This article looks at how there appears to be a lot of "disruption" these days, from business to politics, and the author asks what the supposed real benefits from all this are meant to be.

One of the most widely used (or over-used) words these days is “disruption”. Silicon Valley tech tycoons seem to revel in it and certain politicians do. Perhaps it is worth noting, as the Paypal co-founder and Facebook investor Peter Thiel has said, that disruption is not good in itself. What counts is whether what comes after disruption is worth all the pain. A blizzard and earthquake are disruptive, but do they benefit anyone? Are the resources used up in adapting to severe weather or the effects of plate tectonics drawn from other, arguably more productive uses? Maybe it is time we members of the media declared a temporary ban on the word.

Like it or not, however, “disruptive” is likely to crop up in business and finance pages for quite some time to come. And it also appears when talking about politics, such as the UK’s Brexit process, or the calls by the Labour Party to confiscate large utilities and take them into state control, or in the US, President Donald Trump hitting Chinese supply chains with tariffs.

To think about these different forms of disruption is Subitha Subramaniam, chief economist at Sarasin & Partners, the UK wealth management house. This publication is pleased to share these insights and invites responses. The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Facebook chief executive Mark Zuckerberg famously popularised the mantra “move fast and break things” to describe how technology innovators bring about change. Recently, politicians have also started to embrace this disruptive philosophy.

Newly formed parties, such as the Five Star movement in Italy, have ostensibly challenged accepted political beliefs and enjoyed success at the ballot box. Incumbents, facing a “stand-still and perish” threat, have followed suit. The centre ground of politics is rapidly vanishing.

The new breed of disruptive politicians has little interest in anchoring policies on the opinions of experts. Instead, there is a growing disregard for institutions.

Discarding conventional thinking
The global economy experienced strong growth for much of the past 70 years, as favourable demographics amplified strong productivity trends. With decades of sustained increases in living standards, a strong global consensus in support of unfettered open markets emerged.

However, the economic scars of the financial crisis have profoundly shaken this belief. Not only was the global recession deep, but the recovery has been disappointing. Furthermore, demographic trends are now on the wane and productivity growth is disappointing.

Waning growth is exposing the dark underbelly of capitalism: increasing income and wealth inequality. The global middle class has experienced relatively modest increases in real wealth relative to the top 1 per cent. This stagnation in real income and wealth is feeding a growing discontent with conventional policies and has opened up the political status quo for disruption.

A muscular fiscal agenda
Across the world, politicians are pitching plans to restore distributional equity, with policies like Medicare for All, People’s QE, Modern Monetary Theory (MMT), and Universal Basic Income. The growth slowdown is also coinciding with escalating climate change risks. Policies like the Green New Deal, championed by the Democrats in the US, are attempts to steer the economy towards a more sustainable path in response to the growing demand from younger generations.

The new breed of disruptive politicians wants a more muscular fiscal agenda, including increases in spending on health, infrastructure, defence, climate and education. In the US and UK, calls for greater spending are being accompanied by proposals for lower taxes.

This new fiscal agenda will lead to a deterioration in public finances. Fiscal multipliers are typically low when economies have limited spare capacity. This is because when labour markets are tight, increased government spending is likely to crowd out private enterprise. At this stage of the cycle, increased fiscal spending is unlikely to usher in a growth tide lifting all boats.
 

Asian crisis is a cautionary tale
While increased spending on infrastructure and education can deepen an economy’s capital stock and raise productivity, sustained increases in productivity, known as total factor productivity, need much more. The right ecosystem for driving and rewarding innovation is required and these are aspects typically outside the sphere of influence of government budgets.

In his 1994 paper, The Myth of Asia’s Miracle, Paul Krugman famously criticised the East Asian growth model of the 1990s – driven mostly by capital deepening – as unsustainable. The ensuing financial crisis in 1997 serves as a cautionary tale.

Governments also have a poor record in effectively deploying budgets. As a result, there are strong grounds to believe that the coming fiscal expansion is likely to raise debt and deficit levels while having a very modest impact on productivity and growth.

Monetary toolkit now diminished
Since the financial crisis, monetary policy has been the dominant policy lever. Now, more than ten years later, there is a growing consensus that the toolkit is diminished, with additional easing likely to have a limited impact on the economy. Instead, there is a gathering acceptance that fiscal policy must play a much more active role.

Accompanying this shift is a rethink about debt thresholds. There is a tacit acceptance that debt-to-GDP levels can approach 100 per cent without damaging the economy. Even though higher debt thresholds create fiscal space, a more muscular fiscal agenda will need monetary policy to remain accommodative - to contain the interest burden associated with rising debt levels.

Low rates, along with QE, will be essential to anchor current and future rates. Over time, there is a risk of fiscal dominance - where monetary policy not only contains the government’s interest burden, but also explicitly starts to fund inefficient government spending.

Longer-term challenges likely to prevail
In sum, politicians are now being empowered to disrupt the status quo. In the coming years, we expect a steady expansion of fiscal policy aimed at addressing inequities. With it, public debt and deficit levels are set to rise. Even so, monetary policy will remain accommodative and the era of low rates will remain with us.

Unorthodox monetary policies will be essential to enable the coming fiscal expansion. These policies might provide a temporary boost, but ultimately longer-term challenges, such as demographics and productivity, are likely to prevail. The world is slowing, and a heterodox marriage of monetary and fiscal policy is unlikely to become a long-term salve.

Over the long term, any economic resurgence will depend upon the next wave of disruptive innovation from technological companies. Politicians will do well to heed the advice of another technology disrupter – Google – and “Do No Evil”.