The Economic Dimensions of Democratic Politics

In an op-ed last week, The New York Times editor, David Leonhardt, advised voting for a Democratic Party candidate for president based on the enthusiasm he or she excites in you, but also on how well the candidate’s program appeals to economic populism.  “A substantial majority of Americans favor a populist agenda — higher taxes on the rich, better federal health insurance, more government action to create good-paying jobs and so on. The Democrats did so well in the midterms partly because of the populist campaign many of them ran…I think their best chance of winning in 2020 involves a campaign centered on fighting for working families.”

Over the next few blogs and reviews of several recent books on contemporary economics, I want to put forth an argument that, whatever the value of the first criterion for casting a vote to select a Democratic Party candidate, I suggest that, while fighting for working families is certainly legitimate, and both sides make a claim to do so, that should not be done on the back of populist economics. For what you sow, so shall you reap.

Republicans say their program of reduced taxes not only helps the rich but benefits the working individual by creating more jobs, creating a need for workers and a need to compete for workers which in turn will lead to higher wages for them. Democrats who follow Leonhardt’s lead think in terms of minimum wages, rules to strengthen collective bargaining, taxation policy that redistributes wealth rather than offering incentives for accumulating it and sometimes protectionism. Republicans supposedly support a balanced budget and then run up deficits their Democratic opponents are afraid of lest they be accused of ruining the economy. Republicans, therefore, set aside PAYGO, the congressional rule that increases in spending be matched by cuts elsewhere, when it suits them. The G.O.P. 2017 budget did precisely this.

Projecting an image of a Democratic Party in fear of budget deficits places restrictions on righting the wrongs of the past through increased benefits and laws to redistribute income. This was the position of Nancy Pelosi’s critics when she ran to be speaker of the House of Representatives. Pelosi, however, resisted their criticism and resolved to abide by PAYGO. However, economists like Paul Krugman argue that austerity and budget restrictions impede economic growth and lead to economic stagnation by ignoring or setting back the need to invest in infrastructure and in human resource development for example. I want to question whether either approach is better or worse, or even whether a choice has to be made in the face of the globalizing technological economic forces driving modern economies.

This Central debate within America has to be set within what is taking place on the global level. Richard Haas, and many others, look upon what is happening with an apocalyptic lens. The liberal world order, which began in the seventeenth century and was greatly expanded and refined after WWII with a set of institutions, is at the beginning stages of disintegration. That order was based on an idea of promoting the economic well-being of everyone on this planet by constructing an international system based on the rule of law and respect for the sovereignty and territorial integrity of each country within a world order.

One factor that has contributed to the disintegration has been the very instruments seen to be the culmination of integrating the whole planet, namely the internet and, more specifically, social media. For what set out to enhance worldwide communications has created a crisis for open societies and the freedom of the mind that was the pillar of the liberal world order. George Soros as Cassandra has written that, “The current moment in world history is a painful one. Open societies are in crisis, and various forms of dictatorships and mafia states, exemplified by Vladimir Putin’s Russia, are on the rise. In the United States, President Donald Trump would like to establish his own mafia-style state but cannot, because the Constitution, other institutions, and a vibrant civil society won’t allow it. Not only is the survival of open society in question; the survival of our entire civilization is at stake. The rise of leaders such as Kim Jong-un in North Korea and Trump in the US have much to do with this. Both seem willing to risk a nuclear war in order to keep themselves in power. But the root cause goes even deeper. Mankind’s ability to harness the forces of nature, both for constructive and destructive purposes, continues to grow, while our ability to govern ourselves properly fluctuates, and is now at a low ebb.”

Soros is far from alone. Who would know better than John MacWilliams, who heads the Department of Energy where the internet was invented? He insisted that whenever we interact on a telecommunications device, someone not invited is listening. In fact, many are listening. Michael Lewis in The Fifth Risk, which I will review, dubs this the first risk. When married to the fifth risk, the failure to manage this (and other risks) by denigrating management in favour of ideology, by denigrating knowledge in favour of ignorance, offers the anti-intellectual tools to destroy the modern liberal order.

