What the rise of Trump means and what’s next
Intense dislike of Trump is causing people to miss something big. Trump’s rise and popularity is a symptom of a trend, not a one-time aberration. A bottom-up reaction is emerging in Europe and America against a force that has been ascendant under many guises for over 230 years. In America, it that force is called progressivism, the idea that society can best be improved under the rule of elites, a select cadre of people, who by virtue of superior intelligence and education, know what is best for society as a whole. Certain of their intellectual and moral superiority as well as the truth of their ideas, elites have little tolerance for constraints on their agenda imposed by tradition, custom, religion, and the Constitution. The necessary vehicle for creating this new and better world is a strong central government.
The American version of the idea that elites should be given great power to govern because only they truly understand the common good – to which all private interests should be ruthlessly subordinated – initially took root under Woodrow Wilson. It grew rapidly under FDR, and reached full flower under Lyndon Johnson and his Democratic successors. Republican administrations under Eisenhower and Reagan fought a rearguard action to preserve the traditional view of the role of government as a guarantor of rights and referee rather than an aggressively active agent of social betterment. The reigns of Bush 41 and Bush 43 essentially were “progressive lite”. The apotheosis of progressivism was reached in the Obama Administration which oversaw an astounding spread of the federal government’s regulatory reach.
What are the key tenets of what is called progressivism in the U.S. and social democracy in Europe:
- Enforcement of universal ideals as defined by the elites themselves
- Rule by experts
- Substitution of the judgment of experts for the judgment of markets
- Centralization of power in government.
Progressives have offered the American people a seductive bargain: grant us unprecedented power over your lives and we will bring you peace and prosperity along with social and economic equality. We will manage the economy, supervise health care, create a new world order, finance your education, get rid of stultifying restrictions on personal behavior, and redress racial and gender injustices. And best of all, somebody else – not you, not regular Americans – is going to pay for all this largesse.
The public may be beginning to realize that it has made a devil’s bargain. The elites got their power, but the rest of us did not do so well:
- We don’t have real prosperity; what we do have is phony prosperity built on seemingly endless availability of credit. Someday the credit card will be pulled.
- We don’t have peace. We have hundreds of billions of dollars of “defense” spending annually and, even worse, thousands of soldiers have been killed or wounded. How the United States has benefitted from the wars in Vietnam, Iraq, Afghanistan, Syria is unclear at best, as is the claim that America must “counter” the rise of China and defend against Russia whose GDP is about the size of Manhattan’s. Why was all this military action taken? The justification has been to support an abstraction without substance – the preservation of a global world order – promulgated mainly by people with no personal “skin in the game” beyond the need to burnish their own reputations. Left unexplained are the concrete benefits to regular Americans. It is hard to find any. The amount the United States needs to spend to protect its people from physical, financial, or cyber-attack is a small fraction of what is actually spent. It is discouraging that there has been so little discussion as to whether the current level of expenditure represents the highest and best use of scarce resources.
- We have greater income inequality, not less. Reckless fiscal and monetary policy has greatly advantaged the financial elites. A close look at income distribution data shows that the top 0.1% has benefitted disproportionately; most of them work in finance. By contrast, real median family incomes for most people have been stagnant for decades.
The American educational system is in shambles. Basic competence in reading, writing, and arithmetic has declined as expenditures have risen exponentially. Education is controlled and administered by bureaucracies apparently more interested in enforcing their codes of political correctness than in assuring that our children have the skill and good habits needed to become productive members of the workforce. The very gifted will always do well but the big middle has been shortchanged. The U.S. performs terribly in international rankings.
The totalitarian insistence on enforcement of the diversity fetish has penalized students who work hard – Asians in particular. The supposed beneficiaries, students who are accepted into elite schools despite relatively poor academic performance, have been set up for failure. Their education has not equipped them to do work at the same level as students with significantly higher test scores.
The American public, sensing that something is quite wrong, elected Donald Trump in 2016 as a sign of protest. It is a testimony to the strength of their discontent and anger that Trump won despite personal characteristics that were obvious to everyone and that many found profoundly off putting: narcissism, impulsiveness, shabby treatment of subordinates and women, etc. He shrewdly strengthened his appeal by showing himself willing to fire back at the leftist elites whose contempt and condescension toward regular or “everyday” Americans has become so evident. By “elites”, I mean the people we see, hear, and read about because they dominate the commanding heights of society’s organs of control and opinion shaping: the mainstream media, the entertainment industry, academia, government bureaucracies, especially at the federal level.
I call these elites the “new Jacobins” because of characteristics they share with the Jacobins of the French revolution: absolute certainty as to the intellectual and moral truth of their ideas and policy prescriptions, intolerance of opposing views, willingness to attain their goals by any means available, disdain for other, less elevated humans who don’t embrace their world view, rejection of all restraints of custom and tradition. For the New Jacobins, the rightness of their ideas entitles them to unlimited power to remake the world in their image, and to ignore law and traditional rules of behavior that get in the way of their achieving their goals. If you think this description is over-wrought, look sometime at how Trump is treated at press conferences. The undisguised hatred, contempt, and rejection of his legitimacy are alarming. The New Jacobins are clear in their disrespect not only for Trump personally but for the American people who in their view were stupid and audacious enough to elect him.
The 2018 mid-term elections reinforced the view that Americans instinctively don’t like the fanaticism, self-righteousness, and pursuit of power by any means, particularly, more power for centralized government:
- Democratic senators in close races who voted against the confirmation of Judge Cavanaugh lost;
- Every candidate supported by Elizabeth Warren, the doyen of undiluted progressivism, lost. So did ballot initiatives for favorite progressive causes: government-run (aka single payer) health care, “free” college, expanded Social Security.
