Friday, February 26, 2016

From Deng Xiaoping to Donald Trump

Like many Americans of the "professional class", I have been at turns shocked and dismayed by the success of Donald Trump during the current Presidential campaign season. But this isn't a rant against Trump. I have come to understand, I think, why he's succeeding (and why Sanders is succeeding), and to sympathize with their supporters. In that vein, I'm here to ask: Is the near-total control of American politics by corporations at an end?

(In this post, when will speak of the Republican and Democratic parties, I mean as they were, not as they are becoming. Donald Trump may be running as a Republican, but he is not representative of the Grand Old Party. And in many ways, the same is true of Bernie Sanders. I am speaking of the Bush Republicans and Clinton Democrats. For now I will just say Trump and Sanders as stand-ins for what is coming after, but hasn't been named yet)

It's no secret that the Democratic party is most strongly supported by industries that rely heavily on human capital - media, law, and (most faithfully) academia. From a funding perspective, they're essentially a coalition of the creative class and public sector unions. Republicans by contrast have seen most of their support come from industrial and financial capital-intensive firms - oil & gas, home construction, pharmaceuticals, casinos. A few sectors, notably finance, telecom, and defense firms, support both about equally.

And during my lifetime, the laws passed (or pushed) by the Dems and GOP reflected this funding. But overall, they have pushed a pro-corporate agenda. Free trade, low tariffs, and (on the Republican side at least) lower corporate taxes. At an aggregate level this has been good for the US economy, and our economy has grown at a steady clip. If you look at the aggregate or median numbers (such as median GDP/capita) we're doing much better than Europe or Japan.

However what the aggregate and median numbers hide is the distribution of results within the American economy. Over the last 20 years all of the gains have accrued to the upper classes in America, especially at the very top of the economy. Wage income is up or at least steady among the professional classes, and capital income among the management class has become stratospheric. In the public sector, wages have grown at the steady rates that were "negotiated" between the union representatives and the Democratic politicians whose campaigns they funded. But there was no equivalent benefit or protection for the less educated service workers and vocational laborers in America's private sector, where steady job losses and stagnating wages have been ongoing.

The reason for the poor job prospects of American labor class is a fairly straight-forward story of supply and demand. Post-War American corporations faced competition from Japan and Germany, but this competition was paired with demand from Japanese and German consumers. Starting with Deng Xiaoping's reforms in the late 1970s however, the global economy started to experience a massive increase in the supply of labor, but without an equivalent amount of demand for American goods.

The former Soviet Union and, more importantly, India similarly reformed their economies to be more open in the early 1990s, increasing the supply of labor even further. At the same time, America (under both Republican and Democratic governments) continued to sign more and more free trade deals with other countries, including NAFTA in the 1990s, but that was hardly the only one. The combined effect of these reforms is that it was cheap to move manufacturing and some services overseas, and there were no political barriers to doing so.

Again, to emphasize again, this was great for America as a whole. On the aggregate level the economy grew well all during this period, and while recessions happened, they ended. In the 2008 "Great Recession" had one bad year of job losses and then steady gains ever since. And all Americans, in theory, had the ability to buy the cheaper goods and services that flowed from Mexico, China, India, and elsewhere. But in practice what happened to individual Americans was a lopsided lottery. You either did a little bit better or much, much worse. The increase in the supply of labor had two effects: 1) Any time supply goes up further than demand, price falls. Econ 101. The global price of labor was being set by China rather than Detroit, even after accounting for productivity differences. 2) Labor lost a lot of bargaining power. Whether a shop was unionized or not, management always had the option of moving the whole operation to another country, Carrier just decided to do. Combine these effects, and wages go nowhere while jobs go elsewhere.

So what was great for America's professional class, and great for the world as a whole, was bad news for America's working class. In chart form it looks like this:

Wages are down, and also, jobs were lost. Here's the labor force participation rate. You can see it picked up during the 70s and 80s when women entered workforce in increasing numbers, but then it stagnated even as the economy grew during the 90s, and has been falling ever since the turn of the century.

Falling or stagnant wages, increased uncertainty that a job will stick around, and a real risk of becoming permanently unemployed and dependent on others has a terrible effect on people. While life continues to improve in the rest of the developed world, America's death rate climbed thanks to increased suicide and drug overdoses.

I mean, drug abuse has become so bad that pharmaceuticals that relieve opiate-induced constipation are advertising during the Super Bowl.

These are the people that America's political system has ignored for the last forty years. They're the non-elite, less-educated, working stiffs who don't contribute to campaigns or fund lobbying groups in Washington D.C. I know people who insist that political money has limited control over how elections turn out (look at all the money that Jeb spent), but it seems to have a lot of influence over who runs in the first place. Before "the people" vote in the primaries, the donors who fund the campaigns vote (with their checkbooks) in the pre-primary, limiting the pool of potential candidates to people who the donors agree with. And once in Washington, when politicians cast around for ideas on how to solve this or that problem, they turn to think tanks and lobbyists that are funded by the same corporate lobbing groups or politically active rich guys who benefit from free trade. Rich guys like the Koch brothers and George Soros have very different views on many things, but one thing they have in common is zero direct experience with the concerns of the working poor. It may not even be malice.

This despair and anger is what both Trump and Sanders are tapping into, which is why there is a lot of overlap between their supporters. These are the first two candidates that have bypassed entirely the donor primary and decided to represent the working classes directly, although they take different approaches in doing so. Ross Douthat thinks that Trump is a flash in the pan, that he's a personality rather than the representative of an institutional movement, but this is wrong. Trump and Sanders represent a class of American workers in revolt against the American system. And thanks to social media, they don't need an institution like the DNC to organize.

American corporations aren't about to roll over and cede the field to labor, but for the first time in a very long time, they'll have to share it.

What I hope, as someone who wants both free trade to continue for the benefits it brings, and who doesn't want to see anyone suffer from the economic gyrations that free trade inflicts, is that the Corporate Party and the Labor Party of the future realize that there is a mutually beneficial arrangement where the economy is open and competitive but the government acts as a giant risk pool providing generous safety nets to workers who experience factory closings or redundancies. That way the aggregate and median numbers continue to improve even while the variance individual families experience is reduced. This is the place that many European countries have already come to, but I'm concerned that we may end up instead in a self-defeating cycle of political back-and-forth between labor-populism and corporate-cronyism, like Latin and South American economies experience.