The world is a mess.
As President Trump upends global trade through a punitive suite of tariffs and redraws America’s alliances, world leaders are scrambling to respond. They are badly placed to deal with such disruption: Across the world, governments have been losing elections — or barely holding on — in the face of rising discontent. From the United States to Uruguay, Britain to India, an anti-incumbent wave swept through democracies in 2024. But not only democracies are in crisis. China, too, is grappling with social unrest and economic instability. Strife, these days, is global.
There are many explanations for this sorry state of affairs. Some see rapid social change, especially around migration and gender identity, fueling a cultural backlash. Others argue that elites flubbed their pandemic responses or have grown detached from their populations, driving a surge in anti-establishment sentiment and support for strongmen. Another argument holds that algorithm-driven social media has made it easier for misinformation and conspiracy theories to spread, giving rise to greater volatility.
There’s something to each of these theories, to be sure. But there is a deeper force underlying today’s disarray: economic stagnation. The world is experiencing a long-term slowdown in growth rates that began in the 1970s, worsened after the 2008 global financial crisis and shows no sign of improving. Stuck with low growth, waning productivity and an aging work force, the world economy is in a rut. This shared economic predicament lies behind the political and social conflicts the world over.
The state of the Group of 20, a collection of the globe’s biggest economies, tells us a lot about the world’s economic health. The data is damning. Eight of them have grown by less than 10 percent since 2007, adjusted for inflation. An additional four are just above that bar. Some, such as India, Indonesia and Turkey, have maintained stronger growth rates, but most are experiencing prolonged economic malaise. In the past, G20 economies regularly grew 2 to 3 percent per year, doubling incomes every 25 to 35 years. Today, many growth rates are 0.5 to 1 percent, meaning incomes now take 70 to 100 years to double — too slow for people to feel progress in their lifetimes. The significance of that change can’t be overstated. Stagnation does not have to be absolute to collapse expectations: When people no longer assume their or their children’s living standards will improve, trust in institutions erodes and discontent rises. So why has growth slowed so starkly?
One reason is the global shift from manufacturing to services. This has stalled the primary engine of economic expansion: productivity growth. Productivity — the output per hour worked — can rise quickly in manufacturing. A car factory that installs robotic assembly lines, for example, can double production without hiring more workers, perhaps even firing some. But in services, efficiency is much harder to improve. A restaurant that gets busier usually needs more servers. A hospital treating more patients will require more doctors and nurses. In service-based economies, productivity is always slower to rise.
This seismic shift, in the making for decades, has a name: deindustrialization. In America and Europe, we know what that looks like: lost manufacturing jobs, amid declining demand for industrial goods. But deindustrialization is not limited to wealthy economies. The move from manufacturing to services is happening across the G20, dragging down growth rates nearly everywhere. Today about 50 percent of the world’s work force is employed in the service sector.
There’s another reason for global stagnation: slowing population growth. Birthrates surged after World War II, creating strong demand for housing and infrastructure construction and spurring the postwar boom. Demographers once assumed birthrates would stabilize at replacement level, around two children per family. Instead, fertility rates have tended to fall below this threshold. The trend, historically the result of families having fewer children but more recently of fewer people starting families, now affects Malaysia, Brazil, Turkey and even India.
This is a big problem for the economy. Shrinking workforces mean smaller future markets, discouraging businesses from expanding — especially in service-based economies, where, along with limited productivity gains, costs tend to rise. Investment falters. At the same time, a falling share of working-age people means fewer taxpayers supporting more retirees, driving up pension and health care costs and pressuring governments to raise taxes, increase debt or cut benefits.
In this stagnant setting, businesses have shifted strategies. Instead of reinvesting profits into expansion, hiring and innovation, many companies now focus on stock buybacks and dividends, prioritizing financial payouts that boost share prices and managerial compensation. The result is a vicious cycle of rising inequality, damped demand and low growth. This is happening the world over. No wonder the International Monetary Fund warns of a “tepid 2020s” — and that was before Mr. Trump started his trade war.
What is to be done? For some, artificial intelligence is the way out of the stagnation trap. If A.I. could improve efficiency in labor-intensive service sectors like health care and education, the argument goes, it could revive growth. But the productivity gains of generative A.I., for all the hype, have been limited so far, and it’s hard to see how the technology would translate into widespread improvements for core services. What’s more, A.I. advancements appear to be slowing rather than accelerating. Robots aren’t going to save the global economy.
Others see reindustrialization, under strict tariff protections, as the way to restore economic dynamism. That’s the wager, at least in theory, of the Trump administration. But here, too, there is cause for doubt. For one thing, the decline in manufacturing was not just about trade. Even manufacturing and export powerhouses like Germany and South Korea have seen industrial employment shrink. For another, the industries generally targeted for revival — semiconductors, electric vehicles and renewable energy — employ relatively few workers. The era when manufacturing could provide mass employment is over.
If productivity growth rates can’t be increased all that much, perhaps populations can. That’s the thinking behind natalists urging people to have more kids. Yet even countries with generous family policies, such as Sweden and France, have seen birthrates decline. The other option is high immigration, which remains the most effective way to sustain economic growth in aging societies. The United States has maintained stronger growth than Japan or Germany in part thanks to higher immigration, which has expanded the American labor force. But in these anti-migrant times, with Mr. Trump as president, this solution feels almost fantastical.
There are, however, two plausible ways to respond to stagnation.
The first is for countries to spend more, making use of deficits. Much has been made of the relative strength of the American economy compared with Europe’s. The key, if underappreciated, reason for this is straightforward: The United States has been running large budget deficits — averaging more than 6 percent of G.D.P. since 2009 — while Europe has maintained tighter fiscal discipline.
Deficit spending can stimulate growth, particularly when directed at public investment. A major push toward a green transition, for example, could drive economic activity for years to come. Even in Europe, where fiscal restraint has historically been stronger, governments are now preparing for a wave of deficit spending modeled on the American approach — though much of it is focused on national security and military expansion rather than economic renewal.
The second approach is redistribution. In the past, the primary rationale for policies that enriched wealthy households was to stimulate growth from the top down, but this strategy has evidently failed. Instead, governments could place much higher taxes on the rich and redistribute income to the rest of society. That would be an uphill battle in the United States and elsewhere, admittedly, but it would bring big benefits, improving consumer demand and strengthening markets both domestically and internationally.
The goal should be not just to raise income levels, which studies show are increasingly disconnected from happiness, but also to build more stable and equitable societies in a slower-growth world. That requires investing to improve people’s lives: repairing ecosystems, rebuilding infrastructure and expanding housing. Doing so could also help create conditions for poorer nations to pursue export-led development on fairer and more predictable terms.
That wouldn’t automatically bring global stability, of course. New political conflicts would surely arise as this alternative future takes shape. But with the way things are going, it certainly seems worth a shot.
This article originally appeared in The New York Times.
