The challenge facing liberals in the US

Donald Trump’s upending of long-held conventional wisdom in the polity and economy has shed light on the faultlines and failings of the US politics and society. 

It has dramatically exposed the limitations of the supposed bulwarks of institutional checks and balances in the US government. Apart from this, the Republican Party is captured, the Democratic Party is in shambles, corporate America has fallen in line without any murmur, and public intellectuals in the prestigious and normally vocal academic institutions and think tanks in the US have gone eerily quiet. In fact, when the history of Trump 2.0 is written, it’s most likely that the leaders and scholars of the hallowed Universities will be apportioned as much blame as the Supreme Court for their roles in compromising and allowing the government near-unimpeded pursuit of its goals. Even the civil society seems to be missing in action. 

This accommodation should not have come as a surprise. There’s a strong case that American liberalism was standing on weakening foundations. As an illustration, for a country with a per capita income of $85,000, America suffers from embarassingly high levels of deprivation and poverty, and struggles with the poorest human resource development outcomes among advanced countries. The extent of elite capture of rule-making processes and institutions is perhaps the greatest in the US democratic system. The opinion makers and experts among the liberals who have played important roles in fashioning the economic consensus over the last three decades and have facilitated these outcomes are as much to blame as the policies that have generated them. 

I have blogged on several occasions, highlighting how the public intellectuals in the US have let down liberal democracy and have largely become co-opted by Big Tech and Wall Street. Given that the intellectual establishments in the US (academia and think tanks) are dominated by liberals, it’s surprising that they have allowed the trends of widening inequality, business concentration, and the general political capture by Big Tech, Big Pharma, Wall Street, and other corporate interests to go largely unchecked. 

There are some possible explanations for the lack of even a fight on the face of the ongoing assault on liberal ideas. One argument is that of a society that has not faced any serious existential adversities for long and has been dulled off its collective will and resolve to push back. Since the War, the society has settled into a comfortable equilibrium where all the fundamental requirements of liberal democracy and capitalism - rule of law, free speech, free markets, restraints on untrammelled power, recourse to redressal of grievances, etc., - have come to be taken for granted. Generations have been brought up without having to even think about them, much less fight for them.

On the economy, the great recession in the aftermath of the global financial crisis turned a new page in monetary policy adventurism with a radical expansion of the tools that central banks and governments were willing to use to stabilise the economy. Zero interest rates, quantitative easing, purchases of Treasuries and even corporate bonds, forward guidance, and so on entered the lexicon of central banking. This allowed central banks to keep rates, pump liquidity, and backstop asset prices, thereby propping up both the financial markets and the real economy. Market expectations have been shaped by a giant central bank put, one arising from a belief that if things get out of hand, the central bank will step in as a buyer or lender of last resort. Just like American citizens, its markets too have come to overlook uncertainties and take for granted economic stability. 

Another plausible explanation for the Trumpian backlash could be that, over time, liberalism gravitated to extreme fringes on a variety of issues. On important issues like the traditional family and social values, race relations, immigration, LGBTQ, etc., the liberal positions came to be hijacked by those at the extremes. It’s one thing to accept people’s privately held views that deviate from social norms, but an altogether different matter to decry the social norms and elevate those deviant views as the new norm. The latter is a big social and political shift, and can happen only when the majority or a significantly large representative proportion of the population is willing to embrace it. In its absence, and especially if they are being sought to be imposed by a small progressive vanguard, there will be strong and often violent resistance. Noah Smith has a good blog post here describing how the liberals have lost the plot.

Yet another explanation may be the increasing ideological alienation of Democrats (and liberal parties elsewhere) from their left-of-centre views, given the general shift towards the centre in the post-communist era. I blogged earlier about this here.

