Sunday, 3 February 2019

The real reason populism is rising in the West

In recent years, we have seen the emergence of 'populist' movements across many developed countries, from the US (Trump) to the UK (Brexit), to Italy and now even the Yellow Vest protests in France (not to mention the rise of what are sometimes described - often unfairly - as 'alt right' parties across Europe). This has given rise to much confusion and concern amongst the elite, but if the issues are properly understood, it shouldn't. I feel the underlying drivers are very poorly understood and often misdiagnosed, and I hope to shed a little light on what is going on with this post.

I have a very non-consensus view on this, and I'm not exactly sure why I see things so differently. However, one possibility is that unlike many of today's elite (I count myself as one of the elite today), I come from a working class background. The secondary school I attended was in the bottom decile of academic achievement (I grew up in West Auckland, New Zealand), and of the 300-400 people that started secondary school in my year, only about 100 completed their final year, and less than 10 graduated university. At least 2 people I personally knew from school are currently in jail. I worked at supermarkets and even at McDonalds for a while, for pocket money. As a result, I have real understanding and empathy for how hard life can be for the working classes, and how their life experience can be very different from those of the pampered elite.

To my mind, what is driving rising populist movements is little more than rising developed market inequality; a long period of falling living standards for the working classes, as the cost of living has continued to rise faster than after tax incomes; and a desire for a better life. As I discuss in more detail below, the cost of housing has risen significantly in many countries, for instance, and I have seen first hand the struggle most people have these days to afford even a basic home (even to rent one). Commute times have risen, as the working classes have been forced to buy or rent houses in suburbs further and further away from where they work, and this has taken a real toll on people's quality of life.

The cost of healthcare and university education has risen, while various consumption-based taxes have kept escalating (excise taxes on cigarettes and alcohol, and sales/VAT taxes, which hit the poor the hardest). The cost of gasoline and electricity has risen, as the rich in places like the EU, who have different priorities, have priced carbon and implemented climate policies that they can easily afford to comply with, but which many others can't (this prompted the French Yellow Vest protests), while retirement security has been undermined by the removal of corporate pensions and the growing indebtedness of Western governments. And alongside all this cost inflation, incomes have been relatively stagnant. Many were financially devastated during the GFC, and lost their life savings and houses. There is a sense that things are getting worse, not better, and that a different approach is needed. Indeed, things have got so bad that most Americans now believe that the 'American Dream' is dead.

This is in contrast to the narrative often presented in the mainstream media, controlled as it is by members of the privileged elite that have been immune from these pressures, and indeed on the right side of rising inequality. The narrative is that the working class Joe Blogs' of this world voted for Trump, Brexit, and various populist parties in Europe, because they are at best a bunch of ignorant fools that don't know what's best for them, and at worst, a bunch of hateful, racist bigots, that want to return the world to the sort of 20th Century nationalism that lead to the great wars.

As someone with many working class friends who understand how they think and what their lives are like, I find this accusation not only false and out of touch with reality, but highly offensive and unfair to these people. Indeed, I actually find it obscene, coming as it does from the richest, most privileged members of society, that have no idea what life is like for the working poor.

The truth is, these folk just want better lives, and they also have many legitimate reasons to feel aggrieved, and feel that most of the elite has ceased to understand them; care about them; or represent their interests. The elite flatter themselves too much - their leadership (or lack thereof) over the past 30-40 years has delivered outcomes that have fallen far short of what they could/should have (I agree with Peter Thiel that the idea of 'developed' economies is a bad one, as it implies that these economies have already reached a sort of final maturity, whereas in reality, many aspects of our society fall far short of what could be achieved with better leadership and policies).

We have seen healthcare and education costs mushroom; the cost of housing rise; commute times elongate; wages stagnate; inequality rise; the size of government and various indirect taxes increase; the amount of regulation significantly increase, pushing new business formation to new lows; and pension and employment security undermined (with corporate pension plans being phased out, and governments failing to set aside money to fund future entitlements, while government debt burdens rise). We have also seen monetary policy conducted in a manner that has generated asset price booms and busts (including the GFC), inflated house prices and encouraged the middle class to become heavily indebted. And the design of the Eurozone has also caused much economic suffering in Southern Europe for ordinary people.

A lot of the elite argue that these are uncontrollable forces of nature, but they are wrong. Most of these outcomes are the direct result of failed leadership and poor policy choices, and were entirely avoidable. There is too much mutual back slapping amongst the Davos elite, and not enough soul searching/introspection. There is too much externalisation of blame for the rise of populist movements ('it's just the ignorant masses electing bigoted leaders'), and not enough critical reexamination of how they have been capable of such epic economic mismanagement that the need for a populist backlash has arisen in the first place.

