The world has watched with astonishment as a racist, sexist, lying bigot, with no coherent policies to speak of, has become so popular with the US electorate that he now stands a decent chance of becoming president. Are Americans so desperate, so starved of choice? Why are they so angry with their political establishment? It is clear that Trump has successfully tapped into a rich vein of discontent.
There are many theories about the reasons for the disenchantment with the elites—a backlash against globalization, the continuing impact on the economy of the 2008 financial crisis, an increase in inequality, a concern that the old white America is in danger of being submerged under a tide of immigrants, a whittling down of the middle class and the souring of the American dream of upward mobility.
But why is there so much anger among the masses? To understand that, let’s look back at history. The decades following the Second World War were a period of great prosperity for the US and for western Europe. The threat of communism resulted in a social pact between labour and capital in the West, resulting in the creation of welfare states. Keynesian policies helped keep unemployment at minimum levels. This Fordist system, named after Henry Ford, was based on national production and mass consumption, with strict regulation of finance. Demand management policies kept the economy stable and led to steadily rising incomes for the mass of the population. This period was known as the ‘Golden Age’ of US economic expansion. It was the age when the American dream flourished.
Unfortunately for the US, it didn’t last. There are many theories about why it unravelled, with some blaming it on the rising power of the trade unions, which was a fetter on profitability, while some pointed to competition from a resurgent Japan, while others called it a right-wing coup. The Keynesian system wasn’t working and high oil prices in the early seventies resulted in rampant inflation on the one hand and economic stagnation on the other, a phenomenon dubbed stagflation. The old system of fixed exchange rates broke down and the gates were opened for the rapid development of the financial sector. In the US, inflation was stamped out by keeping interest rates very high and by breaking the back of the trade unions.
So where was the money coming from to fund the welfare state? For a while, it came from government borrowing. For all Ronald Reagan’s conservative rhetoric, public debt went up sharply during his tenure. Indeed, pruning the debt was part of Bill Clinton’s campaign promise in the 1992 election.
In the meantime, both the globalization of production and the financialization of the US economy had set in. Income inequality went up sharply in the US. The welfare state started getting pruned. Labour’s share of national income fell. Since there were limits on continuously expanding the fiscal deficit, how could the economy continue to grow rapidly and the masses be kept happy? The answer, according to British political scientist Colin Crouch, was what he called ‘privatised Keynesianism’. Instead of the state borrowing and spending, it was up to individuals to borrow and spend. Public debt was replaced by private debt. This was helped by keeping interest rates low. The explosion of private debt meant more profits for the elites. And globalisation made the entire world their happy hunting grounds.
As German sociologist Wolfgang Streeck pointed out, “The Clinton policy of fiscal consolidation and economic revitalization through financial deregulation had many beneficiaries. The rich were spared higher taxes while those among them—a fast-growing number—who had been wise enough to move their interests into the financial sector, were making huge profits on the ever more complicated so-called “financial services” that they now had an almost unlimited license to sell. But the poor also prospered, at least some of them and for a while. Subprime mortgages became a substitute, however illusory in the end, for the social policy that was simultaneously being scrapped, as well as for the wage increases that were no longer forthcoming at the lower end of a more and more flexible labour market”.
But after the crash of 2008, privatized Keynesianism too met an inglorious end. With debt levels very high, a stimulus by way of either more private or public debt is dangerous, as the Bank for International Settlements keeps reminding us. The government can do little to rein in finance capital, while ultra-loose monetary policies have led to the rich benefiting from high asset prices. At the same time, economists now talk of secular stagnation for the US. All this is at the bottom of the anger against the establishment both in the US and in other developed countries like the UK.
But while these are the reasons for the discontent, neither Hillary Clinton nor Donald Trump has a solution. All Trump’s protectionism will do is make the US less competitive in an economy that is now truly global. What’s more, it brings to mind the beggar-thy-neighbour policies after the Great Depression, which ultimately ended in a world war. Hillary Clinton, the ultimate establishment apparatchik, can only repeat the tired formulas that haven’t worked. Does the anger against the US establishment prove Streeck’s dictum that “a lasting reconciliation of social and economic stability in capitalist democracies is no more than a Utopian project”.