Tuesday, November 15, 2016

Reasons to be cheerful? Trump, Globalisation and Australia


Yes, yes, dear, dear, perhaps next year
Or maybe even never
In which case...
Reasons to be cheerful, part 3 
- Ian Dury and the Blockheads 
One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans. All you need is one single (and, I am told, quite ugly) black bird.  
- Nassim Nicholas Taleb 
The best argument against democracy is a five-minute conversation with the average voter. 
- Winston S. Churchill
Can we all get along. 
- Rodney King

Introduction

It's likely that many disgruntled voters in the United States and progressive observers worldwide agree with Churchill's disdain for the popular preferences of the great unwashed. Democracy is messy. It can't produce optimal outcomes for all voters and given the multiple reasons why voters choose one candidate over another it may not produce optimal outcomes for the majority. But as Churchill said on another occasion: "Democracy is the worst form of government, except for all the others". It's all we've got and so the way it works - the way that popular preferences translate into optimal social outcomes - matters a lot. Pundits are arguing that a 'whitelash' led Trump to victory in the United States Presidential Election. Angry white Americans came out to vote and elected a Republican President and majorities in both houses of Congress. While the Democrats had an establishment candidate, the Republicans had an anti-establishment, independent candidate who did not play by the rules of the game.

Whether Trump really is an anti-establishment President remains to be seen, but there is no doubt that his success was due to the perception that he would not be 'more of the same'. Trump's victory can't be seen as unequivocal support for a renewed conservative agenda, it's a vote against both the liberal and conservative elites. The Democrats had their chance to match the Republicans with their own anti-establishment candidate, but the Democratic Party hierarchy believed that Bernie Sanders could not win and that a Clinton candidacy would ensure the Presidency for the Democrats. Conventional thinking by the Democrat leadership has led to tough times for progressives. 

While those on the centre-left are wringing their hands and tensely running their fingers through their hair, beards or whatever, it's possible that the election of Donald Trump will open up a progressive path for policy reformers focused on the real problem of distribution rather than globalisation. But the path will have to beaten, it won't just open up as Trump fails to deliver what he promised or, perhaps worse, does deliver on some of his more repugnant promises. Trump's victory does not just contain lessons for Americans but for capitalist democracies everywhere. Australia has done better over the past 10 years than virtually any other capitalist democracy, yet disaffection is on the march. 


Globalisation

Trump's impact will be greatest on Americans but a substantial shift away from liberal internationalism would cause structural change in the global economy. It would alter the rules of the game and change what policies produce the best results. In a protectionist world, will economic liberalism in one country be viable, when that country won't be the United States? Will export enhancement be a viable strategy for developing countries? 

Minor restrictions on trade won't necessarily have the disastrous effects many liberal economists believe. Indeed, a shift to protectionism might stimulate growth in the United States. But the global financial fallout could be considerable if there were a major shift towards protectionism by the United States, which has acted as the sponge to soak up the surpluses of export enhancers everywhere. It would also create anxiety in financial markets. Restricted trade and open finance would be the exact opposite of what is required for growth and stability. Instead, the continuation of trade and investment globalisation will require greater regulation of short-term capital flows. A radical deglobalisation would cause chaos as countries returned to beggar-thy-neighbour policies in the attempt to develop new internally focused growth models. The whole structure could be mutually reinforcing reversing the trends towards globalisation since the 1970s. 

The real problem with globalisation is its destabilising financialisation component, spurred by the idea that capital everywhere must be free. The domestic problem of globalisation is the belief that globalisation means that public services have to be pared back, that taxes for the wealthy have to be lowered, that wages and conditions for low income workers have to be cut, that salaries for executives have to be increased, and that redistribution necessarily damages productivity. Blaming globalisation is a cop out for both the right and the left.

Globalisation has provided a simple explanation for the rise in inequality in developed countries. Both proponents and opponents of globalisation make such arguments. Proponents have argued that globalisation is a marker of a changed and constantly changing world, where the past goals of societies and governments to distribute the fruits of growth equitably are no longer possible or even desirable. Instead, the argument has been that garnering growth in a globalising economy requires governments to intervene less in market processes. Opponents argue that globalisation increases inequality and that better outcomes are only possible if countries take a step back from globalisation and liberal capitalism.

