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.

Get a grip

I received a text yesterday from an old friend who was incensed at the conduct of Boris Johnson’s government over the provision of free school meals to the children of poor families during the Covid-19 crisis. For those not following the story, the Man United footballer Marcus Rashford issued a plea to the government to continue the practice during the summer but the government announced on Monday that it would not do so. Following a host of bad publicity on social media, the government yesterday reversed its stance. In the words of my buddy, “The PM, no. 10 and the whole government have been made to look useless by a 22 year old footballer.” He went on to make the point that the government’s inability to make decisions on key policy matters is increasingly harming the electorate be it health, the economy or Brexit.

He speaks for many. Indeed, the United Kingdom could not be a less appropriately named country at the present time. For one thing the fact that the monarch is a woman makes it a Queendom, but perhaps more importantly it is far from united. It is fighting what appears to be a culture war in which the respective factions see only the righteousness of their arguments whilst dismissing those of their opponents. What passes for public debate takes place in an echo chamber in which the volume is being cranked ever higher (viz. the demonstrations in the streets last weekend) and matters have come to a stage where people appear to identify more with what they oppose than what they support. As an economist who still believes in rational evidence-based policy, this is all very disheartening. 

The origins of (culture) war 

Like many wars, the origins of the present conflict lie deep in the past and people may differ as to the proximate causes. For my money, a key turning point occurred around 1979-80 with the election of neo-liberal governments in the US and UK which subsequently gave primacy to the markets over the state and heralded the breakup of the post-1945 consensus. It unleashed a conflict between traditionalists and progressives, conservatives and liberals, hawks and doves etc. The shared values which had characterised the reconstruction of the post-war global economic order began to fray, particularly following the collapse of the Soviet Union. 

This was particularly apparent on the right of the US political spectrum, the lessons of which were absorbed by many in the UK. Remember the efforts by US Leader of the House Newt Gingrich to shut down Congress in 1995-96 purely for political reasons? Or the attempts to impeach President Clinton in 1998-99 as the political right became desperate to deliver a political knockout? This was followed by the rise of the Tea Party movement which subverted the Republican Party and propelled Donald Trump into the White House.

On this side of the Atlantic, the culture war has been fought less aggressively but it has been bubbling away nonetheless with some of the tricks from the US playbook having been adopted in the UK. The rise of the Tea Party is mirrored in the emergence of UKIP and the Brexit Party whilst the politically motivated Congressional shutdowns found expression in Boris Johnson’s attempt to prorogue parliament. The leitmotif of the UK culture war was Euroscepticism. Many Conservatives who never quite got over the deposition of Margaret Thatcher in 1990 rallied behind this cause, culminating in the Brexit referendum of 2016 and lighting the touchpaper of division which had been simmering for some time. For many on the right, Brexit represents the Trumpian equivalent of draining the swamp: It was the culture war writ large as Brexiteers made out that this was an opportunity for the politically disenfranchised to take back control. This was hogwash in 2016 and as the events of the past four years have shown, it still is.

Far from resolving anything, the divisions sown by Brexit have widened. The referendum was won by a narrow majority and the government has done nothing to assuage the concerns of those who voted Remain. And whilst it is true that in the December general election the party which promised to “get Brexit done” won the biggest parliamentary majority since 2001, much of the evidence suggests this was less due to the fact that people had a favourable image of the Conservatives than they had a negative view of the Labour Party under Jeremy Corbyn. 

Boris Johnson’s problems are piling up

Whatever else we may think of Boris Johnson he is a brilliant political salesman – he is, in short, a populist. He is also a product of the culture war in which his set of political values is rooted in a vision of a glorious imperial past. But this is where he may run into difficulty. The tectonic plates of the culture war have shifted – maybe temporarily but perhaps sufficiently to cause more permanent damage. This finds expression in the current strength of the Black Lives Matter movement, which runs contrary to the Johnson view of the UK’s imperial past and threatens to heap more trouble on a government which is now feeling the pressure (for German speakers interested in a Swiss perspective, I liked this article in the NZZ). 

His government’s handling of the Covid-19 crisis has been less than sure-footed and it has scored a number of own goals, most notably by failing to sanction Dominic Cummings, Johnson’s chief adviser, for breaking lockdown rules. It is also hard to imagine that the electorate will easily forgive the highest number of Covid deaths in Europe. We are only six months into what is scheduled to be a five year term for Johnson’s government. But the weaknesses inherent in his character mean that he has got off to a rocky start. As a populist, Johnson wants to keep as many people happy as he can but this is inconsistent with the credo of good governance which requires setting out a number of objectives and working out a plan how to achieve them.

