In fact however central bank policy rates fell more on trend than nominal GDP

In fact however central bank policy rates fell more

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In fact, however, central bank policy rates fell more on trend than nominal GDP growth: Central banks were
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20 THE INTERNATIONAL ECONOMY WINTER 2019 quick to lower rates in downturns but slow to raise them in upturns. The decline in policy rates exerted downward pressure on market rates beyond what would have been justified by economic fundamentals, boosted asset prices, and bloated the financial sector. This set the stage for a series of financial crises, which culminated in the Great Financial Crisis of 2007–2008. The failure of the Third Way had social and political implications. First, people mistakenly blamed free mar- kets for their disappointments and lost trust in the liberal economic order. Second, people lost trust in the elites, who benefited from globalization and the financializa- tion of the economy, but failed to protect the welfare state against immigration. And last, having lost trust in politics, people turned to populist politicians who promised them economic safety in a nation state with high barriers to international trade and migration. Some say we need more income and wealth redis- tribution and a stronger state. But this is only a watered- down version of the national-socialist policies offered by the populists. If we want to preserve the benefits which the liberal economic order has provided us, we must return to the principles of true liberalism. Today’s elites should go back to read Adam Smith’s The Theory of Moral Sentiments. KISHORE MAHBUBANI Professor in the Practice of Public Policy, National University of Singapore, and author, Has the West Lost It? (Allen Lane, 2018) W hy are people abandoning the mainstream politi- cal parties, the traditional pillars of the establish- ment, and voting for populist leaders, from the Philippines to the United States, from Italy to Brazil? Has something gone wrong with the people? Or have the po- litical and economic systems which were supposed to de- liver social justice and take care of the bottom half failed? The answer is the latter. One shocking statistic illustrates how badly our polit- ical and economic systems have failed. The United States has always prided itself on its open and level playing fields. Yet it has become the only major developed society where the average income of the bottom half has not just stag- nated, but declined markedly, as my colleague Professor Danny Quah of the National University of Singapore has documented. Even more shockingly, the average income of the top 1 percent was 138 times that of the bottom 50 percent in 2010, up from 41 times higher in 1980. These shocking statistics show that the implicit so- cial contract that had promised rising incomes for both the elites and the masses had failed spectacularly. The elites were creaming off most of the rising national income, while ignoring the plight of the bottom half.
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