- Newly elected Democrats to the House of Representatives tended to campaign as moderates.
The Democratic committee chairmen in the House of Representatives are mainly committed New Jacobins, energized by implacable animosity toward Mr. Trump. They would, however, be well advised to see that the American people have signaled time and again that they are less interested in ideology and destruction of political opponents than in policies that improve their lives. Nonetheless, zealots, if they represent safe districts, don’t morph into pragmatists. The My guess is that the American public can expect continued no-holds-barred political warfare. It will take at least another presidential election to determine the durability and strength of the reaction against the New Jacobins. The main battlegrounds will be health care and immigration.
The elephant in the room
Sadly, however, the political trench warfare in Washington will prove to be an inconsequential side show. Both the Republicans and the Democrats are looking at ants while an elephant is tiptoeing by in the night. That elephant is runaway debt and unpayable entitlements at all levels of government, especially the federal level. If the history of credit-driven spending is a guide, the size and growth of the debt burden relative to the economy’s capacity to produce eventually will trample equity and fixed income markets. Even worse, over the next few years, Americans will discover that government promises to fund their health care costs and retirement income cannot not be kept at anywhere near the level they have been led to expect. The reneging on these promises will be via either actual payment curtailments, or more insidiously, via inflation, i.e., a steady decline in the purchasing power of the dollar. No one wants to talk about this problem because there is no solution that does not entail widespread, prolonged economic hardship. Serious social unrest could follow.
Economic conditions seem just fine right now so why worry? After all modern day Jeremiahs having been warning about the debt problem for years and yet unemployment is at an all-time low; financial markets are still not far from all-time highs; and, interest rates, even though they have risen slightly, still are near lows never seen before in the history of civilization.
Although just like everyone else, they are clueless as to timing, the Jeremiahs are right. Total debt – public, corporate, consumer — has been and will keep growing faster than GDP. Today’s prosperity is being financed by the extension of credit, mainly to the public sector. This malign process has been enabled by our central bank.
The Ph.D. academics who run the Federal Reserve System (the Fed) are a perfect example of the power and hubris of the New Jacobins. They apparently think that they can induce prosperity by manipulating interest rates via creating money backed by nothing. Rather than let the most important price in the economy, the interest rate on the 10-year Treasury, emerge organically via an honest free market, the twelve members of the Federal Open Market Committee (FOMC) attempt to set interest rates to where they and their staff think they should be. In effect they are substituting their own judgment for the judgment of markets. In the process, the practice of creating money from nothing to finance government debt has reached previously unimaginable levels. It took 94 years for the Fed’s balance sheet to get to $905 billion as of September 2008. By early December 2008 Chairman Bernanke had taken the Fed’s balance sheet to $2.213 trillion, i.e., had bought federal government debt. Before his term ended, the Fed’s balance sheet had grown to $4.5 trillion. Investors in financial markets have did very well. The rest of America did not.
As David Stockman has noted, in the eleven years since Q4 2007:
- “total labor hours are up by only 7%….
- “Industrial production has only expanded by 3% in 11 years, while median real household incomes are up by about 2% and single -family housing starts by only 5% after nine years of the cheapest mortgage rates in recorded history.” That is a pathetic result for the greatest credit expansion of all time.
A few statistics show the extent to which debt has exploded relative to the economic activity available to service it:
- In 1970, the ratio of debt to GDP was 1.48X; today it is 3.47X [~$70T of debt on ~$20T of GDP] not counting unfunded entitlement programs. This is occurring even though interest rates are at historically low levels, having been artificially suppressed by the Fed since the 2007 crisis.
- The combination of ramped up federal spending and the 2017 tax cuts has put public debt on a trajectory to exceed $40T or ~140% of GDP by 2028 absent higher taxes or lower spending than currently projected. If interest rates return to historic norms, and if, as is certain eventually, there is a recession, that debt load will become even greater.
What are the ultimate consequences?
High leverage especially in the late stages of a business expansion usually generates mass defaults. Higher debt necessarily entails higher debt service costs per dollar of available cash flow. A self-reinforcing downward spiral of less revenue supporting more debt at higher interest rates means that debtors have to spend more and more to pay for past consumption. Economic activity grinds down.
An accelerating downward spiral can be stopped only if a central bank “prints” money to buy government bonds. More money injected into the economy to pay for the same amount of goods and services can and usually does create inflation, albeit with a lag. Each good or service provided per unit can command more dollars. Debt, denominated in a cheapened currency, becomes easier to pay off.
The inflation “cure”, however, is worse than the disease. The monetization process can accelerate price inflation. The process of managing inflation is not as controllable as central bankers seem to think. Either way – a declining GDP from too much debt or declining purchasing power from too much money chasing too few goods – a massive, prolonged credit expansion leaves most people become poorer with the most vulnerable in society suffering disproportionately.
What makes the circumstance of grossly excessive debt especially insidious is that everything seems all right until it isn’t. Historically, like a school of fish suddenly changing direction in an instant, the public can change its mind suddenly and en masse. Recognition of the terrible mess that has built up over a lengthy period of time – sometimes decades — is as overwhelming and unpredictable, as it is unavoidable.
If these views prove a true mirror to reality, the Americans may conclude that the progressive elites who dominate government policy across all its domains – central banking, fiscal policy, foreign policy defense, education, welfare, etc. – have failed, despite having been given immense power. Fervently delivered promises from the elites notwithstanding, prosperity, peace, a well-educated work force, innovative, competitive health care accessible to all are not at hand. Hard times are. No wonder nobody in power, regardless of political affiliation, wants to talk about the elephant in the room.