These problems will be compounded by the fact the government will have to cope with the deepest recession in living memory. To turn things around from here requires discipline and hard work, neither of which the prime minister is noted for. I am reminded of the Conservative government of 1992-97 which was faced with an economic crisis early in its term (expulsion from the ERM) and which spent almost five years trying to get ahead of the agenda. It failed and was eventually swept aside by a Labour Party led by a moderate leader in the form of Tony Blair which condemned the Tories to 13 years in opposition.

This is not to say that we will necessarily see a rerun of the 1990s. But aside from getting Brexit done, it is not at all clear what Johnson’s government stands for. This makes it incredibly important that it gets Brexit right, by which we mean not compounding the economic damage. Failure to deliver on the signature policy at a time of mounting economic difficulties and the shifting sands of cultural change would end the career of most politicians. Boris Johnson is no ordinary politician but he has a lot of work to do to pull things around. Demonstrating leadership and running government to manage the country, rather than operating permanently in campaign mode, would be a good start.

1968 and all that

It is interesting how society forms a popular view of recent history which is constantly reinforced by talking heads in the media, many of whom were not even born when the events in question took place. For example, many people look back to the 1950s with great nostalgia. Perhaps for Americans, looking back to a time when the country was relatively untroubled by military failure and the Great Depression was a rapidly fading memory, this may be understandable. But we tend to gloss over the fact that the country was riven by racism, particularly in the Deep South, which a decade later was to give such force to the Civil Rights movement. Continental Europeans do not have the same yearning for the 1950s, largely because their economies were being rebuilt after the shattering experience of World War II.

There seems little reason to look back to the 1950s with any great fondness in Britain either. Admittedly, the country was living in the afterglow of having been on the “right” side of history in the post-1945 era and living standards were rising rapidly. But the economy was in effect bankrupt, struggling to earn enough to pay the interest on its wartime debt, whilst food rationing continued until the middle of the decade and the Empire was being dismantled. Although people did not realise it at the time, Britain was vacating its position at the top table.

I can well recall the 1970s, which are today characterised by their uniform awfulness when workers in “broken Britain” seemed to be permanently on strike and the country was apparently convulsed by social unrest. The Conservatives have spent 40 years playing on this image to remind everybody about the terrors of electing a left-leaning Labour Party. But it was nowhere near as bad as the popular imagination now believes. Britain at the time was still a major industrial power, albeit losing ground to Japan and Germany, jobs were fairly plentiful and for most of the decade unemployment remained relatively low - at its peak it was less than half the level of the early 1980s. Inflation was a problem but wages kept pace. The downside was that the economy’s global competitiveness suffered, but this was not evident in people’s day-to-day lives.

But it is the way that the 1960s are portrayed which I find most fascinating. The enduring image is one of cultural change – a decade characterised by an explosion in music and fashion, hippies and the Summer of Love. Not so long ago I recall watching a documentary in which an American academic described 1960s Britain as a time when “everyone” was living up to the idealised picture of the time, enjoying the music and taking the drugs. That was certainly not true of the childhood Britain that I remember, many of whose social structures were more closely related to the Victorian era than those of today are to the 1960s. For anyone who doubts that view, I would recommend dipping into the book by historian Dominic Sandbrook Never Had it so Good. One fascinating fact which summarises the difference between reality and recollection is that the album which spent the longest period at number one in the UK charts came not from The Beatles or Rolling Stones but was the soundtrack to the film The Sound of Music, which spent 69 weeks in the top spot compared with 30 for the Beatles 1963 debut album Please Please Me and 23 for Sergeant Pepper’s.This was a very conservative society.

It is the events of 1968 which resound so heavily today. My own memories of that year are pretty hazy, largely because I was only five years old, though two things stand out: my first day at school early in the year and the first manned orbit of the Moon by the crew of Apollo 8 just before Christmas. Sandwiched in between, and largely passing me by, were the ongoing war in Vietnam, the assassinations of Robert Kennedy and Martin Luther King and the student uprisings across Europe and the United States. In short it was a tumultuous period when governance appeared to be breaking down. 

I often wonder how I would have perceived that period had I viewed it through the eyes of an adult. Would I have been as bemused by the events of 1968 as I am by those of today, characterised by an American President who has been accused of “glorifying violence” as the city of Minneapolis erupted in protest at the death of yet another black man at the hands of the police? Would I have felt as outraged as those members of society protesting against social injustice in 1968 as those who are affronted by a British government which appears to believe that it can adhere to one set of rules whilst the rest abide by a different rulebook? And that is without considering the divisive effects of Brexit which, as I pointed out last year, is merely one front in a bigger culture war.

Perhaps what 1968 represented above all was the revolt of youth against a system which they perceived to be biased against them. This was the first roar of the baby boomers who have been running the show for the last 30 years. But maybe their time is drawing to a close. Although US voters may yet grant Donald Trump another four years in November, the boomers will soon have to cede to a younger generation with a different world outlook and different aspirations. As easy as it is to get carried away with recent events and conclude that we are on the slippery slope to a dystopian society, the lesson of 1968 is that positive change can come from apparent chaos.