Why the increase in quasi-fascist and fascist states? Because the policeman (America) of the world has given way and surrendered the responsibility of regulation. Democratic values were viewed initially as being protected by military interventions and crusades. That resulted in a propensity to concentrate power in hegemonic states, unfortunately.  International institutions were created to foster a world of interdependence that could counteract that propensity. The result, as Joseph Nye and others argue, was an unprecedented level “of prosperity and the longest period in modern history without war between major powers. USsis leadership helped to create this system, and US leadership has long been critical for its success.”

However, in our digital age, giant, mostly American, platform companies have turned the greatest political power ever seen on this earth into an impotent giant as companies, that initially played an enormous role in innovation and liberalization, have fallen into the hands of interests which are primarily transactional, focused on promoting consumption rather than liberty in what Yanis Varoufakis dubs “the relentless commodification of privacy.” That, they argue, has made privacy and individual autonomy no longer possible. Innovators, like Mark Zuckerberg, have lost control of the Frankenstein they created.

Pseudo-knowledge – actual false claims – become the headlines people absorb and think of as knowledge. The weighing and evaluating of conclusions are set aside in favour of mass appeal. Sound bites are the clowns of this pseudo-cognitive world, sweeping minds and feelings into mass hysteria. Stop the merry-go-round. I want to, I need to, get off.

However, when it comes to the real world, our material world, our world as understood through economic science, the conclusion that the world is going to hell in a handbasket is offset by the cheery remarks of a leader that the country has the lowest unemployment levels and extraordinary rates of growth of that economy, blissfully ignoring the forces building up. Many if not most analysts see a collapse on the horizon. The volatile Wall Street stock market is just the foreplay for a 2020 depression that will make 2008 look like a blip on a screen and even the mode of management in 1929 seem like a cakewalk.

The fiscal policies of the U.S. are viewed as unsustainable. The period of sustained and synchronized growth has lost steam and is nearing a collapse, Unlike 2008 and 1939, governments no longer have the tools to reverse course according to Nouriel Roubini and Brunello Rosa.

2019 is supposed to be the tipping point with the U.S. running up unprecedented deficits, China has responded to the American-initiated trade war with even looser fiscal and credit policies as Europe limps badly as it still tries to recover from the centrifugal fragmenting forces threatening to throw a united but fragile unity into dozens of pieces. The protective devices of banking unification are proceeding too slowly and are too weak. Fiscal policy coordination is inadequate as political rifts and schisms grow exponentially. Political uncertainty across Europe, especially in the mainstays, France and Germany, grows as the domestic drivers of economic growth weaken and exports suffer because of the American-led trade war with China on a macro scale and the cancellation of the American decision to lift sanctions on Iran decrease trade on a more modest level.

Why? For many, the new communications system and the digital age are not the primary villains. Neoliberal ideology and “public choice” theory emphasizing the reversal of the regulations introduced following the 2008 crisis, are. The dominant economic model is becoming totally incongruent with the actual historical patterns on the ground which demand and need much greater intervention and management of the economy rather than greater anarchy. In spite of many efforts in place, the policy direction is working in reverse even though, in Europe, there is at least a plan in place to counter these trends and to maximize economy strengths in ingenuity and high-end manufacturing.

We have a communications crisis. We have a fiscal crisis. We have a governance crisis. In a globalized economic world with a pressing need for global management of a natural climate crisis of unprecedented proportions coming at us, we need more integration, not less, more governance not less, more regulation not less. But the signs of an emerging system of global governance are all pointing in the wrong direction. The tide of increased global trade that has contributed so much to rising worldwide prosperity is in retreat as the global trade game has shifted from free trade to increasing reliance on mercantilism, that is, regulation and intervention precisely in a way it is not only not needed, but is destructive to the international order. And central banks can no longer cope with the variety and size of the challenges that states face.

