This is a book by Stephen Poloz, the former Governor of the Bank of Canada, that was first published in 2022.
As the title indicates the author argues that the interaction of the five "tectonic forces" of an aging population, technological innovation, increasing personal debt, income inequality and climate change are going to lead to greater economic volatility and uncertainty in the coming decades. He argues that average economic growth with decrease from the current average, that interest rates will be low and that inflation will be more volatile, increasing and retreating much more regularly than it has in the last 30 years.
In the book he describes each of the tectonic forces and he describes how they will impact inflation, jobs, housing and government fiscal policies. He then goes on to suggest ways to reduce risk and mitigate the impacts of the interaction of the five forces.
Some of his suggestions are rather intriguing. Arguing that the current model for buying and mortgaging houses has its roots in the Great Depression he suggests that a new model could be implemented. Instead of the borrower paying off a mortgage alone over the usual 30 years he suggests that mortgages could be structured so that the mortgage is not paid off, the bank will be a partner in the mortgage, accruing some of the equity for the bank while the mortgage holder would receive the bulk of the equity for themselves. In essence the bank would be a co-owner of the house, where the mortgage owner essentially pays rent to the bank, but accrues equity for the future. When the borrower decides to sell the house they will take their share of the equity and the bank will take their share. The author argues that such an arrangement would lead to lower monthly payments, less foreclosures and the ability for more people to be able to afford to buy a home, since they would not be paying off a set amount of money during a set mortgage duration but would be paying the bank for as long as they own the house, whether that would be 5 years or 50 years. It is an intriguing idea and it could very well mitigate the current situation where young people are more and more finding it difficult of afford to buy a home.
One of his other ideas is also intriguing, namely that companies will play a role in assisting their workers in mitigating the risks of the interaction of the five forces. Arguing that the aging population will make it more difficult for companies to hire and retain staff they will have to invest more in keeping them. He further states that companies are more and more adopting the environmental, social and governance (ESG) model as they move to meet the demands of an increasing number of investors who make investment decisions with it in mind. It is interesting that he seems to agree with Mark Carney who essentially argued the same thing in his book Value(s). I am not convinced that this will happen but his argument to support his assertion is a good one. We will have to see.
The most disappointing part of the book is he argues that companies will have to take on the role of helping their employees handle the risk of future volatility and uncertainty because central banks and governments will not have the capacity to do so. He argues that interest rates will be well below the current historical average average so room to maneuver of central banks in cushioning the impacts of that uncertainty will be limited. Since the main lever central banks have is changing interest rates that is consistent with his argument. However, while highlighting the impacts of income and wealth inequality he completely dismisses the idea that governments should raise taxes on the wealthiest. He argues the economic dogma that doing so discourages innovation and is actually counter-productive in raising revenue. Interestingly that assertion has never been tested so it is disappointing that he argues it without providing any real evidence or data to back it up. It is just a matter of faith.
He argues that one way to reduce inequality is a universal basic income (UBI). However, he again doubts its feasibility because of the limited fiscal capacity of governments. Again, higher taxes on the wealthy could be the solution to that.
One thing this book did was help me resolve an issue that I have had with free trade for some time. Anybody who has read this blog before knows that I am not a fan of free trade agreements because their negative impacts on the losers from those agreements. However, I have to acknowledge that free trade does have some positive benefits. I had issues trying to square that circle and this book helps with that. In essence, free trade does lead to great economic benefits but it takes decades for them to be felt throughout the economy. However, it also has great negative impacts on those who work in industries that cannot compete with the same industries in lower cost jurisdictions. That often leads to job losses and economic upheaval for many almost immediately or at least a very short time after free trade takes effect. Further because programs to assist those losers are often token jokes that do not actually help those who lose their jobs it can lead to generational poverty for them. If a parent loses his job, cannot find another with the same wages and benefits of the one he lost, he will have a hard time helping his children in getting out of the poverty trap he finds himself in. In other words, if you are having a hard time making ends meet, for an extended period of time, you are not going to be able to send your kids off to college or trade school to give the opportunity to get out of poverty.
That is my issue with free trade and its proponents. They can truthfully claim that it eventually helps the economy but not before disrupting lives in the short-term, often leading to generational poverty. Their indifference to the losers of free trade is one of the reasons why the backlash towards it, in the last few years, has taken hold. The losers of free trade have found champions and they are systematically dismantling the free trade system that took decades to build.
The Next Age of Uncertainty is a fascinating book. Its central argument is sound and some of its proposed solutions are fascinating and deserve more study. However, it is disappointing that the author does not seem willing to consider all of the potential solutions, including more government intervention in reducing income and wealth inequality.
