Liberals still don’t get the Trump phenomenon. He is not in danger

To judge from the headlines in the liberal press, or liberal commentators on the BBC, you would think Donald Trump’s presidency in the US was on its last legs. This follows the conviction yesterday of two of his (formerly) close advisers, and his being implicated by one of them in an illegal pay-off. But these commentators have failed to understand how the Trump phenomenon has rewritten the rules of US politics. Provided he maintains his health, Mr Trump will surely last until the end of his term in 2020. And if his liberal opponents continue to underestimate him, he could well win a second term.

The first point to make is that Mr Trump is utterly shameless. He is not the least bit embarrassed by anything that he has done. Call this narcissism if you like, but he will fight on. The second point is that his base of support both remains solid, and maintains a grip on the Republican party.

To his base, Mr Trump is the man who has delivered. Evangelicals have their conservative judges. Business leaders have their tax cuts and roll-back of tiresome regulations. Conservatives everywhere are enjoying are enjoying the rout of liberal values: it feels like fresh air. And the bad behaviour? That is utterly unsurprising; they knew the sort of man they were taking on. So long as he is doing the job of battering ram, they will forgive everything. Corruption is something that happens to liberals, in their eyes, and not to politicians on their own side. Indeed in they seem to think that corruption is less about illegal payoffs and more about the process of political compromise with people who are not like them.

So neither Mr Trump nor his base will be shaken by recent events. Legally the President looks secure too. There is debate as to whether it is possible to indict a sitting president with a crime – but if that came to be tested the Supreme Court has shown no appetite to challenge Republicans on anything important. It is unlikely that the special prosecutor, Robert Mueller, will even try. Everybody else in Trumpland is either dispensable or Mr Trump can use his powers of pardon. There is pretty much nothing Mr Trump would not do rather than admit defeat.

Which leaves the danger of impeachment, which is essentially a political process. It is looking likely that the Democrats will take control of the House of Representatives in the mid-term elections in November. That would allow impeachment to proceed. If there were grounds to do so against Bill Clinton in the 1990s, there will be more than enough against Mr Trump. But success depends on the votes of two-thirds of the Senate. Which means that half or more Republican Senators will have to turn against him. Given Mr Trump’s hold on the party grassroots, and his ability to undermine the credibility of any given opponent by a constant process of smearing, he looks secure. He will paint the impeachment as a politically tainted process, and not without a degree of justice. This is politics, and Mr Trump has proved to be America’s most effective politician.

The problem for liberals is that they persist in judging Mr Trump and his supporters by their own standards. Mr Trump’s behaviour would kill a liberal politician’s career. But Mr Trump does not need liberal votes. Instead he is playing an altogether different game: the politics of emotion, victimhood and identity. It is something liberals really don’t get.

But Donald Trump is politically vulnerable. His base is as loyal as ever, but it is a minority. He is making little attempt to win over anybody else: indeed he enjoys antagonising large sections of the US nation. This is one reason why it looks as if he will do badly in the mid-term elections. Another is that there are some cracks in his record for some of the people who had supported him.

To his supporters Mr Trump is a breath of fresh air because, unlike politicians before him, he is delivering on his election promises. That is true in the sense that he is doing things that mainstream politicians have not dared to do: notably the ratcheting up of the trade war, which has widespread public support. There are broken promises aplenty, of course, but these are either on secondary issues, or easy enough to pass off blame onto others. But I think there are two sources of trouble. One is healthcare reform. This is fiercely complicated, and the Trump administration is unable to do anything complicated. His attempts to push through a reform last year collapsed. That itself is not a problem: there are plenty of people to blame it on. And if he had succeeded it might actually be worse for him. The problem is that for many working class Americans, getting decent and affordable health care insurance is becoming impossible. A Republican reform of healthcare would not have helped. But the slow decay of the Obamacare system is making things worse. That is enough to create doubts for a lot of Trump voters, who increasingly realise that the Republicans are not on their side.

