Happy New Year to my readers! These few days are thick with journalists making predictions for the year ahead. This is probably a good discipline for them – and even better if they revisit them at the end of the year to see how they did. But it makes less attractive reading, and I don’t tend to do it myself. Mostly the fare is gloomy stuff. But one group abounds with optimism: the political populists, and supporters of Donald Trump in particular. I want to reflect on that.
As usual my starting point is Matt Goodwin. I rarely read more than a couple of paragraphs of his Substack – and since I’m not a paid subscriber that is often all I’m offered. The writing is high on rant and low on content. It’s only good reading if you want to be wound up, one way or the other. His New Year post offered a note of optimism: “things are moving our way” he said, with the hated “elites” getting their comeuppance. The main driver for this was that he anticipated that the Trump administration would prove that radical-right solutions would work, contrary to the heaps of scepticism from the liberal elite. And this success would strengthen the growing populist movements around the world.
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This rather captures the zeitgeist of populists. Extreme pessimism about how the world is going to hell in a handcart is combined with excessive optimism about what their favoured leaders and policies can achieve. Optimism from Trump supporters, and corresponding pessimism from their liberal critics, is currently rampant. It is behind the strong performance of US shares (I have just dumped the two funds most exposed to this effect in my pension pot – but the profits have been welcome). The idea behind this is that tax cuts and deregulation will drive up corporate profits, while tariffs are either a negotiating bluff or will favour big American companies.
There are two big problems with this outlook. The first is that the politics is much trickier than most people seem to realise. The second is that the policies won’t work either. Consider the politics. In spite of Mr Goodwin describing Mr Trump’s victory as a “landslide”, it was actually very close. He secured slightly under half the popular vote, with a margin of about 1.5% over Kamala Harris. This is a big victory by recent Republican standards, and gave him a comfortable majority in the electoral college, but hardly overwhelming. More to the point, the Republican majorities in both houses of Congress are very tight; it even shrank in the House of Representatives. This will not make getting controversial legislation through easy – and especially from an administration whose political negotiating skills are pretty weak (especially compared to Joe Biden, the outgoing president). Some aspects of Mr Trump’s policy don’t require congressional approval – but the tax cuts, such a central part of the business optimism for Trump, do require this. It will be more than hard going. The response of many liberal commentators is “pass the popcorn” as they seek to get some entertainment from the Republican infighting. Meanwhile the flurry of executive orders will doubtless be subject to a blizzard of legal challenges. That is the American way.
And the policies themselves are bound to disappoint. Mr Goodwin confidently expects mass deportations to take place rapidly, as promised by Mr Trump. This will be much harder and slower going than he expects, and will have adverse short-term economic consequences, as it will throw uncertainty into the labour market. Tariffs cannot possibly meet the expectations placed on them by the policy’s supporters. And so it goes on. There is no great pool of untapped economic potential waiting to be unleashed (as there was in the 1930s, say). Just how the economy will play out is very uncertain, however, largely because the politics is so difficult that it is hard to predict which policies will be enacted and when. A common view, which I have put forward myself, is that tax cuts and tariffs will drive inflation up. An alternative is that the economy stagnates as these policies fail to get started, and uncertainty undermines investment.
The Trump administration may achieve some good things. There is bound to be a lot of nonsense going on in the current regime. Funnily enough, I think the prospects for Mr Trump’s foreign policy are better than for domestic policy. His highly transactional approach is easy to grasp, and accords with how many foreign governments like to do business. I am really hoping he can force a peace in Ukraine that does not neutralise that country. Mr Biden seems to have run out of ideas (incidentally it is entirely possible that a President Harris would have accomplished a peace settlement too). My hopes for the Middle East are weaker – it looks as if Mr Trump will give Israel free rein. But that is pretty much what Mr Biden was doing. There is talk of a deal on Iran, but I’m not sure if the leaders of that country have enough to offer to make any deal look good. The Trump administration may simply play a long game for regime change. In the longer term my main fear is that the muddle and confusion of Trump’s Taiwan policy will encourage China to launch a military attack while the window of opportunity persists.
Overall, though, I see that the populist movement be disappointed, and the politics among Republicans will turn toxic. This will take some wind out of the sails for populists elsewhere. But the long term drivers of populism remain. Demographics and the changed working of the global economy are forcing difficult choices on governments, on tax, on spending and on immigration policy. The public as yet shows no sign of facing up to these difficulties – so the populist message that this is all the fault of an out-of-touch elite still has potential. The floundering of Britain’s new Labour government; the political impasse in France; and the prospect of something similar in Germany – these all show that the mainstream political parties have no answers either.
Something has to give. As yet I don’t have a feel for what this will be. But populists don’t have any workable answers and populist-led governments are likely to fail. Or if they don’t fail, it will be because they will adapt to reality and manage to sell it to the public and reduce their expectations to something more realistic. Some governments might succeed (Georgia Meloni; perhaps even Marine Le Pen); but not Donald Trump.
The human brain seems hard-wired to pessimism – often called realism. There is indeed much to gloomy or worried about at the moment. Quite a bit of it is talked up here: don’t get me started on the subject of economic growth! But it is always helpful to challenge oneself, and in this season of good cheer, I thought I would give it a go. So here are five things that give me hope.
1. Solar Power
Solar panels are a truly transformative technology, in ways that we are only slowly starting to appreciate. It is a distributed technology, which requires little infrastructure of itself (though of course to transport its output large distances does require substantial investment). It doesn’t require much maintenance once installed, as there are few moving parts. It reduces marginal costs of energy to very little. And advances in battery technology make its one major drawback – that it only produces when there is sunlight – much more manageable. It is an economic proposition that fossils fuels are finding it harder and harder to compete with. Thanks to these technologies China is already ahead of its decarbonisation goals. It is indeed thanks to China that the technological advance has been so swift. It is the underlying economics of solar power that makes decarbonisation a feasible proposition, and one that is developing its own momentum. Wind power has some of the same features, but many more difficulties. We should not be placing tariffs on Chinese exports of solar panels or batteries, but saying “thank you very much” and importing all that they can produce. Domestic production will catch up in time.
2. The bad guys can’t deliver
Our modern era is sometimes compared to the 1920s and 1930s, which saw the rise of the Nazis, Fascists and Stalinism. The rise of the far-right today is often compared to these movements. But the context is very different. Then there was much unused economic potential, thanks to misguided (as we now see it) conservative economic policies, and industrial technology that provided a ready and highly productive use for relatively unskilled labour – and much untapped demand for that technology’s output. Fascist regimes could readily produce dramatic economic results by unleashing infrastructure investment programmes – and even by building up armed forces. This would come to be called “Keynesian economics”. The results gave these regimes popular legitimacy. This was especially dramatic in Germany and helped Naziism to become an embedded ideology. No such opportunity exists in the 2020s. Advanced technology does not produce lots of new jobs – or not of the right sort. Labour markets are already quite tight, so that expansionary fiscal policies, and excessive military spending, produces inflation, and not lower unemployment. Instead, the policies of today’s near-fascists result in cronyism, corruption, inflation and general underperformance. That undermines their legitimacy.
Playing for the biggest fall is Vladimir Putin’s Russia, however much he manages to achieve in Ukraine. Russia has a massive demographic problem, with a very low birth rate. The war is making that much worse. Mr Putin’s obsession with pollical control is resulting in cronyism and the suppression of initiative: this is not good for economic efficiency – while sanctions arising from the war reduce Russia’s options. Instead, Russia is heavily dependent on hydrocarbons. See 1. above. Events in Syria show how quickly an excessively tyrannical regime can crumble – and shares elements with the fall of the Soviet regime.
I hesitate to call China evil in the same way as Russia. Its leadership is much more able, and recognises the need to keep corruption in check and for economic efficiency. It has some impressive achievements to its name (see 1. above). But it remains an imperialist power, and actively tries to undermine the West. It too has a demographic problem, and it is finding that an obsession with political control comes with increasing costs. It does not present a shining alternative to western ways, as it once thought it did.
3. Information technology
I am thoroughly sick of the hyping of artificial intelligence (AI), and the way it is crowbarred into any topic you care to name. But it is part of an astonishing development of information technology that will transform our lives in ways that we barely understand. I don’t think it translates into increased productivity in the smooth way that some talk of. As with most technologies it will have to change the way we work and think about things before it will have a real impact. But it should improve economic efficiency and human wellbeing in the longer run. My hope is that it will make some of the public service challenges developed countries face more tractable, reducing the pressure on government finances.
