IS THIS THE TWILIGHT OF THE “LIBERAL ELITES”?
Following “Brexit” (the British referendum decision to leave the European Union), the election of Donald Trump as President of the United States is another severe blow to the self-styled “liberal elites” that have governed the West since the early 1980s.
In both instances, voters defied the wishes of the vast majority of the political, corporate and financial elite, and made decisions that “experts”, and much of the mainstream media, regarded as dangerously misguided.
These outcomes can be baffling, until one point is noted – each establishment endorsement of Hillary Clinton delivered more votes for Mr Trump, just as each political, corporate or “expert” speech supporting “remain” won more votes for “leave”.
What is happening is a revolution, in the sense that society is engaged in the rolling repudiation of established elites. The significance of this is obvious, even though interpretation is made more difficult by an establishment mind-set of denial that is reflected, too, in much of the mainstream media.
Understanding the popular rejection of the elites is complicated, and this article has been through far more “rough drafts” than most. The best course of action is to set out a central point of view, and then discuss the reasoning behind that view. The focus here is on political change – part 2 will explore the economic implications.
The tide of events
We need to start by being clear that “Brexit”, and the election of Mr Trump, are not freak events, and that they were completely predictable. To those of us who have expected a popular backlash against the elite, the only real surprise is how long it has taken.
Just as these choices are not aberrational, neither are they reversible. Much of the British establishment hopes that someone – Parliament, the courts, the Scots, but even Batman and Robin would do – can either stop “Brexit” altogether, or water it down into meaninglessness. If this did happen, public anger would be likely to explode. Likewise, many in the United States hope that office will moderate Mr Trump. But, if the new president does not do most of what he has said he will do, voters will elect somebody else who will.
With hindsight, the 2008 global financial crisis (GFC) was the high-water-mark of the “liberal elites”. Incumbent governments succeeded in preventing the collapse of the banking system, but, in the process, surrendered so much of their political capital – in other words, their credibility with the public – that their demise became inevitable.
Are the “liberal elites” due for repudiation by the public? History suggests that three conditions are required for “regime change” of this nature.
First, an incumbent regime has to be seen as self-serving and exploitative.
Second, it needs to be regarded as arrogant, complacent and out of touch with the general population.
Third, it needs to be seen as having failed.
The public will tolerate self-enrichment, arrogance and incompetence, or even two of these in combination – but will not tolerate all three.
As a rider to this, regimes due for the chop are usually the last to know, and react to a popular challenge by retreating into denial. In deriding the population as misguided dupes, blaming “populist” agitators, and dismissing defeats as just “a little local difficulty”, today’s establishments are doing nothing that wasn’t done by Communist apparatchiks in 1989, Tsar Nicholas II in 1917 or the court of King Louis XVI in 1789. For this reason, we need to ignore the protestations of the elites, and disregard much of what is said in the mainstream media.
Two valid indictments
On two of the three “criteria of unfitness” listed above, incumbent regimes have already been convicted in the court of public opinion. The case against the elites on these issues does seem so self-evident as to need little comment.
Where being “self-serving” is concerned, the evidence is surely overwhelming. In terms both of income and of wealth, the gap between the rich and everyone else has widened dramatically. There is scant evidence that this is linked to merit, because “the system” has played far too big a role in the enrichment of a minority for this defence to be valid.
Big corporations are perceived by the public to have become too powerful, in that they stifle competition, interpret the tax regulations to suit themselves, treat both customers and employees with disdain, and exert undue influence over the political process.
The “revolving doors” between government and business have not been blocked, and the public is entitled to be more than suspicious of the generous remuneration of former politicians and administrators through consultancies and the “lecture circuit”. It defies popular credibility that the burblings of politicians in their dotage, or even their consultancy services, are remotely worth the huge sums paid to many of them. This being so, the suspicion is fostered that the enrichment of retired government figures is linked to influence. This inference may be unfair, of course – but appearances are often decisive.
The second pre-condition for repudiation, too – which is that the elite has become arrogant – also seems beyond dispute. This has been evident, first, in their imposition of their own values on the public through increasingly coercive enforcement of what is known as “political correctness”. Governments are entitled to take a moral lead on issues, but go too far when they start denying the right of free expression to those who disagree.
Second, there have been all too many instances of what looks like systemic unfairness. Bankers are rescued, but steelworkers, shop employees and pension savers are not. The vigour with which benefits cheats are pursued contrasts with very few prosecutions of wealthy tax-evaders. Behaviour treated as “fraud” when engaged in by individuals or small businesses seems to become “miss-selling” when practised by big companies. When corporations break the rules, it is always the shareholders, and seldom, if ever, the responsible executives, who are held to blame.
Policy has favoured the wealthy, both in inflating asset values and in failing to tax “unearned” capital gains more demandingly. Little is seen to be done to close tax loopholes from which only the wealthy benefit, whilst governments seem loathe to tackle “offshore financial centres” which are widely regarded as tax-havens. The latter would, in fact, be pretty easy to implement.
On the charges of being self-serving and arrogant, then, the case seems to be unarguable. What about the third, decisive charge – that of failure?
An exercise in failure?