Centre-left political parties like the Democrats in the US under Bill Clinton, the Labour Party in the UK under Blair, and the Socialist Party in France under Emmanuel Macron (he split the traditional left and right parties and created a new Renaissance Party of the centre) have sought to widen their electoral base by moving to the centre. From being a counter-point to their economically rightwing (capital-favouring) opponents (Republicans in the US, Conservatives in the UK, and The Republicans in France), these centrist parties sought to embrace the market while also retaining their core working class (labour) bases. From hindsight, this move to the centre appears to have been a fatal mistake. In the delicate reconciliation of the interests of labour and capital, the latter has become dominant. The leadership and the intellectual core of these parties have become captives to the interests of the capital. In the process, the new centrist avatars have alienated their core support base in the labour. The labour base has drifted to the populist camps.

The value of centrism as a mobilising ideology is questionable. Centre has its relevance only with respect to some reference points (the right or the left, liberal or conservative). In itself, moderation cannot be an ideology. On the contrary, it can become a cloak for opportunism and hypocrisy. Further, when faced with the power of capital, a strong ideological base may be essential for political mobilisation. Most worryingly, centrists groups often end up being captured or at least perceived as being captive of the opposite ideological group. As I blogged here, this is a greater risk to the liberals, whose courting of capital can end up with capture by the capitalists (and therefore alienation of its core working-class base). The Democratic Party in the US may be the best exhibit in this regard.

In this backdrop, I point to three articles that highlight some of these challenges. 

The first article goes to the heart of an important theme of the Trump populism - the demonisation of DEI initiatives and the stigmatisation of liberalism. In this context, Eugenia Cheng, a mathematician, makes a very bold and compelling case for DEI initiatives.

A metric is a way of measuring the distance between two points but not necessarily physical distance; it could be how much time it takes with traffic as a factor or how much energy will be expended, depending on whether you’re going uphill or downhill. A distance cannot be measured on the basis of the position of a single point. It requires the effort of measuring the distance between two points. This may sound redundant, but it’s an important clarification: Metrics can be measured only by taking into account the starting point and ending point, as well as relevant features of the journey — the whole story.

When we evaluate people, we could do the same. Instead of just looking at what they have achieved, we could also look at where they started and be clearer about how we are measuring the metaphorical distance they have come and whether we are taking into account the support they had or the obstructions they faced.

If we are selecting sprinters for a track team, we might look at their best times for the 100-meter dash. But if someone had, for some reason, only ever run races uphill or against the wind, it would make sense to take that into account and not compare that runner’s times to others’ directly. We would be treating those people differently but only because their paths were different; really we’d be evaluating their paths fairly relative to their contexts. 

Other forms of achievement are not as straightforward to measure, but the idea is analogous. If someone achieved a certain SAT score after months of tutoring and someone else earned the same score having never seen an SAT before, it would be reasonable to be more impressed with the latter result and think that the second test taker has more potential. We should think of D.E.I. efforts as the best versions of this and aim to design systems that can measure the fuller picture of someone’s professional journey, not just the current result… It shouldn’t be called sexist to help people overcome sexism, and it shouldn’t be called racist to help people overcome racism, but if we give this help too crudely, then we leave ourselves open to these criticisms. Math teaches us that D.E.I. initiatives should be about carefully defining the metrics we use to measure how far people have come and thus how far they have the potential to go. They should be about uncovering when some people are constantly running uphill or against the wind, which can inform us how to give everyone an equal tailwind and an equal opportunity to succeed.

On DEI, by taking it to absurd extremes, the liberals have allowed even the idea of diversity to become contentious. Cheng attempts to retrieve some of the lost ground by trying to anchor the debate in terms of measuring merit and achievement more accurately. 

Cheng’s op-ed is also a testament to the abdication by the liberal intelligentsia, those opinion makers occupying important positions of influence and authority, like in the reputed universities and think tanks. When faced with the assault from the right, the ideological and institutional defenders of liberalism appear to have gone missing. 

In the second article, Ruchir Sharma calls for caution in cutting interest rates given the prevailing conditions.