4. The developing world
A lot of the progress made by the developed world in the later part of the 20th Century and the first years of the 21st comes down to the opportunities provided by less developed countries in East Asia. As these countries developed their economies, they presented trading opportunities and gains from trade with the developed world. This has run its course, and has actually gone into reverse, as East Asian economies converge with developed world ones (and in some cases have joined that developed world), reducing trade gains (a process which, of course, has been enormously beneficial to those East Asian economies). This has been a regular hobby horse of mine as this piece of basic economics is so widely under-appreciated, even by economists who should know better. And yet there remain two large areas of the less developed world which have yet to advance properly: South Asia (notably India) and Africa. Might not the development of these economies provide further opportunities for mutual benefit?
This is far from straightforward. The East Asian model saw the transfer of workers from subsistence agriculture to manufacturing industry, mass producing consumer products for export, in exchange for a different suite of products and services from the developed world. That model is surely done. Manufacturing technology is so advanced that there are too few jobs at stake, and the developed world’s appetite for “stuff” is surely approaching saturation – although we should remember that potential markets include those East Asian economies, including China, too. To advance, the South Asian and African economies must move the workforce out of agriculture. India has made important strides, but has yet to seriously tackle agricultural reform. But what should surplus agricultural workers do? Here I’m struggling a bit, but I’m sure that 1. and 3. above are part of the solution. It may be that their development will be less dependent on exports. At the moment, their biggest economic impact arises from the export of labour though emigration, affecting Europe and the Middle East in particular (also America, where immigrants also come from Latin America – which is less of a development opportunity). This has mutual benefits but the stresses in host countries are showing, and this is not sustainable in the longer term.
Of course this effort must be led by the developing countries themselves, and not as part of a paternalist relationship with the developed world – as the East Asian progress owed little to the West except in the cold, hard mutual benefits of trade. There is a lot of baggage here but it is in the developed countries’ interests if they are to take their people out of poverty.
5. Liberal values become world values
I’m on fairly safe ground on the first three of my choices; number 4 is a bit shaky. This one is a bit of outrageous optimism. The later 20th Century was a post-colonialist age. Colonialism by the big European powers was pretty much over, though colonialism in Asia by Russia and China lived on. But the pall of colonialism hung over those European powers and still dominated political narratives. Newly independent nations blamed all their ills on their colonial past, and sought compensation in some form or other from the former colonists. They adapted the narrative somewhat to put pressure on the USA too as some sort of “neo-imperialist”. Meanwhile the developed world – the Western powers, consisting largely of those ex-colonisers, espoused liberal values as being universal ones, and criticised others when they fell short. These two narratives got tangled up, and many less developed countries accused developed countries of imposing alien values to their own advantage, and accused them of racism on top.
This all has another narrative: the West remained extremely powerful after decolonisation, and even more so once it had seen off its Communist rival the Soviet Union. Developing countries needed to plead their case to get aid and assistance; the Western powers never let their liberal values get in the way of self-interest, leading to accusations of hypocrisy that were often justified. Then some of these developing nations became more powerful. China worked its way into superpower status (in large part through trade with the West); other countries, like Iran, became more assertive. The anti-liberal movement gained momentum. Liberal values were Western values, and were a new way of promoting a kind of moral colonialism.
The result was ugly. The number of oppressive regimes grew. Medium-sized powers felt free to interfere in regional affairs, allowing a series of awful civil wars to take root. Western liberals feel beleaguered. And they are criticised at home, by conservatives who are fed up with what they see as the trashing of their countries’ history and culture; and by the left who promote anti-colonialist attitudes, and indulge in identity policies among minority communities that would not be tolerated by those minorities if they were in the majority..
And yet the West’s critics still look to the West for leadership in such matters as combatting climate change. “It’s your fault,” they suggest, “so you fix it.” China, by now the biggest contributor to world pollution and climate change sits idly by, though at least they are developing post-carbon technologies – see 1. above. India persists in its victim mentality, apparently unable to see that with a billion people they can’t just complain from the sidelines.
But this is breaking down. The rise of the populists, and especially Donald Trump, means that the West is retreating from its leadership role. And yet the West still looks to be one of the best places to live in the world. Few would say that of China – and especially if you don’t happen to be Han Chinese. And problems such as climate change change and civil wars rage on, with less developed countries as their main victims. This is creating something of a leadership vacuum, which the less developed countries need to fill. And their favoured narratives are losing traction. East Asian countries that have transitioned to developed status did this largely through their own efforts, assisted by free trade with the developed world. They had to move on from the victim mentality and take on proper agency of their own. It is not that African and south Asian countries are necessarily wrong about the damage of colonialism and slavery, but that their obsessing about this is no basis for building a prosperous future.
Meanwhile Western values and the moral high ground don’t look so bad. Capitalism has proved to be the only viable route to prosperity. The cynicism of non-Western powers, like China and Iran, to say nothing of Russia, is very evident, and has hardly promoted world peace. They are not creating great places to live (even if China’s progress must be acknowledged, it compares unfavourably with places like Taiwan). China may be free of Western hypocrisy, but that just leaves its naked self-interest unvarnished – as it develops its very own brand of hypocrisy. Western values really do have a universal application.
This would be good news because if we see a better quality of leadership from non-Western countries, then global problems will become more tractable. They will push forward harder on de-carbonisation, starting at home; they will be less free about arming rebel movements among their neighbours. A bit more humility on the part of Western countries would certainly be appropriate, but people being what they are, that will not be forthcoming.
When reflecting on this I am reminded of one of the courses I studied in my final year at Cambridge, when I was studying history. It was on the philosophy of international relations and led by Professor Harry Hinsley. How do you achieve peaceful international relations? One line of argument suggested that you needed a dominant power to act as a sort of policeman. Another suggested that you needed an empowered supra-national authority. The first is an uninviting prospect, the second is clearly infeasible, and leads to the problem of how that world authority is to be accountable. A more hopeful idea is that if the world was divided into autonomous nations, whose sovereignty ended at agreed borders, then those countries would learn to live with each other out of self-interest. This was in effect the system that Europe developed after the Seven Years War in 1763. Europe didn’t banish war, but the periods of peaceful relations lasted longer than before. The problem was that wars become harder to stop once started. I would like to think that the medium-sized nations of the world – Turkey, Saudi Arabia, United Arab Emirates, Iran, Israel in particular – will start to learn this lesson. Also that the newer great powers – China and India – will realise that they must play a bigger leadership role if world problems are to be tractable. And that neo-imperialist powers, Russia and to a lesser extent China, realise the futility of their enterprise and start to focus on the real needs of their populations. None of this necessarily involves embracing liberalism – but somehow I feel that it leads there.
Hope springs eternal
Good news tends to happen slowly and it isn’t newsworthy. But there is no denying that the world is entering a rough patch. Economic growth has run out of road in the developed world – as at last even the FT’s Martin Wolf is starting to appreciate. He says that this is causing the current political dysfunction, but it’s worse than that. The US is widely admired for delivering the best growth story, and yet the dysfunction is as bad there as anywhere. Actually the changes required to generate growth are as painful as trying to live without it. But the march of technology and scientific understanding goes on – and we don’t need conventionally understood economic growth for the world to become a better place. Think of a place where people don’t consume any more on average in developed countries (though with a more equal distribution), but who live longer, healthier lives, and where there is much less crime. A world where greenhouse gases in the atmosphere are steadily being reduced, where extreme poverty is being pushed back, and which is not so blighted by armed conflict. Apart from the beating back of poverty, none of these things needs economic growth – and the growth required to combat poverty is required only in less developed countries. This advance can be ecologically sustainable. I have not lost hope that the world can get much closer to such a vision.
In my last post on the US election, I forecast victory for Donald Trump. That was just before Joe Biden stood down – which happened within hours. In a postscript I suggested that the economy and immigration would still swing the election for Mr Trump. So it proved, though as I watched Mr Trump melt down in the first months of Kamala Harris’s candidacy, I thought she might do it – even comfortably. But then Mr Trump’s campaign stabilised, and returned to consistently hammering the points that would swing voters, and he won comfortably. I thought Ms Harris fought a good campaign in the circumstances, but she had no answer on those two critical themes.
And so an earthquake has hit US politics. Mr Trump is much better organised than he was in 2016, and his personnel changes in the American state will be more sweeping. Meanwhile the complacency of the Democrats after beating him in 2020 has been badly exposed: there will surely be something of a clearout on their side. I don’t go along with the idea that this is the most consequential election of our times (which could be applied to 2016, 2020 or 2028 with equal merit) – but the changes will be drastic. To me it evokes nothing more than that what we experienced in Britain after the Brexit referendum in 2016.
