The new politics of growth and stagnation (part 1)

This is the first in a three-part series on Diminishing Returns: The New Politics of Growth and Stagnation, a book co-edited by Mark Blyth, Lucio Baccaro, and Jonas Pontusson. 

Using examples from around the world, the book offers a new understanding of what happens to our politics when growth slows down. In this episode, Mark grills his co-authors about how the book came to be, and the big questions that guided its creation. 

Guests on this episode:

  • Lucio Baccaro, Director at the Max Planck Institute for the Study of Societies
  • Jonas Pontusson, Professor of Comparative Politics at the University of Geneva

Learn more about and purchase Diminishing Returns: The New Politics of Growth and Stagnation

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[MUSIC PLAYING] MARK BLYTH: From the Rhodes Center for International Finance and Economics at Brown University, this is the Rhodes Center Podcast. I'm the director of the Rhodes Center and your host Mark Blyth. Today's episode is a bit of an unusual one because I'm deeply implicated in the conversation.

You see, I've spent much of the past few years putting together a multi-authored book called Diminishing Returns-- The New Politics of Growth and Stagnation. The goal of the book was to question an assumption, that assumption being the way that democracy and capitalism have historically been reconciled is through economic growth, all that stuff about a rising tide lifting all boats. But what happens when growth is harder to come by, and what kind of politics supports the different growth models that make up the international economy today?

To answer these questions, we worked with scholars from around the world. And for the next few episodes of the podcast, I'll be interviewing some of them. To start, though, I interviewed my co-editors Lucio Baccaro and Jonas Pontusson. About how the book came about and about some of the big questions that guided its creation.

We started by discussing the paper Jonas and Lucio worked together that helped kickstart the project. It was in many ways a critique of the varieties of capitalism framework, the canonical framework for understanding different models of capitalism for the past 20 years. Here's our conversation.


Lucio, it's great to see you. Jonas, great to see you too. Welcome to the podcast.

LUCIO BACCARO: Thank you very much.


MARK BLYTH: So let's get started with a little bit of history on this whole thing. You two got together in Twenty Sixteen and did a piece for comparative political studies. And it's on this core topic that the book is all about called growth models. I've never actually asked this. should I'm really curious as to the answer. How did you get there and say, this is a thing, this is a concept that's really worth unpacking let's do something with this what's the back story on the whole thing?

JONAS PONTUSSON: Luc and I both worked at the same university, at the University of Geneva at that time. And we were looking for something to do together. And I think this paper or this article in my mind at least very much came out of an unhappiness with where the debate about varieties of capitalism had gone.

And I think the article got a lot of attention partly because a lot of people I think were unhappy, not only with varieties of capitalism as a framework perhaps, but more importantly with the debate that was generated by that framework at that time. Things had gotten, I think, pretty stale. So a lot of people were looking for some other way to think about comparative capitalism in contemporary advanced capitalist countries or something like that.

And our piece was an attempt to instead of just criticizing the existing framework or frameworks, sort of trying to break some new ground and borrowing from a number of different sources, but I guess Kaletsky above all. But I'll leave it for Lucio to go on from there.

MARK BLYTH: Lucio, tell us about growth models. How did you center on this concept? And what do people need to know about it?

LUCIO BACCARO: Well, to continue what Jonas has started. So our reaction was similar to the queen's reaction with regard to the crisis. Do you remember the Queen famously went to LSE and she asked a bunch of economists there why nobody has seen it?

So in the post-financial crisis period, there we were. The world was falling apart. And not only there wasn't a clear answer among economists, but there was no answer in the academic community that we are most familiar with, namely political economists and especially comparative political economists. And we thought that the problem was that this community had been too focused on the supply side of the economy, understanding what are the institutional conditions in which key firms become competitive and maintain their competitiveness over time.

And there had been a problematic lack of attention to aggregate demand and how distribution affected aggregate demand. So we started reading other stuff, particularly post economics. And there were actually good answers. We thought why not work with these answers and bring them into the community of comparative political economy? There the idea was there once was a growth model that relied on real wages growing in line with productivity, sometimes exceeding productivity. And that created all sorts of beneficial consequences.