Financial conditions are very loose. The economy is still resilient. The basic Fed lending rate is not restrictive. Signs of job market weakness are minor compared with the evidence that inflation has become entrenched. And cutting rates with AI mania gripping US markets risks driving them to greater heights… Capital pouring into the US stock market has driven valuations close to historic highs. Venture capital is pouring into profitless tech firms. Credit growth is surging, particularly in private markets. Junk firms can borrow at rates only marginally higher than solid ones or even the government; the premium they pay over Treasuries is as low as at any point in the last half century… 

Trump aides want to stimulate an economy that doesn’t need help. Despite the tariff shock, GDP is on track to expand by more than 2 per cent this quarter. Regardless, juicing up growth is not the central bank’s job. Its mandate is to control inflation while maximising employment. And standard guidelines on how to achieve this, such as the Taylor rule, show that the Fed’s basic lending rate is not currently restrictive…the unemployment rate is still just 4.3 per cent, close to historic lows. Meanwhile, consumer price inflation has exceeded the Fed’s 2 per cent target for five years running and is expected to remain stuck at an elevated pace for the foreseeable future. It’s also a mistake to ignore prices for stocks, homes and other financial assets… 

By easing every time the markets falter — including as recently as last August — the Fed has been fuelling asset price inflation and wealth inequality. Now, it seems poised to go further, easing in a boom. Tech investment is following the path of past bubbles: at nearly 6 per cent of GDP, it roughly matches investment in tech at the 2000 peak as well as investment in real estate at its 2007 peak, and greatly exceeds investment in oil at the 2013 commodity boom peak. Speculators focusing on the least profitable and most expensive stocks are amped up on AI too. Their share of US trading is now approaching the dotcom era high. The “asymmetry” of Fed policy — always rescue but never restrain the markets — is tilting further towards promoting bubbles… What’s needed is a return to symmetry, including periods of restraint.

In this context, I’m reminded of the metaphor of forest fires and avalanches. It’s a well-known principle that allowing small fires and small avalanches is critical for avoiding big fires and avalanches. Small fires prevent the accumulation of large detritus that can lead to big fires. Small avalanches prevent the accumulation of large fault lines in snow mountains that contribute to large avalanches. 

The central bank's interventions are effectively preventing the kinds of smaller recessions that are required to weed out zombie companies and recalibrate expectations among investors about risks and uncertainties. It’s triggering moral hazard by making a generation of investors and market participants less vigilant about risks. 

A current example of how the dominance of Wall Street interests in financial market policy-making comes in the way of throwing sand on the wheels of financial engineering is the ongoing rise of private credit. With private equity having peaked and interest rates being high, private credit has become an attractive alternative to finance emerging areas like data centres. But it’s rapidly becoming clear that private credit is now spawning excesses, and given the increasing levels of exposure of public pension, insurance and endowment funds to private capital, could be a source for the next financial crisis. 

Finally, Edward Luce makes an important point that the Democratic Party should discover its agenda not by reacting to Trump but by imagining that Trump did not exist. It should emerge from a genuine introspection about where it has alienated its traditional support base of blue-collar workers, blacks, and Hispanics (who have increasingly gravitated to the Trump camp). He writes,

The practical difficulty is that the party is shaped by elite professions, particularly law, government, media and academia. Such types often have a hard time concealing their distaste for those who voted for Trump… They are the party of corporate America. No party in history could ever boast of so many expert fundraisers and humane philanthropists… If Trump did not exist, would Democrats want to reform the US administrative state? They should want to reinvent it but are now its militant defenders… If Trump is attacking something, it must be defended to the hilt.

As Luce writes, the Democratic Party is not alone in this struggle to reinvent. The Labour Party in the UK and the Social Democratic parties in continental Europe are sailing on the same boat. 

The challenge before the liberals is to tailor a coherent agenda that addresses the concerns of the vast majority of the population, who feel socially, economically, and politically marginalised and alienated, and mobilise a sufficiently broad and credible coalition. This would require making hard choices. For example, it might in turn require marginalising the currently vocal defenders of liberalism (or the woke vanguard). It’ll also require breaking free from the incestuous elite stranglehold on liberal thought leadership. Unfortunately, there’s little on the horizon that points to a possible regeneration.