Of course 2016 was when Mr Trump was first elected, and we thought that was a Brexit moment too. But his first administration descended into muddle and was reversed in 2020. The equivalent of the first phase of Brexit happened – the chaos after the referendum result as the country turned rudderless, but not the second – which started with Boris Johnson’s landslide election victory in December 2019. It is the equivalent of that second phase that is starting now in America. At first Mr Johnson’s election victory overawed everybody. His supporters projected their favoured outcomes onto the result, and there was much hubris, as his opponents retreated to lick their wounds.
The similarities between Mr Johnson and Mr Trump are striking. Both won by making a series of impossible promises and relying on humour and bluster to persuade voters to give them the benefit of the doubt. Both are personally quite transparent – what you see is what you get – giving a feeling of authenticity compared to other politicians. Both favour loyalty among their choices for political office over competence. They even both have brought in highly intelligent mavericks to spice up their administrations (Dominic Cummings in Britain, Elon Musk in America). It did not go well for Mr Johnson: his chaotic regime collapsed in not much over two years, getting himself replaced by an ideologue who destroyed what was left of his party’s reputation (Liz Truss) – a mess that his eventual successor, the lightweight Rishi Sunak could do nothing to reverse. It was the most spectacular reversal of political fortunes in British history. Will this history repeat? A chaotic regime which results in Mr Trump bowing out prematurely, followed by an even more disastrous lightweight ideologue (JD Vance)?
Maybe. But we need to think about the differences between the two situations. Firstly the two men. Mr Johnson is by far Mr Trump’s intellectual superior, but he had little organisational experience. He couldn’t run a whelk stall, in the British expression. Mr Trump is an experienced businessman, who certainly could run a whelk stall (“the best whelk stall in all the world”), even if his track record is nothing like as good as he says it is. He may not be particularly intelligent in the normally accepted (left-brained) sense, but he has drive, stamina, confidence and intuition that make him very effective in his own way. His management style is chaotic, but there is more method to his chaos than with Mr Johnson, and he is more adept at blaming others if anything goes wrong (Mr Johnson did this too, but without the same chutzpah). And America’s president is far more entrenched constitutionally than Britain’s prime minister, who is at the mercy of parliament. Mr Trump thrives on attention and status, which the job of US president delivers more than any other – it is hard to see him voluntarily letting go. This would take some sort of physical health issue – though this is a clear risk at his age.
But there are going to be problems. His administration will be peopled by chancers and mavericks, who will under-deliver. That happened last time, though in a different way to what is likely to happen this. In the short term I see this as doing little political damage to him though. There will be ethical issues galore – but (unlike for Mr Johnson) these have little capacity to damage him. Failure to deliver on practically anything doomed Mr Johnson and his successors (even Brexit had a big flaw in Northern Ireland); Mr Trump’s downfall is likely to be over-delivery. Mr Trump has made three major policy promises: the mass deportation of irregular immigrants; the raising of tariffs; and reducing taxes. Even partial delivery on these promises will make America worse off. They might have longer term economic benefits (though I’m a sceptic) but these will not come through in time.
It is very hard to see how Mr Trump’s deportation strategy will unfold – it is so unprecedented. But he has laid huge store on it. At a minimum it will create huge uncertainty in the country’s labour markets, and surely many labour shortages. He may try to releive the shortages by relaxing legal immigration, though this looks politically suicidal, but that won’t happen without massive disruption. This disruption will lead to inflation – with the highly sensitive area of food prices looking especially vulnerable. Inflation was the economic event that did most damage to Mr Biden’s reputation, and it will upset many of those that voted for him on the basis of his supposed economic competence.
Something similar will happen on tariffs. These are so obviously harmful that many of Mr Trump’s business backers assume that his policy is simply a negotiating tactic. Nothing, it seems, will dampen their wild optimism, reflected in a stock market rally. But tariffs are central to Mr Trump’s economic outlook. He appears to think that they will be costless to consumers, and raise revenue with which he can cut income taxes. Besides, it is surely hard to negotiate the kind of change to the terms in trade that he so wants. High tariffs will raise the prices of imported products and so inflation. This may not be as disastrous for America as it would be for some others, like Britain, who depend more on trade. But if prices are already going up because his migrant policy has disrupted labour markets, it doesn’t look good.
And then there are tax cuts. Many of Mr Trump’s business supporters set huge store on these, but there is a real problem with the country’s already-huge budget deficit. Adding to this deficit will be inflationary – one of the things that undid Mr Biden. His regime may want to balance this through drastic cuts to public spending (though not to defence), but there is not enough beureaucratics waste, wokery and foreign aid to deliver anything like enough – which would find him cutting into entitlements such as pensions (social security) and medical schemes. That won’t be an easy sell.
All three of Mr Trump’s main economic policy ideas point to inflation and administrative chaos. This will create stormy seas quite unlike his first administration. This is another difference from Brexit, which has proved to be a slow bleed rather than the big dislocation that some predicted. With his regime’s reputation for economic competence shattered there is liable to be a big backlash.
That should be an opportunity for the Democrats – just as Mr Johnson’s collapse was an opportunity for Labour in Britain. It is also possible that a different strand of populist radicalism emerges from the Republican side to take over. Meanwhile in the wider world, the retreat of America from its leadership position will force others to step up. There will be too much collateral damage for this to be a nice thing to watch – but it will be fascinating if you can see beyond that.
I asked Copilot for a picture of a squabbling crowd in America and this is the result. I suspect political guardrails prevent them including the US flag…
One of my rules here is that I don’t like to comment on elections before they happen. Most news reporting on elections happens before the results are known, because, I suppose, it is more newsworthy. And that’s fair enough if your audience are voters in that election – they have a decision to make. But for others the most important thing about an election is its outcome, the point at which most newsmen seem to drift away, for foreign elections anyway. But the coverage of the United States’ general election tomorrow has become a massive thing in itself. And I want to comment on that before we know the outcome.
The first thing to say is that the coverage here in Britain is massive. My main source of daily news is the BBC, and they are throwing huge resources at it. Alas they often don’t have much new to report. It is quite interesting to see in pictures, or hear real voices, to illustrate what I have read about in more substantial reporting in The Economist and elsewhere – but it has become repetitive. This is typical of the BBC’s “headless chicken” editorial policy. They let their agenda be set by other news outlets (as they see themselves as reporters of the news, not makers of it), set a time budget and fill it even if they have nothing to say – meanwhile suppressing coverage all sorts of important news in areas they consider less newsworthy. Things are not quite as bad as they are when there is a death in the Royal Family, but I’m getting some of the same feeling.
For somebody like me, endless repetition of messages by the BBC and others makes we want to challenge them. These include: this is a very close election; it will be decided in the seven swing states; it is the most consequential election in a generation (or more); American politics is toxic and dysfunctional (to be fair the BBC does not push such an opinionated view – though it is very widely held). All of these contentions have plenty of evidential support, but none of them should be regarded as established facts, as most coverage seems to imply.
Is the election close? Yes, all the respectable polling says so, and the campaigns are acting that way. But accurate polling is very hard to do. In the last two elections Donald Trump’s support was significantly underestimated. There are many unique characteristics about this election, and that is going to make it just as hard to predict: learning from past mistakes can simply lead you to new ones. You can make a case that there will be a comfortable Trump win (a repeat of previous polling error, resulting from a broadening of his appeal across ethnic groups, etc.) or a comfortable Harris one (more motivation from outraged female voters, etc.). We don’t know.
Will it be decided in the seven swing states, or perhaps just the biggest of them, Pennsylvania? A recent poll showing Kamala Harris ahead in Iowa (due to predicted high turnout among women voters) raised eyebrows as this is a regarded as safe for Trump, and may well be one of those polling outliers. But it is entirely possible that the intensive attention both campaigns have been paying to Pennsylvania make this an atypical state, and the winner there loses the overall election. Meanwhile it is possible that one of the parties will flip one or more states outside one of those seven and this could prove decisive.
This is the most consequential election in a generation? That is what both campaigns are saying, and it is what a lot of others were saying too. But it’s what they always say – and especially last time. A Harris win is not going to stop the backlash against “elites” from middle America, even if it means the end of the road from Mr Trump himself. She will not put into action the sort of radical programme that Joe Biden did – as she has not prepared a long for the job as he had, and she will be more constrained politically – she is likely to face a Republican-controlled Senate. And as for Trump, he may in some ways be much better prepared for power than he was in 2016, with many more loyalists ready for the call to assist his administration – but he himself is more erratic and even less focused – and as narcissistic as ever. We could well get a chaotic regime that achieves little and quickly becomes constrained by its unpopularity. Yes, the election will be highly consequential – but so was the last one, and the one before – and well you make the case for earlier elections too.
