G7’s political battle is all about deflation

June 23, 2016 12:21 PM (UTC+8)

 

Surging support for UK’s Leave campaign sits in the same end of the political spectrum as support for protest movements such as the Five Star in Italy and gains for the far right in France, Germany and Austria. As against nationalism or populism, the primary economic driving force is deflation in wages and higher competition for manufacturers. Turning the economic clock may be futile, but politically appears worthwhile.

What does the victory of the Five Star movement in Rome’s mayoral elections have in common with the surge of the Leave campaign (at least until the tragic murder of Labour MP Jo Cox) in the UK’s vote on continued EU membership on June 23? For that matter, what does it have in common with the near-victory of the far right in Austria in May or the surge in popularity of the “Alternative for Germany” in that country?

One way of thinking about all these movements is that they represent a “protest” vote, of the sort that put Syriza in power in Greece – a vote against economic austerity in other words. That logic though doesn’t quite cut it when we think about Austria or Germany, neither of which had economic weakness – you could instead argue that immigration was the primary motivation in those countries. Try adding these together for the UK’s Leave campaign and you may well account for a significant portion of the underlying support – but try extrapolating from that to America’s fascination with “protest” candidates in both main parties, and you’d stumped again.

deflation

From my point of view, the unifying factor lies in the world of economics – and specifically the very deflation that is dragging down these economies. As I see it, the new world of politics in G7 no longer adheres to the old divide between “conservative” and “progressive” agendas (where would you put the Leave campaign on this divide); or indeed heave to the divide between the old ‘Right’ and ‘Left’ (where does the Five Star movement feature on this spectrum).

Instead, new politicians are essentially “Inflationists” or anti-Deflation politicians. US and UK unemployment rates declined since 2009, however wage growth has remained anaemic, leading to a greater share of “protest” vote. Even as the US and UK register strong economic growth, more people perhaps feel left behind (David Goldman wrote an excellent article on this subject a while ago).  How do you confront the following factors, as a politician?

Technology driving down the proportion of the population engaged in manufacturing across G7, driving wages down as a % of revenues

  1. Greater competition from overseas manufacturers and service providers that pushes down the price that can be charged by companies
  2. Companies being necessarily cross-border in their approach and sales, thereby recording more profits outside their original home markets (and with that, avoiding taxes)
  3. Local population growth driven by outsiders, or shifting demographics as locals leave for jobs in other places/countries
  4. Cuts to welfare and local services (from police to garbage collection) prompted by declining tax hauls
  5. Rising costs of medical coverage as hospitals simply cannot show the same efficiency gains as industry and above demographic changes push more people into hospitals

As a local or regional politician, you’d consort with teams of people who could address these problems; nationally, you’d form coalitions of like-minded individuals such as the Leave campaign which is cobbled together from nationalists, conservatives and outright racists (from the looks of it on television).

Across the political spectrum whether you cleave left or right, what is known as the ‘establishment’ primarily represents the following in G7

  • Pro globalization
  • Pro immigration
  • Greater discipline on spending
  • Right-sizing welfare (different from general spending above)
  • Improved productivity
  • Moderate to low tax rates

Disenchantment with this lot, primarily due to deflationary effects of the global economic crisis, led to a political realignment; and the emergence of a cross-section of politicians who believed or at least openly support the following:

Support for local employment even if that means higher labor costs (and precisely if it does increase labor costs)

  1. Support for local businesses – by recommending or making it more difficult for goods and services to be imported (anti-trade)
  2. Increased tax collections from large companies
  3. Greater spending on welfare (but only for locals)
  4. Significant self-confidence/strong belief in being unique
  5. Fiscal and monetary policy relaxation to achieve the above

The combination of protectionism, labour rights and punitive taxes all banding together to fund a welfare state is hardly new – about 80 years ago, it used to be called communism. However, the driving force for these policy planks is not so much the primacy of labor’s contribution to value addition (as communism believes) but something wider, namely that a particular society must capture more of a profit share in the goods and services being delivered locally.

This “go local” strategy, in plain economic terms is an effort to unwind or at least rewind some of the benefits from globalization and free(er) movement of peoples; namely faster integration of economies based on relative efficiency, lower product prices (Pareto optimality) and broader trade practices. Of course, the typical safety barriers of such practices, which would have called for banks to fail following the 2008 crisis and usher in widespread destruction of uneconomic activity, was not allowed to happen as a number of countries – including the UK and the US – intervened. That is a topic for another day though.

For now, we are stuck with the modern and political equivalents of the “Luddites” – a group opposed to the immediate benefits of the Industrial Revolution in the UK almost exactly two centuries ago. They would go and break machinery to try and force businessmen to hire more workers or coachmen and the like. These people finally failed, but not before they occupied the popular imagination for a period of time.

In a world that could take another five to 10 years to recover from the effects of the global financial crisis, the half-life of these far flung political movements could be another 10 to 15 years. This seems a lot until you pause to consider that widely supported political movements last 50 years on average. Let’s all hope this particular evolution is not with us for quite as long.

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