And the wage-led growth model had come progressively undone by various developments, most importantly the liberalization of labor markets and the decline of trade unions and collective bargaining. This led to a generalized lack of aggregate demand and to the search of solutions to this common problem of lacking aggregate demand. And these solutions were distinctively different across countries. So on the one hand, you had an export-led growth model that mostly relied on external demand and tried to stimulate external demand by repressing domestic demand and wages.

And on the other hand, there was still a reliance on domestic demand but no longer financed through real wage increases, rather finance primarily through easier access to debt. This is the basis of the distinction that we made in that Twenty Sixteen piece between export-led growth models and consumption-led growth models.

MARK BLYTH: Just for listeners who are not familiar with this type of work, would it be fair to say that a growth model is in a sense the business model of a country? It's how they make their way in the world. It's how they make profits and then can redistribute them and keep the domestic economy going. Is that a reasonable sort of analogy at base for what we're thinking about here?

LUCIO BACCARO: I would say so. Yeah, I would agree that you can call them the business model of a country. It's essentially how a country generates growth.

And I would emphasize growth more than profits. Growth is super important for a capitalist economy. And without growth, it becomes much more difficult to legitimize and stabilize a system that inherently tends to generate inequality. So, yeah, I would agree.

MARK BLYTH: What we hear right now from a lot of people is this language of de-growth and this need to get away from growth. Why do we still think-- and I'm throwing myself into this-- that growth is so important. You mentioned there that growth is so important. But can you unpack that for us? Why is it so important?

LUCIO BACCARO: Jonas, you want to answer this?

JONAS PONTUSSON: Well I think that one thing, this gets into the question of the politics of growth models, which we can also talk about a little bit later and how we think about that. But I guess we think it's really important that these are Democratic capitalist societies in which elections have to be won. And then therefore, even though we would argue or I would argue-- Lucia agrees with me, that policies are not really made by voters, but it is crucial to generate consent among voters in some sense. And we see with right wing populism as one example of things going wrong when consent isn't there.

And there are obviously other ways to generate consent, but I think we would all argue that economic growth becomes a crucial way to generate consent. And if the growth becomes an imperative from a sustainability point of view, then the de-growth model is going to have to generate consent by some other set of means, which probably involve redistribution-- fairly radical redistribution of income, for instance, and that will challenge or threaten capitalism in some way or certain types of capitalism at least. So capitalism being an unequal economic system depends crucially, I think, on economic growth to generate the consent that it needs in order for it to be reconcilable with Democratic politics.

LUCIO BACCARO: Mark, I just had one thing on de-growth. I mean, I'm not really a fan of de-growth. Let's say that it's a superficially easy solution. I mean, you say we have an environmental problem, let's shrink the global economy. I mean, already argued very clearly that this is practically and politically unfeasible because think of the financial crisis that shrinking the world economy a little bit, and that had massive sociopolitical repercussions.

Thinks of the [FRENCH] the yellow vest movement in France. There was a tiny attempt at increasing the price of diesel that unleashed a huge popular demonstration. I mean, if we are serious about climate policies, we need massive investments, and investments have this tendency to generate growth. I don't see that we can actually address the environmental problem without having a new type of growth.

I mean, granted the type of investments that are necessary are unlikely to be produced just by private actors by firms, and there will be much greater intervention of the state in these investments, which may or may not be compatible with capitalism. But de-growth is the solution to the environmental problem, doesn't seem a very plausible solution to me.

MARK BLYTH: So in that case, then is it fair to say that politics in these national or supranational or in some cases growth models is organized around two poles-- those who are defending the current growth model who benefit from it, the insiders who get the most of the returns, and then that consensus building that you just talked about, how do you convince everyone else to buy into this? And I'll give you two examples and let's see if we can play with it.