American politics is toxic and dysfunctional. Actually the first of those is pretty much incontestable – toxicity is a Trump and Republican strategy to help motivate their voters. Ms Harris is trying to break with that, which is welcome, but not necessarily a winning strategy. But dysfunctional? There is dysfunction – most notably with the failure of bi-partisan border legislation purely to make a political point. But The EconomistLexington column makes a good case that democracy is actually in quite good shape. The candidates are moving to the middle ground; party support is breaking out of its ethnic silos. And in today’s Financial Times Rana Faroohar points out that there is dysfunction in wider American society, with too much inequality and with governing elites obsessing about the wrong things. But there is widespread recognition of this wider dysfunction in American society, and perhaps the raucous debate, and highly contested nature of its politics will start to produce the sorts of changes it needs for renewal – and has a far better chance of doing so than if a more stable and controlled politics prevailed.
Humans are far from the rational creatures that many like to think they are. Our predictions for the future are too heavily influenced by our experience of the past. We think that our battles of the moment dwarf those of the past and future in their importance. Both biases are running rampant in the news coverage of this US election.
“Don’t bet against the American economy,” says The Economist in a recent special report. I understand where that sentiment is coming from. Over the years I have read many prophesies of doom, or at least of decline, for that economy, and often found them persuasive. On each occasion they have proved false. Two thoughts have struck me from this report: first that America’s success can’t be replicated by Europe, and that Europeans shouldn’t try; and second that America’s economic success, paradoxically, lies at the heart of its toxic politics. It is that last paradox which might cause the American success to unravel, as, to be fair, the report acknowledges.
My first insight flows from the principle of comparative advantage – a core economic insight originally articulated by David Riccardo in the 18th/19th Century. It is part of Economics 101, and is the critical idea about what drives international trade, and why such trade is mutually beneficial even if one economy imports stuff that it could make more efficiently for itself. It’s all about opportunity costs, as more modern language than Riccardo’s would have it. At a strategic level the theory of comparative advantage has massive predictive power – explaining so much of the world economy as we see it, including, for example, why exchange rates don’t match purchasing power parity. But as you try to get into more detailed, and tactically useful, predictions, economists have been unable to turn it into anything more precise, in spite of one or two attempts. Therefore it is left out the economic models that drive so much of the work of economists, and it does not progress beyond Economics 101. That is why so many economists, not least writers at The Economist, often forget that it is there and seem ignorant of how it actually plays out. So far as I can see, the great (and late) economist Paul Samuelson is one of the very few economists of modern times to properly have internalised its implications. He it was who pointed out that as undeveloped economies converged with advanced ones, the gains from trade between them would diminish, at the expense of the advanced economies. This does much to explain the relative economic stagnation of advanced economies since the financial crash of 2007-09, compared with the era of rampant globalisation before it (which happened after Samuelson died, having forecast it) – though there are other factors, not least demographics. And yet this is never mentioned amid the wringing of hands about the backlash against global trade, which is generally blamed on politics alone. And yet the invisible hand is so often behind the politics.
I have a another insight arising from Riccardo’s thesis. America’s recent success compared to Europe, as The Economist‘s report points out, is based on high-tech industries, where productivity has soared, while it has plodded elsewhere. This success is surely based on the scale of America’s market, and the relatively lack of legal and cultural barriers to trade and the movement of labour. This is clearly a source of comparative advantage over Europe – though not to China, which has a very similar advantage. This means that the relative productivity of the tech sector compared to others (making aircraft, for example) is always going to be greater in America than in Europe, apart from a few specialist niches. That will drive America to specialise in hi-tech industry, while Europe’s direct competitors will diminish – to the benefit of both, as an Economics 101 student can readily explain. If this the way of the invisible hand, then why does The Economist (and such luminaries as Mario Draghi the EU éminence grise with an economics training) spend so much time bemoaning Europe’s lagging hi-tech industry and urging it to to try harder? Economically literate politicians, like Mr Draghi, often do this sort of thing because it is a convenient argument for policies that are actually about economic efficiency in general . Journalists in more sophisticated publications have no such excuse. Europe is never going to match America, or China for that matter, in some areas and it will be a waste of effort trying. Meanwhile they are doing well enough exporting the many products where they do have comparative advantage – Europe does not operate with a large trade deficit, after all. Of course European leaders must keep trying to improve economic efficiency, and perhaps watching America will act as a spur, but a clearer understanding of the workings of comparative advantage would mean better-directed public investment.
Back to America. The Economist does not fail to attribute some of America’s success to an entrepreneurial zeitgeist – but it points to more solid factors too. First is that it has comparative advantage in industries that happen to be highly productive – not just in hi-tech, but also oil and gas. The former advantage stems from the size and flexibility of America’s product and labour markets – something that only China matches (India seems to be closer to Europe in this respect); the latter from a geological endowment. That’s all very well, but it creates tensions. The successful industries take off, but the corollary is that many others are left behind – and through the laws of comparative advantage – become less internationally competitive (as the dollar strengthens, and as they have to pay workers more to compete with the more productive sectors). This creates what Donald Trump calls “American carnage” – the flip side to economic flexibility, as factories close and more productive workers flee to the booming parts of the country. How much the imbalance between globally successful industries and the mainstream is driving high inequality is an interesting question. The Economist suggests that the poorest quintile has seen significant income growth in recent years with tighter labour markets – but in the middle of the income distribution there may be more stagnation – as the higher income groups continue to do fabulously. But if things happen quickly in America, the human cost is going to be high. Rapid growth breeds “carnage”.
A further source of advantage, according to The Economist, is access to large numbers of immigrants, and not least those flooding across the southern border. This seems to act as a lubricant: jobs get filled more quickly in the growing parts of the economy. Europe has immigrants too (though not China) but finds these harder to integrate. And yet this is a central driver to the country’s toxic politics.
And so the rapid change to the structure of the US economy, and the flood of immigrants that its success attracts, are driving a sense of dislocation among Americans, which in turn is driving the highly destructive direction of US politics. This is placing all its critical institutions under threat. Four dangers lurk in particular: the capture of US institutions by a big business elite (“rent-seeking” in economic jargon); rolling back international trade through tariffs and other measures; clamping down on immigration; and finally macroeconomic instability arising from public finances going out of control.
The concentration of big business, leading to capture of the political system and the corruption of institutions to protect established business from competition (often in the name of social stability), is a familiar process. We see variations of it in many places (although sometimes, as in Russia and Hungary, the relationship between political leader and business elite is more complex) – and , indeed, it is alleged to have happened in America in the late 19th Century. The concentration is happening in America now, as is the business elite’s dabbling in politics (most egregiously by Elon Musk) – but The Economist does not think it is leading to significant anti-competitive practices. Competition between the major hi-tech companies remains intense and the pace of innovative product development is hardly slowing. We might raise eyebrows about the way money buys influence in the US, but it does not appear to be a big threat to the US economy.
The backlash against foreign trade is a more substantive concern and especially the advocacy of tariffs. This seems to be mainly driven by Donald Trump – and as such it is one of his most distinctive contributions to economic policy – but the Democrats are copying him. It is hard to see how such policies will do much to help the American public – their main effect will be to raise costs. However it may not do much damage to the main drivers of US economic health: the technology giants and the oil and gas industries. It is not good news for the rest of the world, however, especially Europe.
Anti-immigration will also probably not hurt as much as it could – unless Mr Trump is actually tries to fulfil his campaign rhetoric about mass deportation. The Economist is also quite sanguine about the impact of public budget deficits, which few politicians seem to be taking seriously. There remains little threat to the US Dollar as the world’s preeminent currency, and hence the ease with which dollar finance can be obtained.
Still, there does seem to be an unhealthy cycle here. Growth in the American economy remains robust, but it is driving US society apart. Politicians and commentators alike focus on the choices at the next election, always described as the most important in modern times. But neither side is able to deliver a killer blow to the other. If Mr Trump wins next week’s election, his movement will have to find ways to survive his departure, amid the inevitable chaos of his administration. If Kamala Harris wins it is hard to see that she can convince Trump supporters that she is taking America along the right course, continuing to fuel the destructive radicalism of the right. One way or another this political toxicity will surely affect the astonishing robustness and resilience of the US economy that is one of its main drivers.
Back in 2021 it had seemed impossible for Donald Trump to return to the White House. Even in 2022 it seemed that his brand was diminished – as candidates he endorsed did badly in Congressional elections. But we should have known better. For the first time in his political career, the man looks unstoppable. We must now think what many of us liberals had thought unthinkable: he will be President again.