Regimes which are both self-serving and arrogant can remain in power if they deliver economic success – the public may be prepared to accept a great deal of downside if this is seen as the price of growing prosperity. The public mood today, however, seems unconvinced by the elites’ claim that they are good at managing the economy to the collective benefit.
There are really two dimensions to this issue. First, has the validity of the economic principles and policies of the elites been proven by experience? Second, have ends justified means? In the current instance, this question re-frames as “has improvement in the general economic conditions vindicated the management of the incumbent regime?” The distinction here is that the public may be prepared to tolerate current hardship if they believe that this will result in longer-term improvement (an obvious example being public support for austerity during war). What they will not tolerate is unfairness that does not also serve the general well-being.
And this, essentially, brings us to one core issue – “globalisation”.
Globalisation – vision, or scam?
If “globalisation” simply meant spreading the benefits of development to emerging market economies (EMEs), few would have much reason to complain. The popular criticism of “globalisation” as it has been practised is that, far from seeking global development, it has been nothing more than a grubby exercise in profiteering through the reduction of wages.
Globalisation, its critics say, depresses wages at home, both by exporting well-paid jobs and by allowing immigrants to compete for less-skilled work. This accusation might not have been true had the aim of globalisation been to spread the benefits of development by boosting both production and consumption in the EMEs.
In fact, this was never the objective – the aim of globalisation, as it has been practised, was simply to reduce the cost of production, widening margins on goods and services still sold to Western consumers.
This has had two detrimental effects on the global economy. First, it has failed to grow demand in the EMEs, something which is necessary for balanced development. Second, it has driven debt levels sharply higher, initially in the West, but latterly in the rest of the world as well.
The linkage between globalisation and the escalation of debt is quite simple – with wages under downwards pressure, consumption could only be sustained by encouraging Western consumers to borrow the difference. A cynic would argue that this is why, over a period of decades, banking regulation has been relaxed, whilst credit has become ever cheaper.
On the facts
It would be hard to deny that the combined effect of regulatory and monetary policy has been to supply the debt needed to sustain consumption in the face of stagnant or declining wages.
This process of using borrowing to support consumption is evident in the data. Between 2000 and 2007, global debt (excluding the inter-bank or “financial” sector) rose by $38 trillion, or $2.20 for each $1 of nominal growth in GDP. Between 2007 and 2014, debt increased even more rapidly, growing by $49 trillion, or $2.90 for each growth dollar.
Even the “growth” denominator is suspect, of course, amounting to nothing more than the spending of borrowed money.
Closer analysis shows that the escalation in debt has taken place in distinct stages. Between 2001 and 2008, the brunt of new borrowing was borne by Western households, whose indebtedness increased from $16 trillion to $34 trillion. These households’ ability to borrow was maxed-out by 2008, despite the use of ever-riskier lending techniques (such as sub-prime, and the on-sale of packaged securities), which involved separating risk from return in ways that previous regulatory norms would not have facilitated.
Since 2008, the further increase in global debt has come from Western governments, and from the EMEs. The retreat from the borrowing-based “boom” of 2001-08 impaired tax revenues whilst increasing welfare demands. This, and the need to rescue an over-extended banking sector, forced Western governments to increase their debt from $26 trillion in 2007 to $46 trillion in 2014. Meanwhile, EME borrowing has surged, with China alone seeing its debt total rise from $7 trillion in 2007 (and just $2 trillion in 2000) to well over $30 trillion today.
Because, by 2008, servicing this global debt mountain – let alone ever repaying it – had become all but impossible, the authorities responded with ultra-low interest rates, pursuing ZIRP (zero interest rate policies), flirting with NIRP (negative rates), and even contemplating outlandish ideas such as “helicopter money” and the banning of cash.
All along, ordinary people have suffered, with wages falling behind even official inflation, let alone the cost of essentials. Though net household borrowing in the West effectively ceased in 2007, debt levels still remain far higher than in 2001. Some of the adverse side-effects of ultra-low rates are now becoming apparent, most conspicuously in the emergence of dangerous deficits in pension provision. The wealthy alone have prospered, most conspicuously from the inflation of asset values, and from generous tax treatment of capital gains created by monetary policy. Young people have particular reasons for feeling aggrieved at a system that has increased costs (such as housing) whilst exporting well-paid jobs.
If it is obvious – to everyone except the elites themselves, of course – that what is happening is a global repudiation, not a series of isolated events, it is equally obvious that solid logic informs the popular backlash. Self-serving, arrogance and a failure to promote the general good are valid accusations against the “liberal elites”.
For those elites, denial is as pointless as it is predictable. What is needed now is thorough-going, self-denying reform, whilst the scope for implementing reform still exists.
This does not, of course, mean that the “populist” agenda is the right one. In particular, protectionism is the wrong answer to the right question. A switch from monetary to fiscal stimulus does make sense, but isn’t as easy as it may sound, whilst the likelihood of higher taxes on the wealthy is, in itself, nothing more than the swinging-back of a political pendulum that had gone a very long way in the opposite direction.
In part 2, we’ll look at how the populist revolution could improve the economy – but only if its leaders and supporters are clear about what works……..and what doesn’t.