A second problem comes with the trade war. The process itself may be popular, but as it progresses it will create more victims. Already many farmers are worried. It may be enough to help the Democrats hold on to Midwestern Senate seats that would otherwise have been near impossible to hold.

This may be enough for the Democrats to overcome gerrymandered boundaries and win the House of Representatives, and even the Senate (tricky because the previous contests were six years ago on a Democratic high water mark). But the path to the presidency in 2020 is much trickier. Once Mr Trump is able to concentrate his political skills on undermining a single opponent, all bets are off. A lot of people blame his victory in 2016 on the Democrats choosing a weak candidate in Hillary Clinton. But in many ways Mrs Clinton was a strong candidate. Mr Trump would have successfully undermined any Democrat opponent, just as he did with his Republican opponents in the primaries.

And there is a trap for Democrats. It is tempting to follow the Republicans into the politics of victimhood and identity. There are plenty of people who feel victimised by the Trump regime. But that takes them away from many of Mr Trump’s less committed and more sceptical supporters. He may be able to rally them again. The Democrats need to show that they are standing up for these voters too, on healthcare and jobs in particular.

I continue to hope there will be a moment of revelation to Trump supporters, akin to what Hurricane Katrina did for George Bush Jnr. But the man has survived so many knocks, that I doubt this will happen. After that I just hope that the Democrats can choose a candidate with high ethical standards that can convince all working class Americans that she or he is on their side and Donald Trump isn’t.

Have economists learnt nothing from the crash? Three fallacies that persist

It is approaching ten years since the collapse of Lehman Brothers. To most people this is when the great financial crash started, since it is from this point that the most serious repercussions started to take place. Personally I date it from the collapse of interbank markets more than a year before, but never mind. What was so shocking about the crash was that so few trained economists foresaw it. Or, lest anybody mistake that for mere criticism of forecasting skills, how so many economists aided and abetted the forces that destabilised the financial system, or at any rate, did nothing to head the crisis off. Ten years on and I am starting to wonder whether we are unlearning the lessons of the crash, and relearning the complacency that let it happen.

What shook me was an article in the Financial Times by long-standing correspondent Martin Sandhu – the devasting cost of central banks’ caution. His suggestion is that central banks were too cautious in the aftermath of the crash, and as a result the recovery has been stunted. What struck me about this article is how heavily it is based on the economic conventional wisdom that helped cause the crash in the first place. It is as if economists like Mr Sandhu had learnt nothing at all. In particular it is based on three persistent fallacies that should by now be well and truly exposed.

Fallacy 1: the pre-crash trend growth rate was real and sustainable

Economics is a numerical discipline, and economists are more than usually susceptible to the delusion that numerical measures are more real than the complex world they describe. One case in point is something called the “trend growth rate”. This is an average rate of growth taken over a long period of time. By its nature it does not vary much from year to year, but before 2008 it had been remarkably consistent in developed economies, at about 2% per annum. After the crash it fell, and a new, much lower trend has established itself. Mr Sandhu’s contention is that the pre-crash trend was ordained by the laws of physics, and that the decline must represent a policy failure – which he lays at the door of central banks. The gap between where the economy is now, and where it would have been had the pre-crash trend persisted, is now very big – and it is the “devastating cost” of the article’s title. This is a persistent idea, which I have heard from Mr Sandhu’s FT colleague Martin Wolf too, though I suspect that he is starting to wake up to the truth. You also hear it from some left wing commentators who lay the blame at the door of “austerity” rather than central banks.

The persistence of the trend before 2008 is all the evidence that many macroeconomists need that it must represent some natural law: the steady advance of technological change on productivity. They did not think it was their job to ask more penetrating questions. But the cracks were showing well before 2008, and had economists spotted this, they would have seen that instead of the world continuing on its steady course, the risk of an economic crash was building up. The crash blew away froth that had been accumulating in the years before.