Why has there been so little empathy for, and so little understanding of, the plight of the working classes, and the populist movements they are voting for, from the elite, and more pointedly, such visceral opposition to/contempt for these movements? I think it is because there is sort of a bizarre bipartisan elite consensus working against populist leaders. From the traditional right, wealthy executives, business owners, and professionals, have all benefited from the status quo, being on the right side of rising inequality, so they don't want or see any need for change. Meanwhile, on the left, in addition to the leaders themselves being personally members of the elite ('champagne socialists'), left wing politicians and activists have historically benefited from having a growing pool of poorer demographics, as that is their core political base. So they are also content with the status quo.

A 'right wing' political movement catering to the poor is therefore a development that has upset everyone. They have policies that are potentially bad for corporate profitability (but good for labour), such as immigration and free trade restrictions, so the right don't like them. But the left resent that their monopoly on the poor's vote is being challenged (having lost it by focusing too much on minorities/identity issues, and not enough on the working class), and also remain pro immigration as it boosts the size of their core voting blocks. Populist leaders have therefore been 'encircled' by the elite, and singled out for self-righteous condemnation, which has resulted in the bizarre situation of what are really grass-roots workers-rights movements being described as alt-right or ethno-nationalist.

A closer look at the drivers of inequality and rising working-class malaise 

So if inequality and falling living standards has been driving populism, what's been driving the former factors? There have been multiple causes, but one of the most important has been globalisation and free trade. Globalisation and the offshoring of manufacturing jobs and other low-skilled labour (e.g. call centres) has resulted in a reduction in global inequality, as emerging economies have benefited from rising exports, but it has increased developed market inequality, as jobs migrated overseas (there has also been an intra-European imbalance, with the North benefiting at the expense of the South).

These policies boosted corporate profits (which are at record levels in places like the US), as labour costs fell (both direct tradeables labour costs, as cheaper offshore labour was used, and also domestic non-tradables labour, as the overall supply of labour rose as competing manufacturing jobs disappeared). Globalisation has basically integrated 6bn low cost labourours into the global economy, undermining the bargaining power of less than 1bn members of the developed market working class, and that has had the effect of radically diminishing the value of their labour. It has also devastated many working class towns/neighbourhoods, as factories closed down en mass.

If you are smart and well educated, you've been immune, as there continues to be a global shortage of highly-educated/skilled people. As the global economy has grown, the value of highly skilled labour has risen, and so the elite have prospered. But there has been a growing oversupply of low to moderately skilled labour, and it's value has therefore fallen in the developed world.

These forces undermining the value of developed market labour have been exacerbated by other trends, which since the 1980s have included the reduction of collective bargaining agreements and the power to undertake industrial action, and a move away from corporate defined benefit pension plans. In combination, people have seen both reduced job and retirement security. Many government pension entitlements remain in place, but instead of putting money aside to fund them, most developed market governments have instead run up huge debts, suggesting these unfunded entitlements will be extremely difficult to make good on. Retirement ages are already starting to be pushed back in many countries, and much more will be needed.

Furthermore, liberal immigration policies - so liberal that in the US at the moment, there is strident opposition to clamping down on illegal immigration, let alone reducing legal migration - have exacerbated the plight of low-skilled labour. Legal immigration can have favourable economic benefits if it targets highly-skilled migrants, or migrants that can work in sectors with labour shortages, and these migrants pay taxes. Those sorts of migrants generally have a net positive impact on their host economy. However, we have seen much low-skilled immigration in recent years in places like the UK, EU, and the US, which has had the effect of further weakening the bargaining power of labour, and suppressing wages.

This is particularly so for undocumented migrants, who may not pay tax, and who may be prepared to work for much less for 'cash under the table'. Furthermore, many such migrants will oftentimes remit large parts of their paychecks back to their home countries to support extended families, rather than spend it in their host economies (migrants are consumers as well as producers; if they spend what they earn in their host economies, they create demand for labour as well as supply it; but if they save and remit most of their income overseas, which they often do, they subtract from overall labour demand in their host economy, and instead boost demand/employment in their home countries).

Heavy migration into big cities can also have the effect of driving up rents/house prices, and worsening commute times, which hit the poor disproportionately. Strict building codes in places like Auckland and Sydney, which have sought to preserve leafy, low-density development in wealthy inner-city suburbs, has - alongside a heavy influx of migrants - driven up the cost of housing/rents meaningfully. This has forced the working classes to live further and further out of the city, and endure longer and longer commutes - particularly those that don't own houses. Some are even being forced to leave the city where they grew up entirely, because they can no longer afford to live there. I went back to visit Auckland recently and was shocked at how much rents have increased, even in relatively poor neighbourhoods, and the ever more marginalised housing many people are forced to live in for affordability reasons. It is a real struggle for people, and immigration has played a significant role.

