Sunday, November 19, 2017

A primer on the rise of populism and a way forward

There are several narratives surrounding the rise of populism and events like the election of Trump and Brexit. I have written about it here, here, and here. This is an attempt at articulating the narrative based on news stories from the week.  

1. What is happening? The remarkable post-war economic, social, and political stability across developed societies, especially in the US, was built on an underlying consensus on certain values. This consensus revolved around the commitment to the values of free-market capitalism, liberal social order, and democracy. Political positions converged to reflect this consensus. 

But as the fascinating graphic below shows, this consensus has been breaking down and the median liberal and conservative positions in the US has diverged significantly over the past decade. 
2. Why is it happening? But this consensus was accompanied by a less benign bipartisan elite convergence (more of it latter) which effectively ended up capturing the economic and political establishment. 

The rapid and fairly inclusive economic progress achieved in the period helped underpin this consensus and paper over fissures that were developing due to forces like trade liberalisation, globalisation, de-unionisation, and skill-biased technological changes. But once growth started slowing, for a variety of factors, these fissures started to show up.

But mainstream political parties, captives as they had become of elite interests, failed to see the breakdown in social consensus. The liberal elites too became caught up in their rhetoric.    

Nothing has been more emblematic of this isolation of elites from the electorate than the staggering levels of economic inequality, which has been widening at a rapid pace since the millennium. As the graphic below shows, in the US, the share of national income going to the top 1% has nearly doubled from 11% in 1980 to 20% in 2014. 
While trade, technology, de-unionisation, immigration, business concentration etc played a role, Jonathan Rothwell argues, 
Almost all of the growth in top American earners has come from just three economic sectors: professional services, finance and insurance, and health care, groups that tend to benefit from regulatory barriers that shelter them from competition. The groups that have contributed the most people to the 1 percent since 1980 are: physicians; executives, managers, sales supervisors, and analysts working in the financial sectors; and professional and legal service industry executives, managers, lawyers, consultants and sales representatives. Without changes in these largely domestic services industries — finance, health care, the law — the United States would look like Canada or Germany in terms of its top income shares.
He also points to how the elite capture of institutions that sets the rules of the game have contributed to an elite premium and rapid widening of inequality,
The United States also stands out in terms of how much money its elite professionals earn relative to the median worker. Workers at the 90th percentile of the income distribution for professionals make 3.5 times the earnings of the typical (median) worker in all occupations in the United States. Only Mexico and Israel, which have very high inequality, compensate professionals so disproportionately. In Switzerland, the Netherlands, Finland and Denmark, the ratio is about 2 to 1. This ratio, the elite professions premium, is very highly correlated with income inequality across countries.
Others are noticing these trends. A new book, “The Captured Economy” by Brink Lindsey and Steven Teles, argues that regressive regulations — laws that benefit the rich — are a primary cause of the extraordinary income gains among elite professionals and financial managers in the United States and of a reduction in growth. This year, the Brookings Institution’s Richard Reeves wrote a book about how people in the upper middle class have shaped both legal and cultural norms to their advantage. From different perspectives, Joseph Stiglitz, Robert Reich and Luigi Zingales have also written extensively about how the political power of elites has undermined markets.
Problems cited by these analysts include subsidies for the financial sector’s risk-taking; overprotection of software and pharmaceutical patents; the escalation of land-use controls that drive up rents in desirable metropolitan areas; favoritism toward market incumbents via state occupational licensing regulations (for example, associations representing lawyers, doctors and dentists that block efforts allowing paraprofessionals to provide routine services at a lower price without their supervision).
Economic geography too has played a role. Richard Florida has documented the increasing trend of concentration of poverty, both across cities and within them. Defining concentrated poverty as neighbourhoods where 40% or more residents are below the US poverty line, he writes,
The number of people living in concentrated poverty has grown staggeringly since 2000, nearly doubling from 7.2 million in 2000 to 13.8 million people by 2013—the highest figure ever recorded. This is a troubling reversal of previous trends, particularly of the previous decade of 1990 to 2000, where Jargowsky’s own research found that concentrated poverty declined. Concentrated poverty also overlaps with race in deeply distressing ways. One in four black Americans and one in six Hispanic Americans live in high-poverty neighborhoods, compared to just one in thirteen of their white counterparts.
Similar concentrations can also explain Brexit. Sarah O' Connor has this fantastic essay on the declining fortunes of the once popular English seaside tourist resort town of Blackpool. The article shows how Blackpool has become "a net importer of ill health, unemployment, and precarious labour and a net exporter of good health and skilled labour". It talks about the "Shit Life Syndrome" that has contributed to a self-fulfilling downward spiral of despair and misery.
And this manifests in social problems that affect the current generation...
... and the future generation too.
See this commentary on the article by Ananth. The opioid epidemic that is sweeping large parts of the US mirrors Blackpool's problems across the Atlantic. And it affects all the similar groups of people.