There are several aspects to this, and I will try to be brief. First is that the sort of productivity growth that economists fondly believed is happening everywhere, was always confined to fairly narrow sectors of the economy, and those sectors are themselves narrowing. In particular it applied to agriculture and manufacturing: industries where you produce stuff and ship it. And yet the importance of these industries to developed economies is steadily diminishing, in a phenomenon called the Baumol Effect that is taught in Economics undergraduate courses, and which should have been no surprise. The true drivers of a modern economy are in services such as healthcare, where technological advance does not tend to advance productivity in the sort of way that is captured by economic statistics.

Second, in the ten years up to 2008 much of the rate of growth depended on globalisation, and in particular the use of cheap labour in the developing world, notably China. This was strikingly evidenced in the fact that the prices of many manufactured goods actually fell in the period. This was not a case of advancing productivity: it was the exploitation of another basic economic idea whose implications few modern economists actually seem to understand: that of comparative advantage. The problem is that where this arises because the developing world is catching up with the developed world these gains are temporary and actually go into reverse eventually. That was what was starting to happen before 2008 as Chinese wage costs relative to American and European ones started to close. It was not sustainable.

And third, much of the growth, especially in Britain, depended on industries whose economic benefits were actually doubtful, and where productivity measures are similarly flawed. Two sectors stand out. One is finance; not only are the actual benefits to human well-being from its output hard to understand, but much of the reported income turned out to be downright false. That is the main reason why the crash had such a drastic effect on GDP figures in 2009, as bank bailouts were needed to replace non-existent assets created by this fictitious income. That should be reasonably obvious, though I’m surprised by how few commentators pick this up. More subtle is the problem with a second sector reporting productivity growth: business services. This is things like lawyers, accountants, consultants and architects – particularly important in Britain. The problem here is that these do not provide services to end users but to other businesses. Which leads to the question, how can you say that these industries were becoming more productive when there is so little evidence of productivity gains in the industries they were advising?

Fallacy 2: consumer price inflation is the main evidence of unsustainable growth

In the 1970s developed economies overheated, and this led to an inflation price spiral, as consumer prices and pay rates chased each other. This wasn’t supposed to happen under the Keynesian economic regime that most of the world used at the time, because unemployment was increasing too. This was a huge shock to the economics profession (a much greater shock apparently than the 2008 crash), which led to a brand new policy framework. This led to an obsession with consumer price inflation. If you keep this at some Goldilocks level, of between 1% and 3% per annum, then nothing too much could be going wrong, people thought. This was made the sole performance target for many central banks, as it meant that economies were neither overheating nor underperforming. Other things, like the level of bank lending, asset prices and balance of payments imbalances didn’t really matter. This was central to the neo-Keynesian consensus.

If this was ever valid, it was rendered obsolete by the advance of globalisation in the 1990s and 2000s. Wages became detached from consumer prices. Capital flowed freely between the world’s economies. Especially in Europe the movement of labour from one country to another became freer. There were many ways an economy could overheat without consumer price inflation becoming affected. Asset prices (real estate, shares or even bonds) could inflate into bubbles; dangerous levels of unreal assets could build up within the financial system; a destabilising level of migrants could cross borders. All of these things happened in Britain in the run up to 2008, and yet because inflation remained in the Goldilocks position people thought everything was fine, and that all these other things would just sort themselves out. Many still believe this; it is one of the few things that unites all factions of the Labour party, which was in power at the time. Likewise Mr Sandhu persists in suggesting that consumer price inflation was all that central bankers needed to worry about after the crash – and because it has shown no sign of taking off, there has been plenty of scope to pump things up.

Fallacy 3: monetary policy is an effective way of regulating demand

This was another part of the neo-Keynesian consensus. Prior to this the conventional wisdom that fiscal policy (taxes and public spending) was the best way to help a flagging economy or cool an overheating one. But after the failures of the 1970s it was felt that this got too tangled up in politics to be effective, and would lead to an excessively big state. Instead the job could be given to central banks, through changes to interest rates and other things like Quantitative Easing. These things were referred to as monetary policy, conjuring up the quaint image (not discouraged by economists) that it was about the printing of banknotes.