The economics are pretty simple here. If you have housing for 1m people, and the housing stock grows by 1% a year to say 1.01m, but the population by 2% to 1.02m, then prices will have to rise to ration demand, and the poorest 10k people will be forced to either leave the city, go homeless, or overcrowd into tiny dwellings. Needless to say, while the rich elite don't see any problems with liberal immigration, the poorer working classes don't necessarily see it the same way.

Immigration also benefits the elite in many in other ways. There might be, say, only two major supermarket chains in a given city, in a comfortable duopoly. Consequently, if you increase the size of the population by, say, 5%, through immigration, you won't end up with 2.10 supermarket chains. You'll still have two, and they will make a lot more money, as revenues go up against a relatively fixed cost base. Furthermore, an ample supply of immigrant labour will keep their labour costs suppressed. So corporate profit margins will rise, and so will stock prices, while rising populations also push up the value of the real estate their stores sit on (and the homes and rental properties of their executives and shareholders). All of these forces disproportionately advantage the rich.

There is therefore a strong alignment of incentives for the elite to be pro immigration, because they personally benefit from it economically, while the poor suffer. And as a bonus, they also get to claim the moral high-ground by accusing opponents of liberal immigration policies of xenophobia/racism, and get to virtue signal about how much better human beings they are. When you understand the real situation, you can see that this type of behaviour is actually obscene. They are literally adding insult to injury to the poor; kicking them when they are down. I for one find it highly objectionable.

But it gets even worse, because much of the liberal-captured elite are seeking (and succeeding) in shutting down the perspective I just outlined, branding it 'hate speech' against immigrants. This allegation makes it fair game to be blocked by liberal-elite controlled social media companies; and the advocates deplatformed and even fired upon accusations of racism. They are defending their interests in extremely underhanded ways, and manifesting a stunning callousness and lack of empathy towards the interests of the working poor, which make up a large portion of the electorate, and whose interests deserve representation. Anyone living in a poor neighbourhood blighted by excess illegal immigration, who wants to build a wall, now not only has to live in poverty, but also has to suffer the indignity of being called a racist and being forcibly shamed into silence as well. The white working class in poverty-ravaged communities also have to endure being repeatedly told by the rich elite that they have 'white privilege' as well.

Another important driver of falling living standards has been rising healthcare costs, which have mushroomed over the past 30-40 years. They have gone from about 5% of GDP in the US, to 17-18%, driven by a bunch of flawed government policies that have, despite good intentions with respect to 'access', succeeded in doing little more than perverting incentives and creating truly disastrous outcomes. This has exacerbated inequality, as excess costs are a regressive tax on everyone, whereas a small group of elites capture all the excess rents generated by the healthcare industry, from highly paid professionals, to executives and stockholders in drug, hospital, health insurance, and medial device companies.

Most people in the US get access to healthcare through employer-sponsored private insurance, without which people can face financial ruin if they suffer a health misfortune, and although it may seem as though employers pay for this insurance, it is included in the total cost of employing someone, and so the burden is effectively borne by employees (with premiums effectively deducted from their wages). This growing de facto deduction has likely been an important contributor to stagnant real US middle-class wages since the 1970s, as rising healthcare costs have offset what would otherwise have been some growth in real wages. It didn't have to be this way. The elite screwed it up - epicly. And the middle class and poor have paid the price, while a small number of well-placed individuals have got extraordinary rich.

The cost of university education has also spiraled ever higher - another outcome that was not a force of nature, but has instead been driven by flawed policies and incentives, as well as market failure. This has resulted in a situation where students now often have to take on six-figure debt burdens in order to attain a university degree (sometimes of questionable real value), which remains essential for access into many better-paid areas of the global labour market.

Furthermore, students were essentially promised that this debt burden would be more than offset by enhanced job/earnings prospects post graduation, and accepted that dictum unquestioningly. However, a combination of the GFC, which weakened job availability for many years, and the reduced value of a degree, as everyone has been encouraged and financed in to get one (the value of a degree's exclusivity and signalling declines as degrees become ubiquitous), many students have found it much harder to find well-paid work than promised, while emerging with massive debts.

Furthermore, in the US for instance, students have been charged a fixed 7% pa on their student loans over the past decade - far higher than reasonable market interest rates, in a decade where Fed rates were essentially zero - and students cannot escape this debt, even if they file for bankruptcy (student loans are the only loans that cannot be repudiated/restructured in personal bankruptcy proceedings). This has created a growing class of indebted 20-30yos that cannot afford to buy houses and raise kids, let along start a business. Marriage and birth rates have plunged, and the level of new household formations has continued to undershoot expectations. But a small number of tenured professors and university deans have benefited, as this heavy tax on students benefits a small well-heeled elite - many of whom use their secure position to condemn populist movements and their voters.