Pretty much everybody I know regards the prospect of a repeat Trump presidency with horror, including a handful of Americans. Some Britons do like Trump, but most treat him as a bit of a joke – a caricature of the worst American stereotypes, and transparently narcissistic. This country has had enough of un-serious politicians after the chaotic period of Boris Johnson’s ministry, and his successors’ indulgence in gesture politics. It is one reason that Sir Keir Starmer’s popularity ratings are now high – seriousness is his most demonstrable virtue. You don’t have to be a liberal here in order to dislike Trump.
But it is clearly different in America. The first way that Mr Trump has been able to make a comeback is that he has fired up a supporter base that has enabled him to take over the Republican Party. He has made short work of his rivals, and any Republican law-maker that doesn’t pay homage to him will have their careers quickly terminated. Mr Trump has been able to forge a special bond with this supporters. He plays on their sense of grievance, and the feeling that the political establishment despises them (which they often do…). This seems is intuitive – I have called him a right-brained genius – following the once-fashionable idea that people are a product of a rational left brain and an emotional and instinctive right one. The irony is that this idea was promoted by liberal types to suggest that Western culture was excessively left-brained and destroying the world – and that the world needed more right-brained thinking. Alas this analysis turned out to be too left-brained.
The interesting thing about Mr Trump’s genius is that other conservative politicians have been unable to replicate it. Ultimately they are too calculating and they can’t hide it, and that undermines their authenticity. That fate has befallen Florida Governor Ron De Santis, once billed as being more dangerous, because more rational. We will have to see how Mr Trump’s Vice Presidential pick JD Vance works out. He is clearly a calculating man, but he gets much closer to his boss’s rhetoric than Mr De Santis did – and his empathy with white working class Americans is authentic.
The second reason for Mr Trump’s comeback lies with the current President, Joe Biden. He did well to beat Mr Trump in 2020 – and he has been highly effective in office. Too effective, perhaps. A narrow victory in a campaign that was mainly about the fitness for office of his opponent was not a mandate for many of the radical measures that he brought forward. There were two particular problems. The first was that inflation got out of hand on his watch. Some of the blame may lie with the fiscal generosity of his predecessor, and some arose from international events – but Mr Biden threw in plenty of fiscal generosity of his own. Inflation is now back under control (apparently) but it has left deep scars in its wake, notably with interest rates still high, and petrol prices over 20% higher than in his first year of office. Mr Biden’s supporters like to paint a rosy picture of their man’s economic achievements – but no amount of aggregrate economic statistics can mitigate the pain that many American people have gone through. The second major problem is the chaotic scenes on the border. Now I haven’t been following that particular issue closely, and it is clearly being hyped up by the Republicans – but there does seem to have been a lack of focus by the Biden administration in its attempts to play a number of competing interests.
And then there was the question of Mr Biden’s lack of physical fitness for office. His disastrous debate performance with Mr trump only confirmed what many people had suspected. As I write, he has now thankfully bowed out – but only after an obstinate period of denial. His likely replacement candidate is the Vice President, Kamala Harris. She doesn’t get a very good press (though how justified that is I find hard to assess). My feeling is that she would do a better job than Biden of mobilising the Democrat base, especially younger voters, but will struggle with neutral voters. But the Democrats campaign has lost momentum, and will need to be completely reset.
I don’t think Mr Trump’s survival of the assassination attempt will make more than a marginal difference. It gave him some momentum at a useful time, which doubtless helped bring some donations in. But he and his party reverted to type so quickly afterwards that surely few voters will be swayed.
Mr Trump still has those two big points in his favour: the economy and the border. For some reason many American voters, even those who are otherwise sceptical of Mr Trump, think that he is a better bet for managing both issues than whoever the Democrats throw up. In the case of the economy, that’s a bit bizarre. He plans to raise prices for ordinary Americans by imposing tariffs, while reducing taxes for the better off by adding to the national debt. Reducing immigration, if he succeeds, may make things worse by raising inflation – though it could help lower-paid workers. Still, the idea that a businessman is well-placed to manage the economy a strong one in America. And if Mr Trump’s record as a businessman is a flawed one, years of starring in The Apprentice have clearly impressed many Americans.
And as for the threat Mr Trump poses to American institutions, many Americans clearly don’t think he will be that bad in practice – and perhaps those institutions have been corrupted anyway. The only criminal convictions that Mr Trump has so far suffered were from a distinctly dubious case legally, giving some substance to Mr Trump’s accusations of “lawfare” against him. Other cases may be stronger but the American judiciary has played along with his efforts to kick them into the long grass. Mr Trump has never made himself out to be a saint, even if he sometimes claims to be an instrument of God.
So what are the consequences for us Europeans if Mr Trump succeeds? The most serious is the war in Ukraine. Most European leaders want wear the Russians down, and force them to conclude the war on terms that they cannot paint as victory – and so weakening their threat. They hope that Mr Trump can be manoeuvred into supporting this – but they know it is unlikely. More likely is that he will force Ukraine into a ceasefire. Russia is then likely to regroup and rearm – although it is possible that the enormous cost of the war will start to rebound on Vladimir Putin’s regime. The European powers will have to reorganise their defences, and reduce their dependence on US weaponry.
Economically the main threat is Mr Trump’s proposed tariff regime – but the main economic damage is likely to be wrought on the Americans themselves, and then their neighbours in the Americas and Asia. But it is unlikely to help Europe’s struggling economies – hastening the awkward political choices that permanent low growth will entail.
A difficult four years beckon. It may not come to that, of course. The last month or so have already shown how fast politics can move. Mr Trump seems to have taken his recent successes as as justifying his continued focus on his base – rather than softening his image to appeal to uncommitted votes. If his opponents can succeed in making the threat of a Trump regime look less abstract – by focusing on concrete issues like abortion, rather abstract ones like “democracy” and “the rule of law”, and if their candidate looks properly presidential, more sceptical voters can be persuaded to vote him down. Perhaps, even, he will go too far and look start looking more dangerously deranged, even to some of his erstwhile supporters. We have been hoping for that for eight years, though, and nothing he does seems to faze his base.
Americans will do what Americans will do. We in Europe will just have to live with whatever they choose to do. That’s democracy, I’m afraid.
Postscript: 23 July
The news that Joe Biden was withdrawing broke while I was finishing the article. Anxious to publish, I edited it without changing the overall thrust. But the whole dynamic of the contest seems to have changed. Kamala Harris has launched her campaign built up real momentum – it looks as if she will be chosen without contest. The Trump campaign seems to have been wrong-footed. They have no shortage of attack lines on Ms Harris, whom they despise as much as her boss. But the main ones look weaker than the focus on mr Biden’s capacity, while the Democrats have some attack opportunities of their own: capacity issues can be turned back on Trump, and maybe they will even get a chance to attack some of Mr Trump’s policies – like his disastrous looking economic ideas. Alas Ms Harris’s early attack lines seem to focus on Mr Trump’s criminality and lack of moral fibre. That’s old news and won’t sway many, surely. Matt Goodwin, who had been predicting a Trump landslide, meanwhile rushed out an article suggesting that Ms Harris is an even more hopeless candidate than Mr Biden.
It will be a couple of weeks before we see if Ms Harris is making a serious impact on Mr Tump’s lead. American voters have a way of bringing me down to earth, so my wiser self is saying that the main thrust of my article still stands – even if my optimistic self thinks that the spring in the step that Ms Harris is showing must have some sort of positive effect.
My last post was a bit gloomy – and indeed there is a lot to be gloomy about at the end of 2023. But you can overdo it, as amid the darkness there is hope. That hope does seem rather remote, but we must hold onto it.
What I want to reflect on today is something that I will call liberal capitalism, a system that is often referred to as liberal democracy – but I wish to emphasise that capitalism is at its heart. It is a system based on democracy, tolerance, respect for individual rights, a system of law and justice separated from political control, freedom of speech and news media, free commerce, and the private ownership of capital in a mixed economy. The system is often referred to as Western, but there is nothing inherently Western about it – and indeed Japan, South Korea and Taiwan have all found their own versions.
Liberal capitalism is under siege. The Chinese and Russian political leaderships in particular, having started an embrace of the system, are turning hostile. They point to the hypocrisy of Western governments and politicians, and resent the way that they, or we, espouse universal values and seek to undermine systems that are perceived to be corrupt or oppressive. Chinese leaders point to the chaotic ways and allegedly short-termist policies of democratic systems. Russian ones prefer to talk about the erosion of traditional values – by which they mean the advance of such things as gay rights, feminism and multiculturalism – although the Chinese leadership has similar views.