3. So what can be done? The always incisive Dani Rodrik describes the political situation as a pooling equilibrium, recounts its consequences, and points to a solution to wean the electorate away from populist demagogues,
Conventional and reformist politicians look alike and hence elicit the same response from much of the electorate. They lose votes to the populists and demagogues whose promises to shake up the system are more credible... A pooling equilibrium can be disrupted if reformist politicians can “signal” to voters his or her “true type"... It means engaging in costly behavior that is sufficiently extreme that a conventional politician would never want to emulate it, yet not so extreme that it would turn the reformer into a populist and defeat the purpose. For someone like Hillary Clinton, assuming her conversion was real, it could have meant announcing she would no longer take a dime from Wall Street or would not sign another trade agreement if elected.

In other words, centrist politicians who want to steal the demagogues’ thunder have to tread a very narrow path. If fashioning such a path sounds difficult, it is indicative of the magnitude of the challenge these politicians face. Meeting it will likely require new faces and younger politicians, not tainted with the globalist, market fundamentalist views of their predecessors. It will also require forthright acknowledgement that pursuing the national interest is what politicians are elected to do. And this implies a willingness to attack many of the establishment’s sacred cows – particularly the free rein given to financial institutions, the bias toward austerity policies, the jaundiced view of government’s role in the economy, the unhindered movement of capital around the world, and the fetishization of international trade.
In other words, the most promising solution may be to let the house burn down completely!


Unknown said...

A very comprehensive post. I am pleased to see that you had linked to the perceptive essay by Jonathan Rothwell in NYT on the elite interests that have gamed the system and the rules in their favour.

As we discussed bilaterally, to a degree, the McKinsey recommendation on more digitisation and more technology to restore the 'glory' of U.S. manufacturing (mind you, the ostensible problem they were dealing with was the declining labour share of income) vindicates Rothwell above!

Also, although Tony Rothman in 'Project Syndicate' ( focuses more on customer convenience and the 'ends' of technological upgrades being lost (motion is not progress) in the welter of mindless 'improvements' and 'enhancements', that too is part of the problem.

As you conclude, the solution is to 'burn the house down' completely. But, that leads us to a cul-de-sac. In the Seventies, the pendulum swung (the house was brought down, as it existed then) due to a combination of factors:

Excessive abuse of labour power,
Economic misery - stagflation,
The turning of the intellectual tide in favour of rules over discretion, Disgust with politics as usual (Nixon's impeachment, Ford's pardon and Carter's perceived or real ineffectiveness)
Rise of alternative leaders who were not exactly perceived 'extreme' like in the case of Donald Trump

May be, I am missing out some.

But, if we try to develop a comparable checklist now, we do have

Excessive abuse of the power of capital by capitalists
Instead of stagflation, we have extreme inequality
There was disgust with politics as usual - it is demonstrated in the multiple political election and referendum results across Europe and the United States

But, what is missing are these two,

- There is intellectual resistance to changing the status quo - many would lose out on their personal perks and influence. Notice how many are writing as boldly as Dani Rodrik is writing. Very few. Those who do are not deemed 'mainstream'. For example, the monetary policy establishment has managed to brand even the BIS and folks like William White and Claudio Borio, et al, as 'extreme' or 'fringes'.

The '99%' is unable to mobilise and have a sane leadership with clarity of purpose and goals as capitalists on either side of the Atlantic were able to achieve in the Seventies.

Usually, crises help overcome all these drawbacks and throw up policy and personnel (leadership) alternatives. One thought that the 2008 crisis would do that. To a degree, it has. It has cracked open the door. But, the door is still being manned and protected well, despite cracks in the door and in the castle.

Perhaps, it needs another crisis to 'burn the house down' as you put it.

Gulzar Natarajan said...