A growing excess of regulations has also stifled new business formation, and contributed to growing market consolidation/power by industry incumbents across many industries, as heavy regulation increases barriers to entry and favours incumbents. New business formation in the US is currently at all time lows on a per-capita basis. It has never been harder to start a new business (outside of tech). This has restricted upward social mobility, and entrenched wealthy interests, not to mention slowed down economic growth. It also grants corporates more bargaining power with labour.

In the Eurozone, structural flaws in the union's design have driven disastrous economic outcomes in places like Italy, Greece, Spain, and Portugal over the past decade. Youth unemployment has sat as high as 30-50% in many of these regions for large parts of the past decade, and living standards have plunged. A large part of the blame for this lies with structural flaws in the design of the currency union that were evident to many observers right from the very outset. And the punishment meted out to the working classes, who have borne the brunt of the fallout from these design flaws, has been exacerbated further by forced austerity measures prescribed by the German/EU elite in the crises' wake.

Forced liberal EU immigration policies have also made things even worse. For instance, the EU required Italy to keep its borders open. Italy, being on the Mediterranean (unlike their Northern European overlords), has therefore seen a significant influx of African/Middle Eastern migration. Italy had to spend a lot of money on social welfare and infrastructure to accommodate this rapid influx, at a time when domestic unemployment was already high, and the EU was at the same time forcing the government into austerity measures to reduce its fiscal deficit.

What this essentially meant was that the EU was asking Italy to raise taxes and cut public spending/pensions/welfare for ordinary Italians, in order to bear the burden of the cost of significant waves of immigration, and to do so despite ordinary Italians having already suffered terribly from a drawn-out economic crisis, caused to a large extent by the very EU bureaucrats forcing this hardship. So why, exactly, are people so surprised that ordinary Italians are finally saying, 'we've had enough'? And why do people believe it is ok to call Italians and their new leadership a bunch of ethno-nationalist bigots?

The only surprise should be that it has taken so long for populist movements to arise, given just how many sources of legitimate grievance the working classes have claim to. Living in their gated communities, cashing their six or seven figure salaries, and attending prestigious meetings in Davos by private jet, the elite are completely immune from the practical consequences of their own ideology. They do not have to suffer rising crime and poverty in their neighbourhoods, falling job and retirement security, and falling wages and public services, if they can get a job at all. And now, the liberal elite feels entitled to call these people xenophobic, racist, and ethno-nationalists, as well.

This is fundamentally where nationalist-populism is coming from. Politicans are starting to stand up and say, you know, it's high time someone paid attention to the plight of the working class; listened to them; and represented them; and it's time we started to gear policy towards what is good for the mainstream working class of our own country (country X first), instead of just the rich, and the overseas poor (e.g. through free trade and liberal immigration). And it shouldn't come as a great surprise that this message is resonating with voters.

And Euroskepticm is rising because Brussels is democratically unaccountable; uncompromising in its approach; and fully captured by the liberal-elite, who do not understand or represent the interests of large portions of the populations they govern. Immigration is the issue that has really tipped the balance and catalysed change, because this is where the gaps between liberal idealism and on-the-ground practical reality have become simply too large for people to ignore.

Aside from the economic impacts of immigration, which are less immediately visible, there are parts of major European cities that have become completely Islamified on account of rapid Middle Eastern and African immigration. Crime, gang rape, intimidation of women, and illiberal attitudes, have grown significantly in these areas, and rendered these parts of European cities dangerous and unsafe to visit - parts a lot of residents used to call home. This is just a fact. It's not an opinion. You just have to go and take a look.

The belief that 'everyone is liberal and tolerant at their core, and deep down share Western values', and 'assimilation and acculturation to Western values will automatically happen on its own, irrespective of how much immigration occurs, and who the immigrants are', is a dictum that has been proven naive and false. And again, a big part of the problem is that it hasn't impacted rich neighbourhoods in the way it has impacted poorer ones. The rich are either unaware of, or don't care about, the actual impacts of their ideology on the poor.

But the poor see the impact on their communities; they no longer feel safe and welcome in neighbourhoods where they grew up; and are starting to say, enough is enough. But because of their EU overlords, many European countries have not been able to effectuate tighter immigration laws within their own natural boundaries, and have been harshly criticised by EU governing bodies for attempting to do so, and accused of xenophobia. With living standards having declined so much already, for so long, people are saying, if the EU won't listen, we have to simply forge ahead and implement change anyway.

The takeaway

The pro-populist working classes aren't racist, and they don't support a brand of nationalism that could lead to war. This movement has absolutely nothing to do with ethno-nationalism, and it is high time they stopped being falsely accused of as much, and someone spoke out in their defense. Instead, working class people simply want better lives, and they want their leaders to listen to them, represent them, and understand the reality on the ground, rather than living in their ideological bubbles. I, personally, do not believe they are asking too much.