The Chinese and Russian leaderships are not alone; there is also an Islamist line of attack – though there is nothing inherently un-Islamic about liberal capitalism, once you have resolved the issue of debt and interest (where, incidentally, I have much sympathy with Islamic scholars – they have spotted a real moral problem). Iran is the leading state to push this line of thinking, as do a number of violent, and some non-violent, non-state movements. It differs from the Chinese and Russian critiques in propounding universal values, and very much seeking to interfere in the political systems of others (including those of Russia and China, as it happens). Beyond China, Russia and Iran, there are any number of states who reject critical aspects of the liberal capitalist systems, leading to criticism and worse from Western states.
And there is opposition to liberal capitalism from within liberal capitalist states. I frequently read from leftist authors that capitalism has failed, and needs to be replaced; others equate liberal capitalism with colonialism. And on the right populists say that the superstructure of democracy and the independent judiciary is simply a plot by liberal “elites” to impose their values on an unwilling majority. These populists have an admiration for the Russian system, with its espousal of traditional values, buttressed by a corrupt elite (though they aren’t explicit about the corruption, of course).
Often it seems as if the forces of opposition are winning. This partly stems from the way democracy and a free press works. Threats and danger make for more saleable publicity than optimism, which in any case reeks of complacency. Right up to the fall of the Berlin Wall you could read commentary that the USSR was winning the Cold War because Western democracies didn’t have the spine to resist. Even after the fall of the Wall, many westerners could not believe that the USSR was so rotten that it was fated to collapse under its own weight. But in 2023 there are indeed many worrying developments, and liberal capitalism seems to be on the retreat in many places. Across the world many accept Russia’s assault on Ukraine with a shrug; anti-democratic coups are becoming the norm in Africa; China’s diplomatic influence has grown immensely; populists (though not leftists) are doing well electorally in liberal capitalist systems.
But look again at the forces of darkness. What is it that they are offering? China and Russia celebrated the fall of the Western-backed regime in Afghanistan. But have they offered to replace the flow of Western aid? And as American interests come under threat in the Middle East, China and Russia are mere onlookers, their recent diplomatic advances proving to be weightless. Many states have welcomed the political neutrality of Chinese aid, but find this is linked to the use of Chinese contractors, and that Chinese creditors are less flexible than Western ones when things start to go awry. Debt forgiveness in developing countries has now become almost impossible due to Chinese obstruction. Russia extracts a heavy price for its aid, with ruling elites required to pay off the support of Russian thuggery with corrupt contracts for natural resources. Russia and Iran do not look like good places to live, though better than North Korea. China offers something a bit more appealing, but the costs are becoming increasingly apparent, as the state has to expend more and more effort in suppressing dissent, while managing a faltering economy and a shrinking workforce. And a closer examination of the Chinese system reveals striking degrees of racism, and at the fringes of its empire, such as in Inner Mongolia, Tibet and Xinjiang, it looks distinctly colonialist – not that you will hear Western leftists complaining.
Also on closer examination, ideas of political non-interference proposed by China and Russia turn out to be not quite what they seem. Russia has a very flexible idea of what the boundaries of its state actually are. The Chinese are slightly better, but not much. The idea of self-determination for the peoples of the empire’s further reaches is treasonous – even though these places were once outside its borders; the country has laid claim to the South China Sea without any internationally recognised legal basis. And there is Taiwan. Neither China nor Russia hesitates to interfere in other states’ affairs if they feel their interests can be advanced that way. Their covert operations are massive. For them it is simply enough to deny anything that is inconvenient. Western states may not be good at respecting the truth in their pronouncements; non-Western ones are much worse.
Liberal capitalism’s internal critics are no better. They are better at stoking feelings of victimhood than of offering constructive alternatives. Leftists may claim that capitalism has failed, but their alternative ideas are weak at best. On the few occasions they have been tried in practice, they have collapsed into economic weakness and political despotism, and, eventually to cronyism. The right evokes an unachievable past golden age; the closer they get to actual power, the weaker their ideas look.
Against all this the liberal capitalist system has much to offer. No other economic system has produced such serious advances in popular wellbeing, or driven back poverty so far. China’s highly impressive impressive economic achievements precisely follow its adoption of liberal capitalist policies. As it turns against those policies, its advances flag. Supporters of liberal capitalism say that you can’t cherry-pick aspects of it and expect to succeed in the long term. China has sought to contradict this by adopting the economic side of liberal capitalism, while standing against tis political one. This is at last being tested. Russia has also shown some economic success from its adoption of liberal capitalist economics, although the exploitation of natural resources has an added dimension there. It has a largely capitalist economic system, but it has institutionalised cronyism and corruption. This may prove attractive to other country’s ruling elites, such as in Victor Orban’s Hungary, but this system only works as long as there is enough meat on the carcass to go round. It does not maximise economic efficiency and is doomed to eventual decline.
Liberal capitalism does face important challenges though. Charges of hypocrisy made by its critics are often well-founded. But for these critics, or the state ones anyway, their point is that we are all hypocrites, so let us be openly cynical in the way we advance our interests; that is not a message of hope. They may complain that Western support for Israel is inconsistent with its attitude to Ukraine – but nobody else is offering more than token support to the Palestinians, who will receive more external aid from Western countries than they ever will from China, Russia or Iran – though the Gulf Arabs will hopefully contribute even more. The rationale for when Western states intervene militarily, or with military aid, and when they don’t is far from clear. The comparison of Ukraine with Palestine is a deeply flawed one; that with Iraq in 2003 is less so. The West’s universalist rhetoric is tying it in knots (non-Western liberal capitalists tend not to make this mistake). I believe this needs to be tempered with a proximity principle, which shows why Ukraine is different from Syria, say. Alas that invites many questions of definition.
There are more substantive challenges. One is economic. Liberal capitalism was once associated with high economic growth, but in the more developed countries this has come to an end. This is not a failure of the system, as some suggest, but a feature. Liberal capitalism delivers to its people what they want as revealed by their consumer and democratic choices. These choices now favour lower growth, and that is exactly what the system is delivering. The priority now is to advance wellbeing through the use of technology and scientific knowledge without this being tied to ever-increasing consumption. Liberal capitalism can do this, though its political leaders have for the most part failed to see how the game has changed. Environmental sustainability, including the need to be carbon-negative, is another, more widely recognised challenge. Migration and cultural integration is also widely recognised as an issue. In less developed countries adopting the system, law and order and the rise of gang culture is a further challenge for the restrained systems of law-enforcement associated with liberal capitalism.
But in the end people will recognise that liberal capitalism offers the only real path to achieving a better world – the sort of place in which most people want to live. Because they can’t deliver this, its opponents are weaker than they look – like the USSR in the Cold War.
As 2024 draws to a close I’m not in an optimistic mood. Britain is stuck a low-growth rut, with crumbling public services and with politicians and public unable to face up to the difficult choices needed to climb out. Western support is crumbling for Ukraine, meaning that the war will degenerate into a never-ending frozen conflict until the Putin regime collapses, and probably long after that. Necessary steps to save the world from ecological and climate catastrophe are subject to endless push-back. Western paranoia over China, compounded by China’s own victim mentality, makes things worse. And then there is the Gaza war.
My thoughts on this topic have been crystallised by two recent articles. The first was in The Economist exploring the two-state solution, suggesting that it is the only solution to the conflict, because all the others are impossible. The second was by Janan Ganesh in the Financial Times, in which he suggests that the British prime minister Rishi Sunak’s business background leaves him unprepared to deal with extremists, who don’t compromise and don’t stick to any deal they might appear to accept.
I have commented a few times on the Israel-Palestine conflict here. I have much more sympathy with the Israeli side than many. Indeed I am instinctively closer to liberal Israelis than I am to any other faction in the conflict. But I have always been troubled by the influence of Israeli extremists – to the extent that I have sometimes upset liberal Jewish supporters of Israel. These maintain that the extremists are a minority who will not dictate Israeli policy in the long term. And yet these liberals remind me of the one-nation Conservatives in Britain’s parliament (or “wets” as they are often known), who may be passionate in their defence of decency and international law, but cave in rather than press a confrontation with their party’s extremists – in the hope that they will win through on another day. The trouble with Tory wets, as Guardian columnist Polly Toynbee has said, is that they are wet (or I think it was her – I can’t find the reference). Mr Ganesh makes his point well. Tory wets are often businessmen (and women) who assume that there is always a deal to be done, and can rely on any deal being ultimately enforceable. Political extremists are playing a different game.
