created what we call a supply-constrained growth environment.

In a supply-constrained growth environment, you're short of capital. You're short of labor. The political incentive, particularly with the Cold War, was to keep sea lanes open to open trade, to open the US market, to open every market in order to be able to create the supply to satisfy the world's demand. The business executives during that time focused on the skill of allocating capital because it was a scarce resource.

Now, that worked for several decades, until about the late '80s, early '90s. By then, Europe had recovered and created its productive capacity. Germany stumbled a bit in the '90s after reunification and then found its footing. Japan recovered and then some.

And then China entered the global economy with 800 million or so productive workers. And at that time we went from being a supply-constrained growth environment to being in a demand-constrained growth environment. In a demand-constrained growth environment, rather than fighting inflation you're fighting deflation, because there isn't enough demand. And crudely speaking, you can't make a pair of trousers cheap enough that somebody wants to buy two if they don't want to buy one to begin with.

We saw Japan suffering from this deflationary environment. But more importantly, globally, the key resource constraint wasn't capital, where we saw capital superabundance. It wasn't labor. But it was demand, end demand, the warm, beating hearts at the end of the supply chain, many of which were located in the United States. And we saw the successful growth strategies being things like export-led growth to reach those wealthy end markets in the United States and Europe.

Now, the challenge of that environment is the workers in those markets weren't able to compete on a wage basis with the producers in those emerging economies. And so while goods became cheaper, that demand in the United States was in many respects losing out in terms of the benefits of globalization, which had accrued to the US and then began to accrue elsewhere.

And that is the underlying construct that's created the political message we're seeing today. It's not about one campaign slogan or one individual on the global stage, but these themes, trends that have developed over decades that are going to persist for some time.