There can be no doubt that that governments face a multitude of domestic and global pressures and constraints. States and societies wanting to increase living standards have little choice but to engage with the global economy. However, the debate about globalisation and inequality obscures the most important variables in the determination of outcomes – government and societal choices. To understand the impact of globalisation on social outcomes, it is still necessary to focus on the impact of policy changes, rather than on globalisation as a stand-alone variable. The determination of the level of inequality in a society has more to do with domestic political struggles than with globalisation.

Globalisation is both a process and an ideology. It is not a thing that necessitates particular outcomes. There's no instruction book. Each capitalist democracy's relationship with the outside world produces different constraints and opportunities. While most countries have to adjust to the world ‘as it is’, the choice of adjustment strategy is shaped but not determined by globalisation processes. Varying responses and outcomes are always possible. As comparative politics makes clear some political systems produce dynamic capitalist economies with high levels of social equity, some don't. 

There are always choices to be made that have multiple trade offs. Societies that value egalitarianism, generally have more equal outcomes. The victory of Trump shows that even capitalist democracies that have a more laissez faire attitude to social outcomes still must find a way to make globalisation work for the people. In my 2009 book The Vulnerable Country I wrote: 
Ultimately, globalisation’s future will require domestic support in both liberal democracies and authoritarian regimes. This support will depend on globalisation producing more winners than losers or, at least, on the winners being able to convince the losers that they stand ultimately to benefit from short-term sacrifices to their welfare. Globalisation needs to be able to produce the goods – and the services. A liberal economic policy structure and support for globalisation is not set in stone. As the next few years will show, the imposition of more market-based regulation did not settle regulatory struggles for all time. The art of government will continue to involve trade-offs between economic and political pressures, and domestic and international arenas. The possibility remains that coalitions against globalisation and economic liberalism will emerge and that some groups within nation-states will continue to be amenable to protectionist rhetoric and policies. 
While the jury is still out on whether the world is entering a period of de-globalisation, we have clearly moved away from a world of advancing globalisation. The continuing impact of the global financial crisis has seen to that. Australia, however, is an outlier among the capitalist democracies as it continued to benefit from growth in China and Asia more widely. 


Australia 

What I got wrong in my book was the timing of events. As Keynes is reputed to have once said: 'The market can stay irrational longer than you can stay solvent'. If you're not right on time, you're not right. I can accept that. 

Lots of variables intervened to continue the mining/housing/debt boom that began in the 1990s. The longer it has gone on, the more it has seemed that Australia is indestructible, that vulnerabilities can be dealt with by the existing policy framework. Australia has been lucky, but there's been some good policy as well. At the height of the crisis, the Rudd Labor government’s fiscal stimulus and the Reserve Bank of Australia’s lowering of interest rates each had a beneficial effect on the Australian economy, halting a downward spiral that otherwise might have led to a recession. The government’s haste to stimulate the economy, associated bureaucratic problems, and a general antipathy to government spending, led to intense criticism from the opposition and some commentators. Nevertheless, Australia did perform better than other countries during the key quarters of the crisis and before the Chinese stimulus helped to bolster investment and export growth. Australia clearly benefitted from the decoupling of Asia from the major advanced economies from 2009. 

There's no denying the sterling performance of the Australian economy in aggregate over the past 25 years. My argument is that the vulnerabilities that loomed large during the GFC have not gone away. Australia still remains vulnerable to the declining demand for resources and any future restrictions of the global supply of credit. And it still remains vulnerable to rising inequality, which was clearly a major factor in the rise of Donald Trump.

Australian policy-makers – both political and bureaucratic – have gambled that the distribution of opportunity, income and wealth is satisfactory, that the economy will continue to benefit from Chinese and broader Asian growth indefinitely, and that the economy will transition away from the mining boom with few policy innovations required apart from fiscal rectitude. They have also gambled that the build up in debt and property prices won't lead to a severe recession when the bubble bursts. 

Let's leave the gloom aside for a moment and consider what could go right?  
  1. Australia gets lucky again and the household sector de-leverages gradually rather than savagely. 
  2. China continues to grow rapidly. 
  3. India and the United States (Africa?) embark on an infrastructure boom and revitalise Australia's resource sector. 
  4. Disgruntled supporters don't reach a critical mass and they are marginalised by the centre parties and blamed for their  plight. 
  5. Some people get lucky because high house prices really are a 'new normal' and the desire for homeownership and property investment sparks a new innovative culture in Australia that leads to unimagined high tech exports? (Other people stay unlucky but are positively impacted by trickle down economics).
Maybe not that last one, but even if we do get lucky again, the problems of indebtedness and high property values will just push the problem forward and increase the leverage of the household sector, making the eventual adjustment even worse. 