The Economist suggests that there are two alternatives to the two-state solution. One is the one-state solution, where the two communities co-habit with full rights in a single state; the other is apartheid and ethnic cleansing. It describes both of these as “non-starters”. They are right about the one-state solution, which has few serious sponsors anywhere. Apartheid and/or ethnic cleansing are simply dismissed as “abhorrent”. And yet this is the approach advocated by the Israeli extremists, and they are working towards it much as Brexiteers worked towards Brexit in Britain against a hostile establishment. This solution is also advocated by Palestinian extremists (“from the river to the sea, Palestine shall be free”) and their supporters on the western political left. These latter extremists have nowhere near enough power to make their wishes come true, but they do help build the conditions in which the Israeli extremists can have a prospect of success.
The Hamas-led attacks of 7 October, and the appalling atrocities they perpetrated, are an excellent example of this. Israelis are united in horror, and quickly agreed that military action was required both in vengeance, and to destroy the perpetrators to prevent future attacks. The government framed the objective of military action as the destruction of Hamas, to make it incapable of holding power in the future. All Israelis could agree on that, and so military operations started. But there the agreement ends. The world has been shocked by the level of violence and the number of civilian casualties resulting from Israeli action. The Israeli government and military have responded with a combination of denial and obfuscation, and constant reference back to the original atrocities. It is true that their tactics are less indiscriminate those used by Russian-sponsored forces in the various Middle Eastern civil wars, which specifically targeted hospitals, for example. But the level of destructive power available to them is much higher. I have followed military matters since boyhood, and I would certainly question whether such destructive tactics are militarily all that effective. It is in fact easier to defend rubble than intact buildings, where defenders suffer a constant risk of being cut off and trapped. Having said that, the Israeli military, which doesn’t seem to controlled by extremists, are leading this, and military men usually have a predilection for blowing things up. What is clear is that the political leadership is not holding them back. The soldiers don’t see it as their job to give serious thought to how to manage the civilian needs.
The result of this is not just high civilian casualties, but a wider disaster beckoning, due lack of food, water and medical faculties, to say nothing of protection from the elements. The Israeli government seem to think it is enough to let a few extra lorry-loads of aid through the controlled border. Meanwhile the Hamas fighters will simply follow their usual tactic of hiding amongst the civilian masses, wherever they might be. The logic seems to be that the population of Gaza, or a substantial proportion of it, will be forced to flee into Egypt, whether the Egyptian government likes it or not. The Israeli government is not offering an alternative Hamas-free civilian infrastructure within the territory as an alternative. What is clear to everybody is if Gazans escape to Egypt, they will not be allowed back.
Because that is what happened after the 1948 Nakba, or catastrophe, when Arab refugees fled their homes into neighbouring territories, for what they thought would be a temporary respite. This is what the Israeli extremists want, and nobody else will stop them. More liberal Israelis may not want to admit this explicitly, but they are worried about their future security. The 7th October attacks fell particularly severely on liberal Israeli families.
Israeli extremists have particular power because they form part of the current government, and the prime minister, Benjamin Netanyahu has made it his life’s mission to covertly ally with them. That’s perhaps a bit too strong – Mr Netanyahu has always undermined anything resembling a long-term solution, and simply let Israel’s control of the territory it occupies expand incrementally, and the rights of their non-Israeli inhabitants to be marginalised. But recently he has been in hoc to extremists because he needs their help to block court cases against him.
Mr Netanyahu’s political career will end eventually, and the extremist parties may be ejected from power – they have never had majority support. But the extremists are armed and very determined to advance their agenda. They are strong in settler communities in the West Bank. If a two-state solution is to be implemented, many of them will have to be forcibly removed. This could spark a civil war. But, if my understanding of the Israeli psychology is right, that is unthinkable. Ultimately the country survives through a strong sense of solidarity. Turning on each other to advance the interests of Arab inhabitants and refugees is beyond imagination. Enforcement of laws against unruly settler communities is at best half-hearted as it is because of this sense of solidarity. It is much easier to blame the Arabs for their difficulties. Especially when they behave as Hamas have done.
Perhaps I’m wrong about the second Nakba. Perhaps the Israeli government will be able to allow a stable civilian infrastructure to support Palestinians resident in the Gaza Strip. But there is no two-state solution, just as there is no one-state solution. There is either catastrophe or a never-ending semi-frozen conflict. And that adds to my depression over political affairs at the end of 2024.
Flowers in Kibbutz Be’eri By Maqluba2023 – Phot: Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=138887313
I don’t make a point of listening to BBC’s The Today Podcast as I don’t need extra things to listen to. But I caught some it on the radio last night while brushing my teeth. In it Nick Robinson and Amol Rajan talked about the Gaza war – and Nick (as the BBC like to refer to him) explained how there were three incompatible narratives to the history of the Israel-Palestine troubles. It is a very good way of making sense of what is going one here, even if it offers no hope of how it might eventually resolve.
I have had a special interest in Israel since I volunteered on a kibbutz in the summer of 1979 between graduating (it was organised through the university) and starting my training as a Chartered Accountant. It was at Kibbutz Be’eri on the Gaza border. I was there for about six weeks. The kibbutz organisers soon decided that I had limited value as a worker and had me doing duties in the communal kitchen, cleaning floors, etc. – after starting off in agricultural work. Our stay included a tour of Israel organised by the kibbutz. I and one one of the other volunteers then did our own bit of tourism, based in Jerusalem, but including an organised trip to Sinai, then under Israel control. In the course of this I met a wide variety of people: our Israeli hosts, Palestinians both in Gaza and elsewhere, and American Jewish tourists. This was inevitably light on the Palestinian side of things, but a group of us volunteers did walk into Gaza one day, and all the way to the beach, before getting a taxi back. Back in 1979 the Gaza’s were quite open an friendly – they simply wanted the rest of the world to know how things were. To the kibbutzim, though, Gaza was just Other, and they feared to go over the border. Security was ever present. 44 years later Be’eri was overrun by Hamas terrorists, and over 100 people were murdered, with others, I presume, kidnapped. Things had moved on in the intervening period after my stay, but not in a good way.
The first of Mr Robinson’s three narratives is that of Israelis. The establishment of the Israeli homeland in the original land of Zion was a response to many centuries of persecution, where a pattern was repeated. After their dispersal by the Romans in the first century AD, Jewish communities became minority communities spread across the world (reaching as far as China), maintaining their faith and distinctive customs. A pattern was generally repeated: the community would try to fit with their host community, with a greater or lesser level of commercial interaction and with a generally passive approach. This would work fine for a while, but sooner or later the hosts would turn on them, expelling them or massacring them. In the 18th and 19th Century in Europe many Jews integrated with the newly liberal middle class in Europe, even taking up the Christian religion. And yet this simply provoked an even more violent backlash, culminating in the Holocaust. Even outside the Nazi empire, prejudice was rife. In Britain, France and America Jews were still Other. Many were appalled at Nazi policy towards Jews, but in a rather detached sense and they lifted hardly a finger to help. Few refugees were accepted, even as the persecution became more extreme. Zionists decided that they could only be secure in their own community, and so Zionism took off, leading eventually to the foundation of Israel.
How does this narrative deal with the Palestinians? They were a problem because they violently tried to stop the establishment of the Israeli state, leading to the war of independence in 1948. It is central to the idea of Zionism that the Jewish people be able to match violence with force, and they must not compromise on the idea of controlling their own fate. If that meant establishing their state using terrorist tactics against the British, or deleting Arab villages, then so be it. What struck me back in 1979 when visiting Yad Vashem (and also meeting those American Jews) was how much Israelis were treating non-Jews as Other. Gentiles were divided into friends of the Jews and Enemies. You cheered on your friends, and fought your enemies. Since 1948, according to this narrative, Palestinians have been given every opportunity to peacefully coexist with Israeli, but instead have used those opportunities to attack. The Hamas assault on 7 October is only the latest example of using freedoms allowed by Israeli to plot against it.
Next comes the Palestinian narrative. After the dispersal of the Jews the land of Palestine was populated by tribes that were local to the area and shared it with them. We refer to Palestinians as “Arabs” but this is a misnomer – they, or only a few of them, did not originate from Arabia. The Bible provides us with a series of names – notably Canaanites and, of course, Philistines, after whom Palestine is named. They adopted Arabic language following the Muslim invasions, and the Islamic religion, a faith which draws heavily on Jewish traditions, and has adopted Jerusalem as holy site. These peoples have a strong historical right to this land. More so, perhaps, than the Saxon and Norse English have to England. While some Jewish people living in Palestine have deep historical roots there, the influx over the last last century amounts to an alien invasion. Palestinians were violently displaced from their land in 1948, with further displacement taking place ever since. This is a historic wrong that can only be righted through active resistance. Israeli occupation and rule increasingly resembles Apartheid South Africa, with the natives forced to occupy depleted homelands with only nominal sovereignty, if that.