And yet this idea has not stood up to the test of time. Quite apart from the fallacy of using inflation as the main performance indicator, monetary policy affects many other things than consumer demand, and in fact has led to a build up of dangerous levels of private debt. The political pressures to keep interest rates low, especially if inflation is low, quickly become unbearable. And not just political pressures. Increasing interest rates can destabilise the banking system. Such increases may have provoked the pre-crisis in 2007 that in turn led to the main crisis. Monetary policy has no brakes.

Here the left wing critics of economic policy, who think that fiscal policy should do more of the work of regulating demand, are on stronger ground. But would politicians have the guts to tighten fiscal policy when needed? The vehemence of left wing criticism of austerity, and their denial that the pre 2008 economy was overheating, suggest that fiscal policy too lacks effective brakes.

Are we heading for a new crash?

There are some worrying signs, with the build up of private debt, and with reckless fiscal policy in the US. But we are not seeing the same reckless advance of “financial innovation” that proved so devastating ten years ago. Not in the developed world anyway: China looks a bit different, though the awareness of the central authorities there is a strong contrast to the denial of many western leaders before 2007.

But some trouble is surely ahead. Perhaps then economists will start to break out of their bunker and start viewing the world as it really is, instead being a construction of outmoded statistical aggregates.

Boris Johnson raises the spectre of Islamophobia

I was going to observe a dignified silence over British MP Boris Johnson’s latest stunt. His aim was to gain attention and notoriety, and I didn’t think he deserved any help from me. But with a week gone and the story still being run prominently by BBC Radio 4, my silence must be broken.

The stunt was Mr Johnson’s regular column in the Daily Telegraph, published last Monday. I haven’t read it, and I don’t intend to. Nobody disputes three salient facts. First that its subject was the banning of face-covering garments in public places, recently enacted by other European countries, such as Denmark. Second that Mr Johnson said that such bans should not be enacted here, based on good liberal logic. And third Mr Johnson expressed his dislike of such garments as worn by some Muslim women (the niqab, the face covering with a slit for the yes, and the burqa, a total body covering) by making two derogatory comparisons. Unlike the BBC, who do so at every possible opportunity, I will not repeat these here.

Deliberately or not, this was a very clever piece of work. The first fact allows Mr Johnson to claim that the article is part of an ongoing and legitimate political debate, and the second that his views on the subject are liberal. But the third picks up on public hostility to women who wear the burqa or niqab. It was what attracted all the attention, drawing condemnation from Muslim members of the Conservative Party, and admiration from those with less liberal views, and those who think Muslims have no place in this country. The timing was impeccable. The BBC had just given wall-to-wall coverage to the Labour Party’s troubles with antisemitism, so they could hardly downplay coverage of the story without being accused of bias. And, comfortably into August, there has not been much competing news; even the drought was abated by some welcome rain. Also Mr Johnson was on holiday, so he could evade interviews. As a politician that loves attention, things could hardly have gone better.

Could it damage him politically? That’s hard to see. His liberal comments allow him to maintain injured innocence; the people who are condemning him were by and large hostile to him anyway. Brexit supporters have stuck with him. And large parts of the white British middle and working classes are hostile to Islam, and his derogatory comments resonated well. This is especially true of Conservative grassroots members, who most suspect are the main audience he had in mind. Mr Johnson surely wants to take over from Theresa May as party leader and Prime Minister. That ultimately depends on a vote by party members, should Mrs May step down or be forced out (not to be taken for granted). He is maintaining his already high standing with the grassroots. His main difficulty is his weak standing with MPs, who must pick the top two candidates for the membership vote. But his charisma far outshines potential rivals (except Jacob Rees-Mogg, whose standing among MPs must surely be even weaker) and he may yet be able to pick a path through that minefield.