So the first one is the archetype of the export model, which is Germany. Most German workers do not benefit from wage compression in the non-export sector. But it's a critical part of making exports cheap enough so that you can make lots of money, and that's bring in growth essentially through that channel. So you have to get them to buy into it.

On the other hand, if you think about the UK's growth model, which is based around consumption and finance and debt, ultimately in the aggregate, this is not a very sensible model to pursue, but there are enough people who have basically bought houses at the right time and taken on debt at the right time that they are definitely organized around the protection of that model. When you see the politics of the countries around you in terms of growth model, it does clarify a bit of things, doesn't it?

JONAS PONTUSSON: I think definitely. And let me just say, one thing I-- when it comes to wage restraint in the case of Germany-- Lucio knows more about this than I do, crucially, wage restraint in the manufacturing sector is facilitated if it is accompanied by even greater wage restraint in the services and domestic sector of the economy.

So in that sense, I would argue that German workers in export oriented industries were willing to accept some restraint partly because the cost of hiring domestic services in the domestic economy or going out for dinner-- I mean, lots of things were relatively cheap in Germany in terms of consumption items relative to, let's say, Sweden or Switzerland or other countries where it was much more difficult to decouple domestic service wages from wages in the export oriented sector. At some level, no workers benefited, but it's all about relative to others. And I'll leave it at that for now. Lucio.

LUCIO BACCARO: Just one thing to add. It is true that in a growth model, there are winners and losers. But one of the things that we postulate, and we also have some supporting evidence, is that if the growth model is very clearly defined, say, export led, these differences will not be heavily politicized. They will recede in the background, and there will not be a real debate, our export's good for Germany.


LUCIO BACCARO: I mean, everybody will more or less buy into the idea that yes, it's a great thing to be the world champion of exported dinettes or something like that. And same thing about what you were saying with regard to housing in a growth model that depends heavily on house prices being high and there being an expectation of these prices increasing or at least remaining stably high. Yeah. So I mean, our position is that politicization of the key planks, key policy planks of the growth model is going to be a rare event.

And it's going to happen more-- it is more likely to happen when there is a crisis, prolonged stagnation, or in case there isn't, in the country, a very clear driver of growth. For example, in so-called balanced growth models, these countries have the luxury of being able to rely on different drivers at different points in the economic cycle, exports or consumption. In this case, partisan competition may actually be about key policies for the growth model, key growth strategies. But that's not always the case.

MARK BLYTH: So let's play a little bit further with this. If we're in this moment of crisis just now, which seems to be the case, you do see in a sense the Germans doubling down on the growth model very visibly. There's all these commitments, for example, as you've said to green investment, et cetera. Also military spending is meant to be up. But now, guess what? The Black zero is back balancing the budget, which seems to be an integral part of that growth model and this is defending the growth model.

In contrast, I find Britain fascinating just now because the defenders of the growth model, traditionally, the Conservative Party, seem to have well and truly screwed it over and it's no longer working. And yet the incumbent opposition, the Labor Party seems unable to fully articulate what another growth model would look like. Would you say that's a fair analysis using growth models to think about the current moment?

LUCIO BACCARO: I will talk about Germany briefly. So yeah, the situation is very much in flux. I mean, the finance minister has announced the return to austerity. At the same time, we are now in a very peculiar situation in Germany where inflation is fairly high. It's actually higher in Germany than in Southern countries like Spain or Italy or France, at least core inflation. So things are in flux.

From several points of view, you would say that the instinct of the export led growth model is kicking in. So return to austerity, an attempt to clamp down on inflation as quickly as possible in order to protect or even increase competitiveness. But at the same time, I also see a shift, an attitudinal shift in key German elites. I mean, certain industrialists or representatives of employer associations seem to realize that in this day and age, you actually need a more expansionary fiscal policy.

You need a competition policy which is slightly laxer than it used to be because you have to face climate change, which requires massive investments, and they would want to state to chip in, and you will have to face a competition which is highly competitive coming from China in which the state doesn't restrain from state aid. On the contrary, the state is actually heavily subsidizing companies. So I would just say that, yes, growth models is clearly, in my view, rich enough as an intellectual conceptual tool bag to deal with these issues. I don't know how it's going to end up. I mean, things are in flux.