Thanks Ananth. The two points you raise as missing are very important. A few thoughts

1. Unlike the seventies, when there was a genuine ideological divide, today’s intelligentsia display a remarkable ideological consensus, with marginal variations towards either side of the spectrum. In fact, the post-Soviet consensus has been a hegemony of liberalism and the free-market. Isn’t it striking that the star economists of today (Chetty, Autor, Acemoglu etc) are spending their time using statistical software to tease out correlations from large data sets, stopping well short of drawing the obvious conclusions leave alone being inclined to debate the most pressing social issues of our times – inequality, automation, business concentration, executive compensation, excessive financialization. And when someone like Piketty shows the courage to call out on the widening inequality, the same intellectuals scatter the debate by indulging in arcane trivialities and hifalutin technical discussions.

We know how the allures of large speaking fees and revolving door posts keep influential opinion leaders and intellectuals straying too far in critiquing the establishment and its consensus. Even when faced with absolutely clinching signatures of business concentration, monopoly profits, and attendant threats to social order and personal privacy, how many of these intellectuals have had the courage to hold the mirror on the consensus? As you say people like Borio, Helene Rey etc are dismissed as the “fringe”, just as people like Raghu Rajan were in the build-up to the GFC. Ask Annie Marie Slaughter, the poster child of liberalism and gender empowerment, who gets a cushy job and big public profile for playing along…

2. As to the lack of political leadership, I think the lack of any ideological movement and sharp cleavage makes anything other than populist leadership difficult to emerge. It is for this reason that someone has to come from outside, itself in turn made difficult without the house burning down.

In the US, I like Elizabeth Warren, because I see her as a very very rare member of the same elite, who has realised the corrosive effects of the prevailing economic order. If people like her can help burn down the economic order, then the conditions for building a new house become available. Instead, if Trump is replaced by someone else from the establishment like a Bloomberg, we will continue to grapple with the same set of problems…

3. One thing I am puzzled is by the absence of any stirrings of a popular revolt against the excesses and failings of the current order, especially given the presence of platforms like social media which can easily help organise and consolidate such campaigns.

It is now well documented that some of the actions of Wall Street leaders during the sub-prime bubble and its aftermath were clearly illegal and amounted to criminal misdemeanour. But not one top executive has been indicted or jailed for their actions. Where is the equivalent of the social resentment and pressures that led to the Pecora trials in the aftermath of the 1929 crash? Where is the indignation from the countless examples of egregious misdemeanours that the large investment banks, consulting firms, accounting agencies, and credit raters indulge in with alarming frequency?

Anonymous said...

On the comment "One thing I am puzzled is by the absence of any stirrings of a popular revolt against the excesses and failings of the current order" - is this because the beneficiaries of the current round of excess are not the ruling class but a tiny section of elites, whom one cannot fault for curbing the benefits as they were entitled to it meritocratically. In history revolutions & rebellions happen when a section of society which feels left behind and turns against the ruling class as they are viewed as unjustly benefitting to the detriment of the section which has lagged. The 1% identified by Rothwell, while they benefitted due to a system which was loaded in their favour were not the ruling class. The "occupy wall street movement was a sort of popular revolt but it whittled down as the ruling class (democratically elected politicians) and the have not's joined hands against a supposed common enemy and just made the situation worse without realizing (by loading on more regulation). Specially in the financial sector the overdose of regulation is worsening the situation by concentrating more and more of the benefits into a narrower set of winners who are becoming larger to gain scale to handle the cost of regulation, in the process keeping out competition.

Gulzar Natarajan said...

@researchbyanand, thanks for your comments.

I am not convinced by the distinction you make between the two types of elites. Actually they have now come to overlap almost completely. For example, the children and wives/husbands of the political elite occupy the "meritocratic" elite group. Eric Schmidt and Annie Marie Slaughter belong as much to the political elite as much as Hillary Clinton and Donald Trump belong to the "meritocratic" elite. The fortunes of your 1% "meritocratic" elite, as Brink Lindsey and Steven Teles show, are in no small measure the result of elite capture of the political system and their setting the rules of the game. As I have blogged several times, the danger with such levels of income concentration and inequality is that it is invariably followed by political capture...

Btw, what is meritocracy today? It is a simple Ovarian Lottery. Your life prospects are largely determined by the circumstances of your birth, the exposure and opportunities that this chance event endows you with. Isn't it true that education and personality development is more determined by your family environment, your networks, and external exposure than what is learnt in school? Is it any wonder that social mobility is at its lowest in the US today and the proportion of children earning more than their parents at the age of 30 has almost halved to just 50% since 1940?