The context is very depressing. Islamophobia is rife in Britain, as it is in most of Europe. Even respectable people can be heard saying that Islam is a repressive ideology, and alien to traditional British or European culture. Many people are open about this in a way that they are furtive about antisemitism – a bit like antisemitism in the 1930s. This is a remarkable turn of events. The British Empire included many Muslim subjects, who were recruited into the armed forces (especially in India) as they were considered to be good soldiers. These were then brought over to Europe to defend the homeland in both world wars. I remember my cousin, a senior colonial administrator in British Sudan, speaking warmly of Muslims.

It is not all that hard to see how the modern hostility came about, though. Militant Islamic terrorism, especially after the 9/11 attacks, is one reason. Muslims may regard these groups as nutters on the fringe of their society, but Islam is central to their identity, and they comprise a large part of what ordinary British people know about Muslims. And, over the last 50 years, there have been high levels of immigration from Muslim countries, especially Pakistan and Bangladesh. Many people feel threatened by immigration, which becomes a scapegoat for modern ills generally. Many of these Muslim groups are conservative and have made little attempt to integrate. People find women dressed in the niqab or burqa, though rare, especially provocative. I have to confess that I’m not comfortable with them either – it seems insulting somehow. The real problem with Mr Johnson’s comments is that they will invite even more people to abuse these women in public. Indeed that seems to be exactly what has happened. Since the Brexit rebellion, hostility to all groups of immigrants has risen, and this has broken out into public abuse more often. It is why we all have to be careful in what we say.

Meanwhile most Muslims are good, law-abiding citizens, and harmonious integration proceeds apace. The fears of Islamophobes are fantasies. And yet it is these good citizens that will suffer the most. Mr Johnson well knows this (his family has Turkish roots after all), but he is happy to exploit anti-Muslim prejudice.

There are parallels with antisemitism. Just antisemitism disguises itself as perfectly legitimate criticism of Israel’s treatment of Palestinians, so Islamophobia masquerades as criticism of extremist terrorists, or conservative social customs, such as the niqab. Legitimate topics for political debate get subtly subverted. Mr Johnson’s subversion was particularly subtle – he just poked a bit of fun. Unfortunately this makes these legitimate topics harder to discuss.

So the anti-liberal backlash continues. I still believe that it will peak in Britain and other countries, and then turn. Partly this will be because the anti-liberals will be unable to deliver anything of actual value. But also I hope that liberals will buck up their ideas about how to help, and appeal to, left-behind people and places. Meanwhile we must call out prejudice when we see it.

 

Amid the noise about no-deal, a blind Brexit is being put in place

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The quality of political debate in Britain is hitting new lows. The politicians areĀ  not interested in helping us understand what is going on, just in promoting some half-true story or other. ‘Twas ever thus. What has changed is that challenge from journalists and commentators is weaker. Most media are promoting their own agendas. The BBC tries to be better, but it just presents one fiction, compares it to the alternative fiction being offered, and retires. Few are interested in talking about what is really happening.

The current talk about a “no deal” Brexit is a case in point. On the one hand, business groups are worrying that this will lead to an Armageddon on the day after exit, at the end of March next year. This is pounced on with glee by Remain supporters as a sort of “told-you-so”. Government ministers simultaneously try to say thatĀ  it just won’t happen, that it is the fault of EU intransigence, and that anyway no deal is better than a bad deal. Brexiteers, like the Conservative Ian Duncan Smith last weekend, just talk about something else completely. What are we to make of this all?

First of all, we have to be clear about what a no-deal Brexit actually is. We are not talking about the choice between the Single Market or WTO terms or something in between. This is what IDS, William Rees-Mogg and others change the subject to when pressed on the topic. What is meant by no-deal is, well, no deal. No trading protocols, no divorce bill, no transition period, no mutual recognition of citizens’ rights, no common VAT infrastructure, no mutual recognition of standards. Just a vacuum in place of 40 years of accumulated law and regulation.