Current events come against the backdrop of the Covid-19 crisis – an unprecedented event which is going to transform the structure and operation of our economies. Add in the desire for political change and the stage is set for a radical process of restructuring. We may not notice the difference tomorrow, or even next year. But it is a fair bet that in 50 years’ time, 2020 will go down as the year everything changed.

A battle in a bigger culture war

I have tried over the last six years to look at the Brexit question mainly in terms of economics and deal with the politics only in so far as it distorts economic decision-making. However, it is becoming increasingly clear that Brexit is merely another front in what can broadly be termed a global culture war, defined as a conflict between conservative and liberal values. Perhaps the reason why I did not originally recognise Brexit in these terms is that we have never experienced such a phenomenon in the UK. Maybe the Thatcher era in the 1980s can be classified as a culture war but it always felt more of an economic than a social project, which is how I view it even thirty years on.

The election of Trump and the ongoing Brexit debate are merely the two most obvious manifestations of this clash. But it is happening elsewhere, too. In the course of this afternoon, I happened to read two German language newspaper articles within minutes of each other.  The Frankfurter Allgemeine Zeitung led with a story about how the AfD in Germany “demands a "strong military" with "relentless" soldiers and a leading role in Europe. Their plans for the Bundeswehr are reminiscent of old times.” The subtext of the story was the appeal of the AfD to those wishing to relive past glories – something that the majority of Germans reject. Meanwhile in Switzerland, the Neue Zürcher Zeitung pointed out that not everyone holding views associated with right-wing politics are necessarily extremists (“to be against the "right" has developed into a kind of national  sport, particularly in Germany”). The warning from the NZZ was that we should beware the temptation to generalise, for in doing so we end up talking past each other and hardening attitudes rather than resolving our differences.

However, it is difficult to take such a stance when it has become apparent just how much damage is being inflicted on long-standing institutions in the pursuit of victory in the culture war. The office of President of the United States, to which large parts of the western world looks in order to provide moral and political leadership, is being used as a bully pulpit by a man not fit to occupy the Oval Office. The premiership of the UK is about to be handed to a man who has routinely lied in order to serve his own interests and is about to inherit a country whose institutions have been assailed as never before. Boris Johnson is one of the last people in politics to provide the sort of healing that his country needs.

Those promoting Brexit campaigned three years ago for a UK parliament to oversee UK laws (never mind the fact that it already did). Yet this did not prevent the government from trying to sideline it in a bid to deliver Brexit, and last year the government was found in contempt of parliament after refusing to publish the legal advice underpinning its Brexit decisions. Meanwhile the independent judiciary was characterised as enemies of the people whilst large parts of the press parrot politicians’ fact-free agenda, with one organ in particular paying a considerable sum to the man likely to be the UK’s next PM. The civil service has also come into the line of fire, with Sir Ivan Rogers,former Permanent Secretary to the EU, resigning in January 2017 when it became clear that ministers did not want to hear what he had to say. 

But the resignation of Sir Kim Darroch, the UK’s Ambassador to Washington, following the leaking of confidential diplomatic information to the press, represents a new and sinister turn of events. We do not know who leaked the information and we can only speculate on the reasons. But the Ambassador’s position was totally undermined once Donald Trump refused to negotiate with him (and in the process confirmed Darroch’s views). By politicising diplomacy in this way, a line has been crossed. In effect, the US President has exercised his authority to determine who represents the UK in Washington. Where will it end? So far, the politicisation of central banking happening elsewhere has yet to infect the UK, but with the successor to Mark Carney to be chosen by the new government it is something to look out for.

It is all very well for the revolutionaries to want to overthrow the status quo but what do they propose to replace it with? To quote the late British politician Tony Benn – a firebrand member of the hard left in his day – there are five questions that should be posed to those seeking power: “What power do you have; where did you get it; in whose interests do you exercise it; to whom are you accountable; and how can we get rid of you?” These are questions that apply just as much to the defenders of the status quo as those who wish to overturn it, but what concerns me most is that the rebels cannot provide good answers to the third and fourth of these.

Any Leave supporters reading this will no doubt dismiss the arguments as more scare-mongering on the part of one who will not accept the democratic will of the people to leave the EU. But this is a much bigger issue than that. Whether or not the UK remains in the EU is far less important than maintaining the institutional framework around which the economy (and indeed the whole country) is organised. In the words of the economist Douglass C. North, “Institutions are the rules of the game in a society, the humanly devised constraints that shape human interaction … They structure incentives in human exchange, whether political, social or economic.” Whether you are a Leaver or a Remainer; a liberal or a conservative; a supporter of the political left or the right, a country’s political and economic health is determined by the quality of its institutions. It is vital that they are not undermined.