Session V: Macro Perspectives: Bigger Problems than Corporate Governance
Columbia Business School’s well-known authority on value-based investing begins by attributing today’s economic problems to a “global economic dislocation,” one that is rooted in the ongoing—and in Bruce Greenwald’s view, inevitable—decline of manufacturing and displacement by services. Like the other example of dislocation in modern times, the Great Depression of the 1930s, the 2008 global financial crisis and protracted recession—still very much with us—are viewed as originating in the sharp decline of a major “sector” of the global economy. In the Depression of the ’30s it was agriculture; in the recent financial crisis it was manufacturing. In both cases, technological advances and economy-wide productivity increases led to huge increases in stock and financial asset prices—but also to sharp drops in the prices of farm and manufactured goods, and massive overcapacity and ruinous competition in both sectors.
According to the author, the working off of overcapacity in the agricultural sector was accomplished largely by the effect of World War II in moving huge numbers off the farm and into the mainly urban industrial sector at government expense. This labor force relocation, which occurred in all developed economies, was essential to a global economic transformation that for the next 50 years provided high productivity growth and greater equality of income and wealth.
More recently, however, the global economy has been confronted with the challenge of accomplishing a transition from manufacturing to services that will feature lower productivity growth and more inequality. Foreseeing a long, difficult process, Greenwald’s biggest concern is that government intervention will distract businesses from making this transition effectively—which means continuing to operate as efficiently as possible, downsizing when necessary—and so make the problems worse. And while business focuses on preserving its own efficiency and value, Greenwald urges governments to look for more cost-effective ways—for example, expanded use in the U.S. of the Earned Income Tax Credit—to cushion workers from the consequences. Nobel laureate Edmund Phelps, while agreeing with much of Greenwald’s analysis, has a different explanation of the U.S. productivity dilemma. Innovation is viewed as the primary driver of the prosperity of the advanced economies. Higher income and wealth matter less than job satisfaction, participation, and an array of non-material “modern values” that have somehow been lost and that, for Phelps, are the key to restoring economic growth and “mass flourishing.”