And that could be Armageddon. There would be queues at ports, empty shelves in shops, hospitals running out of medicines, layoffs in all kinds of businesses, holidays cancelled and even planes grounded at airports. Things would start to settle down in due course, but with Britain in the weakest possible bargaining position, it is very hard to see how most people aren’t going to be made worse off. It is no wonder that Brexiteers don’t want to talk about it. They are prone to suggesting that threatening a no-deal will improve Britain’s bargaining position in the exit negotiation – a bit like threatening to walk away from a house purchase when you are making yourself homeless.

In fact, if the pro Brexit politicians were interested in intelligent engagement they could make two points. The first is that a no-deal is not in fact all that likely, because the deal is quite close to being done. The main sticking point is trying to find a form of words that will cover the EU’s demands on the Irish border. The British government thinks that the current draft is politically suicidal, because it opens the possibility of Northern Ireland having some form of semi-detached status, with a strong boundary between it and the rest of the UK. Although most British people are quite chilled by that prospect, it would have devastating political consequences in the province. But a no-deal would almost as devastating for Ireland as it would be for Britain, so there is sure to be some flexibility on this. Indeed, there are already some signs of movement from the European Commission. The rest can be fudged, even if it does open up the prospect of another no-deal cliff edge when the transitional period comes to an end, on 31 December 2020. This is what the Scottish First Minister Nicola Sturgeon is calling a “blind Brexit”: one where the longer term relationship is unresolved. This is exactly what the UK and EU negotiators are planning.

The second point to make is that we will know if there is likely to be a no-deal later this year – probably October. After that it becomes too late for the deal to tidied up and ratified by all the bodies required to do this, for such a complex treaty, in both Britain, the EU institutions and in other EU countries. That gives perhaps five months to prepare for that cliff edge. Temporary stop-gaps can be put together for the most urgent issues: citizens’ rights, air traffic, and so on. I can’t see that a lot of supply chains or border facilities will be sorted out by then – the infrastructure can take years to build – so there will still be chaos at the borders and some lay-offs. But we should avoid Armageddon.

And the rest is theatre. Remainers want to build up a sense of crisis so that people seriously start to rethink the whole foolish enterprise and call it off before it is too late. They know that once we get beyond exit day it will be much, much harder to get the UK back into the EU. The government thinks it is wise to keep its head down to preserve unity within the Conservative Party and to keep the Democratic Unionists of Northern Ireland on board. The Brexiteer politicians (the clever ones) have probably decided that this battle is done and are getting on with the next one: which is the shape of the world on 1 January 2021. Their main concern is that any deal done on Ireland does not lock out their preferred solution, which, for now, is some sort of Canada trade deal.

Admittedly this is quite delicate. A Canada deal looks incompatible with on open Irish border, which, with Republican terrorists still active and Loyalist groups ready to retaliate, could restart an escalation of violence. But the thing is to fudge it for now and hope that the passage of time will make the problem easier to solve. Under the transitional arrangements there would be an open border until 31 December 2020.

Theresa May’s government has played a weak hand quite well. At the cost of making any progress on other burning political issues, including the ones that led to the referendum backlash, she’s winning on executing Brexit. She is better off without Boris Johnson and David Davis, the two ministers who resigned in a huff. It would have been better to have negotiated a deal on citizens’ rights separately, and put it to bed ages ago; that would make no-deal less scary. The EU side was dead set against this – but it would have been a bonus to their own citizens, so they might have given way. Mrs May made no serious effort (or any effort at all so far as I know) to do this.

So the good news is that Brexit Armageddon is very unlikely. The bad news is that the Brexit roadshow will keep on running after 29 March 2019. I read one article recently which looked forward to the day when we could move on from Brexit to sorting out Britain’s many other problems. Alas that day is still years away.