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Global Trumpism
by Mark Blyth, foreignaffairs.comNovember 15, 2016
https://www.foreignaffairs.com/articles/2016-11-15/global-trumpism
"At the end of World War II, the United States and its allies decided that sustained mass unemployment was an existential threat to capitalism and had to be avoided at all costs. In response, governments everywhere targeted full employment as the master policy variable—trying to get to, and sustain, an unemployment rate of roughly 4%. The problem with doing so, over time, is that targeting any variable long enough undermines the value of the variable itself—a phenomenon known as Goodhart’s law. In short, the system undermined itself. The 1970s became a kind of “debtor’s paradise.” As irose, debts fell, and labor’s share of national income rose to an all-time high, while corporate profits remained low and were pummeled by inflation. Unions were powerful and inequality plummeted.
But if it was a great time to be a debtor, it was a lousy time to be a creditor. Inflation acts as a tax on the returns on investment and lending. Unsurprisingly in response, employers and creditors mobilized and funded a market-friendly revolution where the goal of full employment was jettisoned for a new target—price stability, aka inflation—to restore the value of debt and discipline labor through unemployment. And it worked. The new order was called neoliberalism.
Over the next thirty years the world was transformed from a debtor’s paradise into a creditor’s paradise where capital’s share of national income rose to an all-time high as labor’s share fell as wages stagnated.
But Goodhart’s law never went away. Just as targeting full employment undermined itself, so did making inflation the policy target. Wage earners now have too much debt in an environment where wages cannot rise fast enough to reduce those debts. Meanwhile, in a deflation, the opposite of what happens in an inflation occurs. The value of debt increases while the ability to pay off those debts decreases. Seen this way, what we see is a reversal of power between creditors and debtors as the anti-inflationary regime of the past 30 years undermines itself—what we might call “Goodhart’s revenge.” In this world, yields compress and creditors fret about their earnings, demanding repayment of debt at all costs. Macro-economically, this makes the situation worse: the debtors can’t pay—but politically, and this is crucial—it empowers debtors since they can’t pay, won’t pay, and still have the right to vote.
The traditional parties of the center-left and center-right, the builders of this anti-inflationary order, get clobbered in such a world, since they are correctly identified by these debtors as the political backers of those demanding repayment in an already unequal system, and all from those with the least assets. This produces anti-creditor, pro-debtor coalitions-in-waiting that are ripe for the picking by insurgents of the left and the right, which is exactly what has happened.
In short, to understand the election of Trump we need to listen to the trumpets blowing everywhere in the highly indebted developed countries and the people who vote for them. The global revolt against elites is not just driven by revulsion and loss and racism. It’s also driven by the global economy itself. This is a global phenomenon that marks one thing above all.
The era of neoliberalism is over. The era of neonationalism has just begun. "
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