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The age of wealth accumulation is over



About four decades ago, America began the developed world's last major economic paradigm shift – the supply-side revolution.

Tax on capital gains was cut. President Ronald Reagan and Britain's Prime Minister Margaret Thatcher took on air traffic controllers and coal miners. The power of trade unions faded and the strength of the companies. Some people became very rich. But inequality increased, and gradually the overall trend growth slowed.

When I looked at the first debates of the Democratic presidential debate last week, I couldn't help but think that we can witness the next big shift, from a time of wealth gathering to one of wealth distribution. Moderators like Joe Biden and John Delaney tried to argue for answers mid-way in questions like health care and trade.

But the pole positions were set by Bernie Sanders and Elizabeth Warren, who have similar views on everything from shifting Americans to a national health care system and relief for debt-protected students. Both are also seeking higher taxes for the wealthy and tougher rules for companies.

Although little of this seemed radical in many other parts of the world, in the context of American politics, it was really something new. The set point for economic debates, even for Democrats, used to be how the government could help markets work better. Now that is how the public sector can tame them and divide the economic sector more fairly.

It's more, it's not just the democrats. Some Republicans are also looking for a paradigm shift. Marco Rubio, an influential Republican senator who hopes to be president someday, recently published a paper on the problems of shareholder capitalism and the benefits of industrial policy.

The signs of this new era after the supply side are all around us. Witness the emergence of B companies, which balance objectives and profits, and the growth of investments based on environmental, social and governance factors.

In government, note the growing bipartisan enthusiasm for tougher cartel control and calls for trade protection, as well as attempts to politicize the US central bank. It's not just President Donald Trump's tweet seeking interest rates, but also progressive Democrats who see "modern monetary policy" as a way to pay for their priorities without having to fund them through tax cuts that Congress has agreed to.

These views are increasingly part of the mainstream. Last week, two senators introduced a two-party bill that would force the Fed to devalue the dollar to boost exports and balance operating accounts with China.

This is not a passing populism, but something much bigger, argues Kiril Sokoloff, founder of 1

3D Global Strategy & Research, which has been at the forefront of recognizing previous turning points, from supply-side economics and the declining inflation that began in the early 1980s, to the rise of China and the proliferation of smartphones. "What we're seeing is a setback to the second gilded era, and it will have a huge impact on the world – and the markets."

A likely impact will be fundamental changes in who owns the assets. The Democratic race reflects the growing conflict between two primary American voting groups – baby boomers, represented by candidates like Mr Biden, and the Millennials, who supported Mr Sanders in 2016, and now like him and younger candidates like Pete Buttigieg. A decade of loose monetary policy has come to the former, which has seen its assets valued, in favor of the latter, who cannot afford to recover on the housing ladder.

One of the major political struggles will be over who gets the part of what appears to be a slower growing sector in what appears to be a slower growth economy.

Another struggle will be between capital and labor. Rising wages are taking a chunk of the US companies' profit margins, and they should, frankly. When consumer spending accounts for 70 percent of the economy, we need a little bit of wage inflation to make sure people have money to spend. This is especially true at a time when the authorities are not investing, and the transition from a tangible to an intangible economy has led to reduced capital expenditure in the private sector.

But it has taken trillions of dollars in unconventional monetary policy to boil up relatively small wage increases. And for many Americans, the gains are immediately eaten up by increases in health premiums or prescription drug prices, two other hot topics on the campaign trail. This is one of the reasons why there is now broad support for higher taxes on the richest.

It remains to be seen when and what form of tax increases will take. But the age of asset allocation is coming and will have major investment consequences. The value of US equities has probably peaked, and hard assets such as gold, other commodities, housing, and even art – all of which are in fixed supply – can benefit from the equity and debt of multinational corporations.

This is not the end of the world – we have gone through cycles of wealth collection and distribution forever. But that means changing the rules of the road for investors. Some property prices may fall, but it is possible revenue growth will be higher. This would come with its own upside, financially and politically.

rana.foroohar@ft.com


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