Dealing with Disenchantment 

Even if I'm completely wrong and Australia continues its long boom indefinitely that won't solve the problem we started with: the attraction of voters to anti-establishment leaders and parties. This is a smaller problem in Australia than the United States, but we can expect a Trump effect, wherein dissident members of the major parties and independents are encouraged to speak out about race and welfare in a way that vilifies sections of society. It might not be pretty. 

The tragedy is that 25 years without an officially designated recession has left too many Australians behind. If it hasn't solved the problem of disaffection over the past 25 years, why do we think more of the same will do the job? Even with continuing growth, Australians will need to rearrange how the benefits of growth are distributed. In a recession, Australians will need to ensure that burdens are shared. 

While faith in democracy to produce the 'right' outcome has reached a new nadir amongst progressives everywhere, I still have faith in democracy to eventually get it right, or make things better, or at least to preserve gains already made. Eventually. 

If we lose our faith in democracy what are the authoritarian alternatives? For the left there's the idea of a 'right on' authoritarianism, with rules protecting the environment and the rights of the poor (as long as they're not damaging the environment). For the centre there's a government of rules limiting the discretion of elected governments to develop alternative policies. An independent monetary policy is a well accepted example and limiting fiscal discretion with unbreakable rules, is sometimes mooted. For the right there's a domination of nationalism and national security authoritarianism, restrictions on immigration, and the underlying belief in historical and racial hierarchies. 

Non-democratic outcomes are possible, which means that a major component of any progressive shift in capitalist democracies will require party and policy elites to engage with the disaffected, not write them off for their social views and actions. They will have to unite people on the basis of a shared solidarity, rather than divide them through vilification. 

Progressives will have to rebuild a coalition, uniting their cafe latte and fluoro bases. They will also have to build a new progressive business coalition, which realises that fairer and greener can be good for business. It will require balancing economic liberalisation with redistribution and improved equality of opportunity. Only the state can provide the resources for this to happen, which means abandoning the idea of a continuously smaller state.  

Centre-left parties will have to find new ways to distribute incomes, wealth and opportunities. They will also have to deal with the real concerns of many that immigration - both legal and illegal - is out of control, that multiculturalism is changing societal values for the worse, and that centre-left parties are just as beholden to financial and business interests as the centre-right. They'll also have to deal with the popular explanation that the root of their problems is globalisation. 

In Australia, the whole edifice can be built upon long-standing egalitarian ideals. While white Australia was an unfortunate component of Australia's egalitarian protectionist policy structure, racial exclusion can't be a part of a modern Australia. Australia is now unequivocally a multicultural country and so 'the people' are now a diverse bunch. Australians like to think of their country as an egalitarian one, so making that a key element of multiculturalism could help to smooth societal divisions. There is a great irony with the 'if you don't love Australia, leave' brigade, given that to not love a multicultural Australia is to not love Australia as it is now.

My optimism about the possibilities of a progressive future for capitalist democracies is not just based on faith. There's a vast trove of historical evidence, showing how capitalist democracies have improved the lot of working people, children, women and men; how public spending has provided opportunities across societies, how feminism has advanced the position of women; how racism has been challenged in the public sphere; how the green movement has improved environmental outcomes. Some of these have taken a long time and many of them have a long way to go. But at a time of seeming progressive retreat it's important to remember past battles fought to produce the 'good society' and the battles ahead to keep what has been gained and to embark on new progressive measures. There's no success in isolation, both within societies and between states.  

History also shows us that radical parties don't generally control the process of policy change. Instead it is their impact on the mainstream parties that leads to breaks with the status quo. Think the historical adaptation of conservative parties to welfarism and workers rights over the late nineteenth and twentieth century. More recently, consider the impact of the green movement on mainstream environmental policies from the 1980s. The outcomes are never as pure as the radicals desire, but that is the nature of democracy: compromise. 

It is important to remember that not every democracy produces poor social outcomes like the United States. Maybe, just maybe, Trumpism in the United States and its equivalents in other capitalist democracies will open up the path for a new progressive policy structure that attempts to share the benefits and costs of capitalism through the democratic process.  