And third there is the Western liberal narrative. If only the Israelis and Palestinians could sit down to talk, and learn to live together peacefully, in two states, or even one! Various opportunities have been presented to do this, but repeatedly thwarted by weak leadership and the influence of hotheads.
Each of these narratives has more than an element of truth to it. The Western liberal one may look very weak, but it is the only one that looks towards a resolution.
When looking at the terrible mess, most commentators respond along the lines of “I wouldn’t start from here”. Various people are blamed for moving the parties to this wrong place, but in the end blaming people doesn’t offer any kind of solution. Each of the two principal narratives has its own strong, grinding logic. History offers no encouraging precedents. India went for partition, which led to mass murder and ethnic cleansing. The German diaspora in east Europe was likewise settled with population transfer, only thinkable after a devastating war. Yugoslavia collapsed in a vicious civil war. It is hard to see Switzerland offering much of an example to follow.
I would like to offer hope in this gloom. I won’t take sides. Israel has suffered an appalling atrocity whose scale it is hard to take on. But the Palestinians have suffered more.
The Economist print edition was published before Hamas’s shocking attack from Gaza, and led on one its own stories. I will stick with that story today. This blog isn’t meant for instant reactions and the dust is a long way from settling. All I will say is that I was a volunteer at one of the kibbutzes (Be’eri) attacked on Saturday back in 1979 – long ago but it still adds depth to my reaction.
The Economist‘s lead is a challenge to “homeland economics” – the rejection of globalisation in developed economies, with the rise of protectionism and massive state subsidies to locate manufacturing in home country. The case is made by an extended essay (“special report”) on the world economy by Callum Williams, senior economics writer. This in turn is fronted by a leading article, Are free markets history?, which frames the issue as a challenge by politicians to the ideas of free market economics, which will lead to bad things. “Governments are jettisoning the principles that made the world rich,” it says. Having free market instincts myself, I find much to agree with in this critique. Most of the justifications offered for the increase in protectionism and extended government programmes don’t add up. But the newspaper’s writers are making three mistakes. They are taking the political narrative at face value without trying to understand the forces that shape it. They underestimate how much free markets themselves are driving the changes to the economic system. And they don’t know what they want. “The task for classical liberals is to prepare…a new consensus that adapts their ideas to a more dangerous, inter connected and fractious world.” Yes, but what on earth does that look like? It may turn out to be surprisingly close to what the world is doing now, but in slightly different clothes.
I see things differently – while at the same time using classical liberal economics as my basis. The expansion of global trade has been one of the most critical aspects of the development of the world economy since the Second World War. At first the main beneficiaries were the Western European and American economies – but this started to run out of steam in the 1960s – as the war-damaged economies of Europe recovered. Then Asia burst onto the scene, in three distinct phases – first Japan, then the “tiger economies” of South Korea, Taiwan, Hong Kong and Singapore – and finally and most dramatically with China – with India, Vietnam, Thailand, Indonesia, Malaysia and Bangladesh playing a significant role too. This last phase, from the mid 1990s up to the financial crash of 2007-09, was the most dramatic of them all and was given the monicker of “Globalisation”. The impact was dramatic – many scores of millions were lifted out of poverty; China rose to be a superpower; and living standards in the developed world (now including Japan) steadily advanced as falling prices of manufactured goods fed through. These advances had three critical ingredients: free trade, technology and comparative advantage. The weakness of The Economist‘s argument is that it concentrates on the first part of this holy trinity without appreciating the impact of the other two.
Let’s consider technology. The first critical development was the rise of manufactured consumer goods. Technological developments from the Second World War – from manufacturing technology to the use of plastics – saw a massive rise in the production of cheap goods from cars to washing-up liquid which came to occupy a dominant position in the economy. Advancing agricultural technology also led to huge agricultural surpluses in some countries. These goods are readily tradable and thus gave rise to a huge opportunity for trade. The second critical development was the advance of information technology in 1980s and onward, which allowed the development of long, global supply chains and the relocation of manufacturing and other economic activity, sometimes to the other side of the world. This again greatly expanded the scope for increased trade.
Then there is comparative advantage. This classical piece of economics has been well understood for two centuries and more. It gets taught in basic economics courses (“Economics 101”) as a wonderful illustration of the power of counterintuitive thinking. Then, after Economics 101, it quietly gets forgotten by trained economists. While its strategic impact is obvious, it is very hard to incorporate it into the mathematical and computer models that are at the heart of professional economics. That is unfortunate, because its dynamics are critical to understanding patterns of trade. It suggests that benefits from trade exist when two economies have structural differences that lead to different opportunity costs for different economic goods and services – for illustration the amount of wheat production that must be foregone by redeploying resources (typically labour) to make a car, say, or vice versa. In an undeveloped economy, like China in 1990, agricultural productivity is very low and you don’t have to forego much wheat to make a car. In America, agricultural productivity is sky-high, and the amount of wheat forgone to make that extra car is much higher, even allowing for much higher manufacturing productivity. So China is said to have a comparative advantage in car production, and America in wheat production – even if America is much more efficient at car production. So if China redeployed labour from the farms to factories and imported wheat from America to make up the shortfall, it could make more cars than the Americans would forego to redeploy labour to produce the extra wheat. Of course, that specific example is flawed: America can’t simply send workers to the countryside and expect that to raise agricultural production. But the general principle stands: export where you have comparative advantage; import where you don’t – and everybody should be better off. Exchange rates gravitate to levels that make the exchange beneficial to both sides, allowing for the differences in absolute productivity. This is one of the main reasons that exchange rates do not follow purchasing power parity.
Now the point that isn’t made in most Economics 101 courses, and fails to be fully appreciated by even trained economists, is that these gains from trade arise from differences in the structure of economies. If two national economies are identical, there will be no gain. And, in principle the more economies differ, the bigger the potential gains. Sometimes these differences arise from geography – if one country can drill oil in its jurisdiction it will certainly have a comparative advantage in oil over one that doesn’t – and production of oil will tend to drive out production of other goods (one reason why British de-industrialisation was particularly acute when North Sea oil was plentiful). But other differences are less rooted. The main difference that drove globalisation was the state of development – and in particular a vast, unproductive agricultural workforce compared in developing countries compared to a fully mechanised one in advanced ones. This did not necessarily drive agricultural trade, which is often subject to heavy protectionism, but led to low manufacturing wages, and thus an advantage in lower-tech manufacturing. But as these economies developed, starting with Japan, and moving on to China, they converged with the developed world. Manufacturing wages rose and the exchange rate of the developing nations appreciated. The gains from trade were based on much more subtle differences, and there were generally less of them. Outsourcing manufacturing from America to China is a much more nuanced economic proposition now, even without all the political baggage.
The role of technology in trade has changed too. Manufacturing technology has advanced to the point of being so productive that its role in the overall economy is much less dominant than it was. Indeed The Economist points out that one of the issues with relocating it “back home’ is that it doesn’t bring many jobs with it – it will not be recreating the good old days of plentiful mid-level jobs in the 1970s. Technology itself continues to evolve at a rapid pace, but it is far from clear that it is doing so in a way that opens opportunities for trade. It may even be doing the reverse by making it easier for economies to be self-sufficient after paying due homage to the technological giants that control so much of it. And the tech giants do not employ all that many people.
So it’s not at all surprising that the bottom is falling out of globalisation. There are just fewer opportunities to make profits. And with this tightness comes political sensitivity. It is much more likely that government policies will affect trade patterns because it takes less effort to turn the tables. And other issues such as resilience and security weigh more heavily. In particular China’s unsubtle effort to tilt economic advantage its ways in particular economic sectors, and use economic leverage to bully (countering, no doubt they would suggest, the American propensity to do the same) is drawing an understandable political reaction.
Where The Economist is right is to suggest that the new developments in structure of the world economy will yield disappointing results, especially in the developed world. The loss of gains from trade as a result of convergence adversely impacts the world economy. By and large they result from increased productivity in developing nations, who are able to offset the loss of trade gains by banking the extra productivity. The developed world can’t offset the loss in the same way. The costs of imported goods rise relative to domestic goods and this amounts to a headwind against living standards. A tailwind turns into a headwind for economic growth, to be added to other headwinds such as adverse demographic changes.
These are, funnily enough, the problems of success. Globalisation has done a huge amount to advance human development, but we’ve reached the top of the escalator (leaving aside, for now, the issue of what happens to the remaining less developed economies, in Africa for example). Much the same can be said of developments to manufacturing technology. We must look in a different direction to make future advances.
That different direction may include market economics, and surely it includes a trade in ideas – but physical trade will play a lesser role. Restoration of the environment, a better appreciation of human psychological needs, and a rethink of public services will be the critical elements. We can’t look to the recent past as our guide.