JONAS PONTUSSON: I wanted to make one point that I think is important for the podcast and for our volume, which is, we sometimes end up talking about it as if there were two growth models-- consumption led growth model and an export led growth model. And I think that we should or I want to qualify that, and I want to qualify it because this theoretical framework that we've been trying to build, in some sense, is meant to be an alternative to the theoretical framework of varieties of capitalism.

And I think that one of the problems with the theoretical framework of varieties of capitalism was that it ended up with a typology in which there were two types, and there were coordinated market economies. And there were liberal market economies. And if you were a liberal market economy at the end of the 19th century, you would still be a liberal market economy at the end of the 20th century, and similarly for coordinated. So it was-- became a fairly static and very much a classificatory exercise.

There are export led and there are consumption led economies. There are varieties of export led, and there are varieties of consumption led. And I think that we have-- that is already in the Twenty Sixteen article, but I guess I want to emphasize that. And I think that some of the debates going on right now is not about choosing consumption led versus export led perhaps, but choosing which kind of export led or which kind of consumption led.

In the volume, we also talk about East European countries that are exporters of intermediary goods that are part of the supply chain of German export oriented companies, for instance. And we have a chapter on Latin America where exports are primarily agricultural and raw material goods. And similarly, with respect to consumption led, consumption can be financed through credit, it can be financed partly through wages.

And I think in some countries, wage growth has been an important source of financing consumption since the crisis and before the crisis, and also, consumption can be financed through tax transfer systems. To me, it's important to emphasize that our framework, at least as I conceive of it, is not binary. There are many varieties, and there's more than two types of growth models. And as a result, countries can change more readily or there is more room for hybrids and for transitions over time in the kind of export oriented model or kind of consumption led model.

Because otherwise, I think a lot of people coming out of a variety of capitalism tradition look at this and they say, well, you've just created other labels for the same types that we had before. The coordinated market economies are export led, and the liberal market economies are consumption led. And in that sense, it's just different words for the same thing. And I want to insist on that not being our contribution.

MARK BLYTH: So let's explore that a little bit further because I think that's actually really important. I mean, a key focus of the volume as we put it dynamics rather than statics. And whilst one can come up with types, this is not an exercise in typology. And the way that I think about this-- and I just invite Lucio to say a bit more about this because this is really home turf for him, is that's not the theoretical core. When you're doing typologies, you do a scatter plot.

You have some vectors you look at what they have in common, and then you say, that's what generates the types. We're not doing that. There's a set of key ideas here about demand drivers. There's a set of key ideas about the type of institutions that produce certain types of growth. And there's also this key idea of disequilibrium that things change over time and the growth drivers and the overall growth model changes over time. So Lucio, if you were to basically say, OK, here's the theoretical core, here are the absolutely essential core components that makes this machine go, what is that?

LUCIO BACCARO: First of all-- I mean, I think the book as a whole gives up on the idea that there are these institutional equilibrium.


LUCIO BACCARO: Equilibria namely situations that are star 6 points out of which no actors has incentives to go. And it resuscitates this analysis of capitalism as endogenously unstable, which was originally formulated by the regulation school. So that's the first key point. The second key point is that you need to take the dynamics of aggregate demand, the composition, and the distribution of aggregate demand.

Seriously, you have to take macroeconomics seriously as well, you have to exploit pluralism in macroeconomics. And in particular, there is this tradition, which is not as famous as mainstream macroeconomics, that emphasizes the long term effects. Not just the short term, but also the long term effects of aggregate demand, including for the supply side. So including for productivity and innovation.

The third is this idea-- I mean, we had the ambition to produce a theoretical framework that could reconcile the analysis of common frames-- common trends. Common trend towards liberalization or common trend towards financialization with an analysis of country level-- not necessarily country level, local specificities. And we would be able to articulate the relationship between, as you put it, the system and the units.