The startling part of it all is that we are just on the edge of vast improvements in productivity resulting from the digital age as machines not only replace the need for our muscle. Artificial intelligence is on the brink of displacing many levels of decision-making that can be better managed by electronic rather than by human intelligence. Look at how out of synch economic policies are. Tax policies in the U.S. and elsewhere increase inflation and impede investment just when more intelligent management of the economy is needed, not less. Most of all, there is public discord that grows as economic inequality grows and as the graduates of even our universities no longer see a route to owning their own homes unassisted by inherited family wealth.

In other words, the problem is not just economic disruption, but an earthquake taking place in our institutions of governance both domestically and internationally. On the macro scale, even as Democrats re-energize themselves in America, the institutions of liberalism and democracy appear to have weakened so much that salvation appears almost impossible. On the micro level, our youth face a housing crisis and young families face an eviction crisis as they face mortgage renewals at rising rates that they cannot support. At the same time, all my moves, all my plans – for travel, for work, for leisure – to eat, sleep and be merry – are being tracked as advertisers both monitor and target our desires. The surreptitious mapping of our habits and desires work to erode autonomy and individuality. Freedom then becomes reinvented as celebrity. Glitz and glamour displace gravitas and critical reflection. And opinion displaces fact as a foundation for decisions.

On a more mundane, but the most painful level, debt is punted down the line to future generations. Further, the problem is not only the exploding federal debt, but, as Carmen Reinhart has written, the high issuance of corporate collateralized loan obligations (CLOs), the new temptress on the financial runway that has pushed corporate bonds aside. High-yield corporate debt instruments are the emerging market within the U.S. economy, but the rapid rise is even greater in Europe where yields are even higher. Of course, these are of very different order of magnitude than in 2008, but they hit the productivity rather than consumer side of the market. Thus, these could be the equivalents of the high-interest poorly secured bundling of mortgage obligations in the first decade of this century that led to the 2008 financial crisis as the money is borrowed by weaker corporations and with more questionable valuation of the collaterals. And the debt is arranged through third tier lightly regulated banks. Do all capital surges end badly?

Unprecedented unemployment levels, owing almost entirely to the rapid increase in the service sector, in the atomized environment of outsourcing, does not produce increased income resulting from increased competition for workers. Expected increases in income have not been forthcoming. Thus the rise of Trump in America, of the Brexit fiasco in Britain, of Macron as a fleeting shooting star, not to count the quasi-dictatorships in Russia, China, Poland, Hungary, Turkey, the Philippines and Brazil, to list some of the major ones which still exclude totalitarian oppressive regimes such as North Korea or Myanmar, and imploding governments such as that of Venezuela, are all part of this trajectory towards disaster.

The rise of populist political parties and leaders with increasing influence almost everywhere threatens economies that depend on facts, on analysis, on knowledge-based decisions instead of whims and ignorance. Trump and other leaders on the right avoid comprehensive and coherent policy platforms for they are impossible to come by in an era dominated by ignorance and impulse, lies and braggadocio. Agility declines. Rigidity sets in.

Other Cassandras, such as George Brown, appear as optimists, for they still believe that steps can be taken to save the world from the collapse of a liberal globalization and a planet destroyed by climate change. How appealing then are the corrective measures promoted by The New York Times editor, David Leonhardt? There are two: based on enthusiasm in a candidate for public office who excites you; and choosing on the basis of how well thought out a program the candidate offers that simply appeals to economic populism. I will argue that they feed the beast rather than stopping it in its tracks.

Reviews of economic books follow.

 

With the help of Alex Zisman

One comment on “The Economic Dimensions of Democratic Politics

  1. ‘while fighting for working families is certainly legitimate, and both sides make a claim to do so, that should not be done on the back of populist economics. For what you sow, so shall you reap.’

