War, trade or inequality?
Eight months after Donald Trump's shock election, economists and other social scientists remain at odds on his rise and that of right-wing populism in the west more generally.
So we have combed through recent papers on the political wave. Three of the most interesting ideas:
- Harvard economist Dani Rodrik: we are watching the predictable result of more relaxed international trade and the rise of financial globalization.
- Boston University's Douglas Kriner and Francis Shen of the University of Minnesota: if just three states had suffered fewer casualties in Iraq and Afghanistan, Hillary Clinton might today be president.
- And James Montier, an asset allocation team member for GMO, the investment manager: crippling inequality explains the anti-establishment revolt.
Rodrik and history: the anti-establishment wave, he writes in a new draft paper, "has been on the rise for at least a decade ... and was perfectly predictable." He writes:
- Populist movements everywhere are the result of an "advanced stage of globalization," when international trade becomes highly integrated.
- An example: at the end of the 19th century, multiple countries cut trade barriers; allowed capital, through the gold standard, to move freely across borders; and permitted relatively free immigration.
- In the U.S., this period culminated in the impactful presidential campaigns of populist William Jennings Bryan, who denounced big banks, monopoly power, and the gold standard, and, later, legal alcohol and the teaching of evolution in schools
- Rodrik's prescriptions: restrict foreign investment, protect sensitive industries, and enact a more robust safety net to blunt the effects of global competition on workers.
Kriner, Shen and the effects of war: Deep dissatisfaction with establishment political figures is especially prevalent among communities that have suffered a disproportionate share of the casualties from a decade and a half of war in Iraq and Afghanistan. They write:
- A pillar of Trump's presidential campaign was an indictment of both Republican and Democratic foreign policy, specifically the invasion of Iraq, which he called a colossal blunder and a waste of money that could have been spent on domestic problems.
- There is a link between military casualties and support for Trump. "Even controlling ... for many other alternative explanations, we find that there is a significant and meaningful relationship between a community's rate of military sacrifice and its support for Trump."
- "If three states key to Trump's victory—Pennsylvania, Michigan, and Wisconsin—had suffered even a modestly lower casualty rate, all three could have flipped from red to blue and sent Hillary Clinton to the White House."
Montier and economic inequality: The global economy is a period of "secular stagnation" — widespread slow economic growth, low inflation, and a global middle class with little increase in spending power. He writes:
- Politicians seeking to avoid tough political fights over fiscal policy have instead relied too heavily on central banks, like the Federal Reserve.
- Governments should target specific, low unemployment and inflation rates, and offer a jobs guarantee until that target is hit, singling out high-priority work like caring for the elderly.
- The rationale: "The government offers a fixed wage. ... This wage acts as the de facto minimum wage, below which no labor will be forthcoming to private sector employers. When unemployment is high, workers will flow into the government scheme, and when the economy starts to grow, private employers 'hire off the top' of the scheme by offering a [higher] wage."
Thought bubble: The Trump election and the success of other populist movements in Europe have emboldened establishment economists like Rodrik to reassess the costs and benefits of globalization, and led respected City-of-London vets like Montier to advocate radical policy changes.