The fourth insight is-- and there, I want to hear your view, is-- I mean, we thought that it's-- in order to understand the trajectory of capitalism, one has to go beyond this boundary between comparative political economy and international political economy, and needs to mobilize both. Which is the reason why the two of us got together with you because we wanted to accomplish that. So I want to ask you whether in your opinion, we have actually accomplished this overcoming of differences in boundaries between CPE and IP?

And the fifth theoretical point I think is something that Jonas has already talked about namely a new conceptualization of politics that tries to steer a mid course between producer group politics and this electoral revolution that attributes all policy outcomes to electoral dynamics and partisan dynamics. Yeah, those, I would say, are the five key theoretical points.

MARK BLYTH: So I'll happily pick up on the fourth one briefly. We're going to talk about this in another podcast. But the international side of it, of course, is crucial. I mean, the notion of a global economy is little more than a cliche, but is at the same time an ever present reality. When varieties of capitalism was being put together, China wasn't even on the conceptual map. And yet now it's the second largest or depending on how you count it, largest economy that's out there.

You can think of the world as a series of discrete nation states that are linked by treaties and other formal devices, for example, the European Union, or you can think about it as global firms with integrated balance sheets and operations across multiple countries, and that gives you a very different picture of what's going on. I would say the ambition that we have, which is, obviously incomplete, but we've got a good start on it, is to start thinking about how growth models interact with each other and how they enable each other. That's a systemic rather than a unit level property.

A good example of this being Apple is the most profitable company in the world mainly because of Holland and Ireland's tax shelter policy, which then gives them different financial leverage vis a vis other global firms. So you can see how these things are implicated in that way and integrated in that way. And another one that we do is we talk about-- and you briefly mentioned this, if you think about them at scale, China is not one growth model. It's an agglomeration of different growth models and different regional specializations.

And Latin America is fascinating. The chapter that we have on this is one of my favorite ones in the book because it points out that since Latin America was integrated into the global economy over 300 years ago, its primary purpose has been the production of specific commodities for other capitalist economies. And politics there can very usefully be seen as various attempts to get off of an agricultural exporting commodity standard as the business model of the continent as a whole.

So I think there are multiple ways in which the international and the domestic dissolve into each other without it becoming meaningless drivel. There are ways of bringing these perspectives together, the CPE and IP, I think, in very useful ways.

JONAS PONTUSSON: To me one of the key contributions of this framework is that the politics of macroeconomic management is brought back in a way to center stage, and is treated as a kind of distributive politics with different implications for different sectors and for different actors in the political economy. Whereas I think we ended up-- and this is not only varieties of capitalism, but I think a lot of political scientists working in this domain ended up thinking that the welfare state is about distribution of income. And that macroeconomic management is what's called a valence issue.

MARK BLYTH: Technical.

JONAS PONTUSSON: It's technical, and everybody likes growth, so there is no-- there are no interests at stake here in some sense. And I think that both bringing macroeconomic management to the fore and perhaps downplaying-- I'm being a little unfair right now, but a strand of my field of comparative politics seemed to end up thinking that vocational training was really the crucial issue that distinguished countries from each other. Some had vocational training, others didn't.

And I think obviously, the issues to do with interest rates and government deficits and government debt management, these things are much bigger issues and much more pressing issues in some sense. And they have distributive implications. To me, that really is an important part of what we're doing.

MARK BLYTH: Absolutely. We started this off and we thought about this first in a period when the word secular stagnation was the way that we thought about things, perhaps not in the summer's version. But nonetheless, a notion that interest rates are permanently low, inflation is nowhere to be seen, growth is low, and that has certain political consequences.

And now we are in an inflationary world, and it seems to be an inflationary world that even if this particular inflationary burst is transitory in some sense, as we move forward into a more climate shocked world, we will have shortages. Those shortages will be supply shocks. That will create volatility around prices. How does inflation fit into this framework? How does a growth models perspective help us understand an emergent world of inflation?