    Economists, following Condorcet, believe that ‘populist’ policies (i.e. one’s which command a majority, or if there is a lot of noise, then a plurality of a certain sort) should be followed where a random voter has a better chance of being right than wrong about the outcome of that policy. Unfortunately, this does not get us very far. It only applies to choice situations where risk can be ‘factorized’ into probability distributions. Our evolutionary fitness landscape is not like a complicated casino game. It features radical uncertainty which is ‘gunky’ in the sense that all its parts are equally uncertain. Once we admit that Uncertainty underlies all Economic, as opposed to Chrematistic, processes, we see that Knowledge is different from Information. It has a special feature which, following Kirman, we can call ‘organisational’ in the sense that to know something is to have a conceptual tie to action of an essentially collective, organizational, sort.

    Prior to the early Seventies, it was assumed that the progress of Science & the Law of Large numbers was enough to defeat Knightian Uncertainty. Indeed, maybe we could derive ‘shadow prices’ as good as any created by the Market just by looking at the Supply side of the equation. However, both the Marxists and the Neo-Liberals were disappointed to see that Mathematics refuted any such complacency. General Equilibriums are ‘anything goes’. This is a good thing. As a species, it means we can baffle a predator or parasite or side-step any other sort of Nemesis because of our innate ability to collectively screw up!

    Sadly, the ‘Rocket Scientists’ in High Finance didn’t get the memo and so there was a brief moment of anxiety a decade ago because it wasn’t clear that
    1) the State could assume the downside risk
    2) the West doesn’t matter very much. The White Man’s burden can easily be redistributed to lesser breeds without the Law.
    3) Universal Rights are not incentive compatible. Their vendors are Madoffs. We have to go back to idiographic mechanism design and ‘Tiebout models’ (i.e. subsidiarity based local or regional ‘mixes’ of taxes/public goods) and…actually the sort of thing which enabled Israel to break all the laws of economics and do well despite having a first rate economist- Patinkin- in charge. Why? The economic and military survival of Israel depended upon finding ‘co-evolved’ processes to get the better of Knightian Uncertainty. We may speak of Israel as continually making losing bets and yet- by Parrando’s paradox- coming out the winner!

    Knowlegde is about co-evolved, essentially organizational (in Alan Kirman’s sense) processes not changes in the information set.

    Adelman’s own work- to my mind- has this quality of being epistemically quite humble yet engaging and involving a conceptual tie to action of an essentially qualitative or ‘organizational’ type.

    Having said that, let us address the elephant in the room- viz ‘working families’- and what they are likely to look like in Advanced Capitalist countries. Being dark skinned myself, I hope no one will take offence if I point out that recent less skilled migrants may, for purely economic reasons, follow a different reproductive strategy from the median voter. Furthermore, ‘assortative mating’ is likely to take a higher toll on precisely the demographic group which possesses more status signals. Even a small female preference for hypergamy- or, in some communities, a husband with a job not a rap sheet- can have dramatic effects. Moreover, if young females are more mobile than men, you can have regional depopulation.

    It is far from ‘Racist’ to say Governments should return to the sort of ‘family friendly’ policies pursued in the Post War period such that the median voter felt demographically secure and could overcome the knee jerk prejudices of the inter-War period. Recent research shows that migration does negatively impact indigenous working class families and this has a knock on effect which can hollow out the middle class.

    This is something of a scandal for the faux Libertarian Right but it is also an opportunity for the Left. Why not steal the clothes of an Orban or Kaczynski? ‘Family friendly’ policies pay for themselves because families are a good thing. So are Communities. ‘Wedge issues’ recede where policy initiatives are idiographic and based on subsidiarity. Nomothetic or Universalist claims- though forgivable if raised by historically oppressed or marginalised people- can be self-defeating. By contrast, highly beneficial mimetic ‘demonstration’ effects spread rapidly through populations with relatively small mechanism design based tinkering.

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