For that path to open up Trumpism must be seen to fail for its own faults not from some plot conspired by the liberal elites to hamstring his mandate. Managing a progressive coalition is going to more difficult in the United States, but they too have successful historical precedents during the Roosevelt and Kennedy/Johnson eras. The Clinton and Obama Presidencies made gains, but they also show that opportunities can be missed: Clinton's decisions to further liberalise the financial sector and cut welfare and Obama's willingness to bailout the financiers and leave homeowners to their own devices. Hopefully, Obamacare does not go down as a failed attempt to improve access to healthcare. 

It might take a while for Trump's shortcomings to become clear. Indeed it is likely that the election of Trump will provide an inflationary boost to the US economy as spending and tax initiatives boost animal spirits. I think we can dismiss the possibility of Trump becoming a small government conservative, regardless of the rhetoric. If Trump were to embark on an infrastructure program it would boost the US economy considerably. Progressives should support that. It's also likely that Trump will cut some regulations and go slow on the enforcement on others, stimulating business and investor confidence in the short-term. 

A more laissez faire approach to regulation will not be sustainable, however, especially in the financial sector. Finance needs more regulation, not less. It needs regulations to be enforced and it needs real penalties for criminal behaviour. Overall, it must aim to restrict the bubbling of asset prices and the growth in private debt to unstable levels. 

A pro-finance and a pro-business policy stance won't appease working and middle class desires for improving living standards and protection of their savings, which can only be achieved through higher wages for lower paid employment and limitations on the salary packages of executives, either through regulation or taxation. Given Trump's world view, it is likely pro-business will mean greater incentives for the wealthy and more discipline for the poor. 


Exhausted 'Solutions'

One of the major reasons for Trump's victory is that the political and economic establishment have presided over an era of stagnating and in many cases, declining living standards. Two past measures measures that have helped to augment household incomes over the past 40 years are no longer 'solutions'. The first strategy has been to put another parent to work. The second has been the expansion of debt. Increasing debt has helped households to maintain or boost consumption and to afford more expensive housing. Unless we move to three parent families or banks forgive all debts, these options are now virtually exhausted. Households can no doubt increase their debts for a while, especially if house prices keep increasing, but that's only a short-term solution. And one with worse consequences for economy and society down the line. 

These exhausted solutions apply to virtually all capitalist democracies. Including the United States. Trump will find that 'running' an economy is much harder than running a business, no matter how large. Eventually there will be another backlash, as people realise that right wing populism is worse than the centrist status quo; and that Donald Trump and the Republican Party will make the lot of the working and middle classes worse. This won't guarantee a progressive solution, but it will open up the path.

I have faith in a backlash to the whitelash because I don't believe everyone who voted for Trump is necessarily committed to Trumpism, racism or misogyny; they're committed to shaking things up. They're committed to sending a message to the political establishment that their privileging of the economic establishment at their expense, can no longer stand.

The problem is that they're wrong to believe that Trump can deliver with his advertised suite of 'policies'. Despite the political establishment berating the public for electing Trump, it is they who must change. If the establishment wants to maintain open economies then they will have to help build a new coalition in favour of openness and a fair distribution. This must be underpinned by real gains for the middle and working classes.  A new pragmatism among centrist politicians and economically liberal policy-makers must take hold.  


Conclusion

The fact that governments in Australia and elsewhere have abandoned attempts to increase equality is more important than any impact of globalisation. Globalisation as an ideological and political construction is important as a constraint, but also as a framework for policy-makers and economic interests to argue that egalitarian policies are no longer possible or desirable. Such aspects of globalisation are, of course, much more difficult to ‘measure’, but are no less important. Attempts to improve social outcomes have given way to attempts to explain inequality.

Scepticism should prevail about the contention that globalisation compels governments and societies to idly accept inequitable outcomes. It is even more doubtful that that the best response is to increase inequality by downgrading existing government efforts to improve social outcomes in the name of incentive and efficiency. 

Trump's victory and similar reactions throughout the capitalist democracies show that people are unhappy with the establishment's rhetoric about globalisation imperatives. While the populist right aims to gain support by blaming globalisation, the left should remain committed to a progressive or sustainable globalisation.

Alternative globalisation strategies are available for Australia: economic liberalism is not always the best strategy. For globalisation to continue in Australia and throughout the world, efforts must be made to ensure that globalisation creates benefits that are widely distributed. Just as the concept of globalisation is contested and multifaceted so are the choices available to citizens and governments.

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