LUCIO BACCARO: Well, first of all, I'm not entirely sure-- I think nobody is sure whether we are in an inflationary world. I mean, it's-- I mean, an inflationary process has three phases. One is the shock phase, the impulse phase. Generally, a shock to the upstream sectors of the economy, the commodity and energy sectors. That phase has happened. It has happened twice. There have been two such shocks. First, the disruption of global supply chains as a result of COVID, and then there has been the effect on energy prices of the war in Ukraine.

The second phase is a phase of amplification. In this phase, firms downstream, not just upstream, defend their margins. And according to Isabella Weber's, some of them are actually increasing their margins because they have temporary monopoly power. But what's crucial to an inflationary process is the third phase. The entrenchment of inflation because the workers have real-- display real wage resistance, and they actively resist the cut in real wages and the decline in their share of product. Now, that third phase is a function of labor power and institutions. And I'm not sure that's going to happen.


LUCIO BACCARO: --because labor power is largely gone. So this may ultimately be a transitory phenomenon unless there are further shocks. There might be further shocks, in which case, I think we should prepare for them, including by adopting the measures that Isabella Weber advocates for, more active intervention of the state in systemically significant sectors. Now, suppose that we're going to have a third phase, we're going to have the entrenchment of inflation. Is growth model now obsolete?

MARK BLYTH: No, I wouldn't say that. I would actually go more like rather than as obsolescence, does it glean you extra insights? I mean, can we say that particular growth models are dependent on particular growth drivers are perhaps more or less susceptible to inflationary shocks? Will some growth models do better than others would be the way I'd look at it.

LUCIO BACCARO: Absolutely.

MARK BLYTH: OK. Jonas, let's bring this home. I just got to give the last one to you. What's missing in this volume and where would you like to take this framework next? Where do the uncharted territories where we can go with this?

JONAS PONTUSSON: So I think if I were to do it over again, I would have liked to have a chapter dealing with the public sector as a very important part of these advanced capitalist economies certainly in Western Europe. And by that, I don't mean the government and macroeconomic management, that's all already in there. But I think that the role of public services and public service employees-- and this brings perhaps gender in, that this is an important factor that we didn't really deal with very much.

And I would have liked to have a chapter talking about how the organization of the public sector and the size of the public sector fits in with the kinds of growth model dimensions that we talk about in the volume right now. I think the other thing that I would have liked to have a chapter on, and I think we actually tried to get a chapter on and couldn't find the right person or it didn't really quite work out, has to do with income distribution.

As Lucio said at the very beginning of the podcast, we were concerned about income distribution from the get go. And yet in the volume as it currently stands, I don't think there is a chapter that really tackles changes in income distribution over time, differences across countries, top income versus bottom income inequality. And I think there is a lot of room for further empirical work that would fit into and that would feed into and help us develop the model.

Last thing, perhaps we talk about politics, we talk about the politics of maintaining, sustaining growth models. We don't talk that much about the politics of choosing no growth models or I don't think we have a chapter in the volume right now that to my mind in a satisfactory way shows us how we would analyze the transition from one growth model to another.

MARK BLYTH: All right. Well, that's at least three areas that we can work on. And I'm sure there's many others we can think of and we are thinking of, but we will talk about some of those in the subsequent podcasts on The Volume. Gentlemen, thank you very much for, first of all, doing the book, it was really fun and informative, and thank you for doing the podcast.

LUCIO BACCARO: Thanks, Mike.

JONAS PONTUSSON: Likewise. Was really fun to work with you on the book. It's been a great experience.


MARK BLYTH: This episode of the Rhodes Center Podcast was produced by Dan Richards and Zach Hirsch. If you like the show, leave us a rating and review on Apple, Spotify, or wherever you listen to podcasts. And if you haven't subscribed to the show already, please do that too. You can learn more about what we covered in this episode and the other podcasts from the Watson Institute at Brown University by following the links in our Show Notes. We'll be back soon with another episode of the Rhodes Center Podcast Thanks.


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