It's over, yet it isn't

At the time of writing we still do not know who has won the 2020 US Presidential election. Whilst it matters profoundly who gets the keys to the White House, many of the issues raised during the election campaign will remain unresolved. Above all else the election reminded us just how split the US is along cultural lines. It is not my intention to get into the details of how Trump might react if he were to narrowly lose the election or the actions Biden might take if he were pipped at the post. Such issues are well covered in the press (here for example). I wish to focus instead on what the election tells us about the nature of the economic and political system in the US (and maybe also the UK) and what the next four years are likely to bring.

We should start by pointing out that the US is not the only country going through some sort of existential political crisis. I have been highlighting such issues in the UK on this blog for quite some time, but the splits on the other side of the Atlantic have existed for longer and are more entrenched. Indeed almost 15 years ago – long before most people had ever heard of Obama – the academics Mark Brewer and Jeffrey Stonecash argued that the cultural split on social and religious lines is only half the story. Division is also fuelled by differences in income and economic opportunity, as I pointed out a few weeks ago.

With the benefit of hindsight I am not sure whether Obama’s message of hope in 2008 would carry the same resonance today, even though many of the problems remain the same. Perhaps what the US election makes clear is that we are not about to return to a world of consensus anytime soon. Trump is not an outlier representing a deviation from the norm. He is the embodiment of a large slice of the electorate that wishes to overturn the status quo because it has not worked for them. I have made the point repeatedly in recent years that governments promised a quick return to the good times following the GFC in 2008 but have on the whole been unable, or unwilling, to deliver. This was partly a consequence of deliberate actions, with the likes of the UK introducing a policy of fiscal austerity which made such a major contribution to the Brexit vote. In the euro zone it was more by accident than design but simmering tensions between southern Europe and their northern neighbours remains a fault line at the heart of monetary union.

In the US the widening gap between the haves and the have-nots is the result of benign neglect. Trickle-down economics, a corner stone of Ronald Reagan’s policies in the 1980s, has never been repealed but it increasingly appears to be leading to adverse outcomes. Research into US wealth and income equality conducted by the Pew Research Center throws some light onto why people are so dissatisfied. Average household incomes in real terms have basically stagnated over the past 20 years, growing at a miserable 0.25% per annum. In the preceding 30 years they grew at an average rate of 1.2% per year. To put it another way, real incomes are more than 20% lower than they would be had the trend over the period 1970 to 2000 been sustained. Moreover the data also show that households at the upper end of the earnings scale have continued to outperform those lower down the scale.

A similar story holds for wealth where growth in the wealth holdings of upper income families has outstripped that of lower income families. Indeed the disparity has widened in recent years, with the real value of wealth holdings for upper income families having risen since the turn of the century whilst those lower down the scale have seen the real value of their wealth holdings decline (chart). The Pew Center makes the point that high income households are less dependent on the value of their homes to generate wealth and are more likely to hold financial assets whose value has been boosted in the low interest rate environment. It does therefore seem to be the case that policies to boost the stock market really do benefit the already-rich at the expense of the less well off.

It seems obvious that the widening disparity between the rich and the less well-off is a key reason why people continue to vote for Trump. Whatever people may think of him, his electioneering is touched by genius – a multi-millionaire pretends to be on the side of the little guy, promising them they will be better off under his presidency whilst the policies he espouses, such as tax cuts, benefit Trump and his ilk. Throw in the smokescreen of blaming foreigners (in this case the Chinese) for US economic woes and he has it made. However, Trump has done nothing to make life better for his core voters. The way to alleviate some of their problems is to apply a redistributive fiscal policy but that is not going to fly in a country which sees such options as heretical socialism. Indeed, the Republicans hate Obama’s signal policy on healthcare reform because it seems so un-American.

Whoever is the next President is unlikely to redress the balance by raising taxes on higher earners. Bernie Sanders tried to popularise such a policy and look where it got him. However, under a Democratic President there might be a move towards increasing spending. Modern Monetary Theory (MMT) is popular on the left wing of the Democratic Party and may make small steps towards the mainstream. This policy (which I looked at here) in effect suggests that because governments are the monopoly supplier of money they can provide unlimited quantities of liquidity without creating inflation. There is a lot wrong with the economics of MMT – it’s the Democratic equivalent of trickle-down – but it might spark a bigger debate about how to boost public spending to benefit those left behind. The Republicans do not appear to have any new economic ideas other than more of the same. However, this will not help the left-behind and will likely lead to greater stridency as both sides continue to shout at each other across the divide.

There is little doubt that the US, like the UK, needs a radical economic and political overhaul. This is simply not going to happen. As the neoconservative commentator Bill Kristol noted in an article today, the day after the election can be characterised as a mixture of the good, the bad and the ugly. In his view, the good news is that Joe Biden is more likely to be president than Donald Trump – and this from a leading light of the neocon movement. The bad is that the election will leave both the Republicans and the Democrats worse off than before, since the fairly even showing of both parties does not suggest any incentive to rethink their strategy. The ugly is that “after four years of seeing Donald Trump govern … the American people rewarded President Trump with an increased share of the overall vote. To some very real degree … We have met the enemy and he is us.” Whoever occupies the White House in January will continue to face a restive electorate.