Belmont Club

The Year of Disillusion

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2016 may be remembered as the year when disillusionment became universal. David Goldman argues the doubt started when global investors discovered that the American land of economic miracles was overhyped back in 2008. “The world used to believe in the United States,” Goldman wrote.  “America was the world’s only superpower back in the mid-2000s.”  The world’s money came and got sucked into the subprime mess.

Donald Trump argues that America’s problem is that it has sent its wealth overseas. Exactly the opposite is the case: America’s problem is that the world’s wealth came to America, and bought subprime mortgages. At the peak of the housing bubble America imported capital each year equivalent to 6% of GDP. Everyone from China’s central bank to Arab sovereign wealth funds to German provincial-government banks bought American mortgage debt until the housing bubble crashed. Virtually all of the world’s available savings came to the United States….

Then came the inevitable crash. Home prices collapsed and well-paying white collar jobs disappeared. The brother-in-law who made $150,000 a year as a mortgage broker in 2007 was unemployed in 2009 and driving a FedEx truck in 2010–or doing nothing at all, as the labor force participation rate collapsed. …

Americans became downwardly mobile, as I showed in a March 1 essay, and along came Donald Trump to tell Americans that their misery was all the fault of illegal immigrants and rapacious foreigners. Not so: during the decade before the 2008 crash, Americans were being paid for being Americans. Their forefathers had built the world’s strongest democracy and most open capital markets, and they were living off the rent they charged to foreigners to come in and use it. Meanwhile Americans under 25 somehow sank to the bottom of the international rankings for skills in literacy, math and technology. If you’re paid simply for being American, why not spend your high-school years with Grand Theft Auto?

Cruel disillusionment may now be in store for the Chicago Teachers Union. Bankrupt, its pensions underfunded, its healthcare plans unsustainable from years of mismanagement, the union is doing what it has always done, using political strength to get more money. It worked in the past so the union has gone on strike to force the Illinois legislature to raise taxes because education is important; education is a right.

Chicago Teachers Union vice president Jesse Sharkey has probably thought long and hard about whether it’s a good idea for his union to go on strike Friday; the risks are high. But in hearing him talk about it last week, you couldn’t tell.

“We are going to strike over things that judges might consider illegal, but we consider moral and right,” he said at a public-sector union conference in New York. “There might be judges that disagree with us…” He shrugged. “But we disagree with them.”

The CTU, unlike the foreign investors, still believes in the Stash. Or maybe they think there is no option but to keep believing.  As the Wall Street Journal reports:

CPS, which faces a $1.1 billion budget deficit and billions more in pension debt, already has halted salary increases, imposed three furlough days and made other cuts to schools. It reached an agreement earlier this year with union leadership on a proposal that included salary increases, but a larger union bargaining team rejected it, partly because it required employees to contribute more toward their pensions and health insurance.

The union and its allies say the only way to get a fair contract and improve struggling schools is to pressure lawmakers to approve new revenue, either through a tax increase or other changes.

The California public employee unions apparently believe in the Stash too and are playing the same game. The legislature is on track to raise the minimum wage in California to $15 an hour ( New York to follow suit), which will effectively give government employees a $3.6 billion raise. “The University of California, Berkeley, Center for Labor Research and Education projected the ripple effect of a $15 minimum wage on higher earners could raise pay for 5.6 million Californians by an average of 24 percent. Latinos would benefit most because they hold a disproportionate number of low-wage jobs, the university researchers said.”

What’s not to like? But if the mythical Stash isn’t real or is used up it will mean stagflation, a situation where everything costs more without producing any real growth.  It could already be here. “Overall, for the first time in this recovery, a broad and significant rise in core economic costs is slowing job creation, real consumer spending and profitability,” said Jim Paulsen, chief investment strategist and economist at Wells Capital Management. It’s an easy concept to understand in the context of the CTU. The teachers get paid more, as do union officials, but the quality of education remains about the same or actually declines in provision.  Higher costs, zero real growth.

In that case the CTU folks will find their pay checks seem bigger but buy less. “The number of able-bodied Americans entering the labor force has surged since last fall. But… circumstantial evidence in the latest U.S. jobs report suggests many of these newly employed workers have found part-time work with mediocre pay.”  Like Obamacare daily life will be “affordable” yet crushingly expensive.

One of the constituencies which may finally be waking up to the fact that liberal politicians won’t keep their promises are non-white voters.  After eight years of Obama it may  be dawning on them that they’ve gotten nothing in exchange for their votes.  Black America is much worse off than before.  Not surprisingly Common Dreams writes, “Hillary Clinton’s Support Among Nonwhite Voters Has Collapsed.”

On February 27th, Hillary Clinton led Bernie Sanders among African-American voters by 52 points. By March 26th, she led Sanders among African-Americans by just nine points. …

So no, it’s not a coincidence that, in the 18 state primary elections since March 1st, Bernie Sanders has won on Election Day in 12 of them.

The next disappointment will be Bernie when it is realized that while Hillary won’t redeem her promises, Bernie can’t because the magic Stash machine from which the payoff is to come simply doesn’t exist.  The goose has been slaughtered and all that remains is a tug of war over over the leftovers.

The 2016 disillusionment won’t be confined to the left.  Many Republican voters are also coming to the realization that nobody from the field of less-than-perfect GOP candidates can “bring back” American jobs which have not so much been exported as destroyed. While it may eventually be possible to rebuild them there is no magic wand that can be waved which will restore them quickly.

From a psychological point of view the U.S. 2016 election occupies the same psychological space as the Brexit referendum does in the UK. Extraordinary hope for a turnaround is invested in it.  Only let Britain leave the EU — only let a Republican be elected president — and everything will be right again.  But the sudden realization that what is left of the UK steel industry was soon about to close, probably forever, brought home the fact to Britain that the sickness is decades deep and too deeply rooted to be solved at once.  Green energy mandates and  European Union regulation have done lasting damage, and British politics did not help treating steel as an industrial spoil.

Global overcapacity, a strong pound and cheap Chinese imports are causes of the present crisis, but many of UK steel’s woes are self-inflicted. It has a history of poor management, lack of capital and ill-judged state intervention.

Economically, the industry is much less significant than it was, though arguably it has strategic importance for manufacturing and defence. In 1875, Britain produced almost 40 per cent of the world’s steel. Now its 12m tonnes a year account for just 0.7 per cent. The UK steel industry has declined faster than that of its main neighbours. It used to be second only to Germany in terms of production, but since 2001 it has fallen behind Italy, France and Spain. …

Even in its Victorian heyday, the industry in the UK was wedded for too long to obsolescent technology and was overtaken by that of the US. After the second world war, under-investment was a reason for the Labour government nationalising it in 1949. The Conservatives privatised it in 1952 and Labour renationalised it in 1967 as the British Steel Corporation. British Steel was privatised again in 1988 by Margaret Thatcher’s Tory government.

By the same token Trump or Cruz can try to bring back the jobs, but it won’t be easy; it certainly won’t be quick. Although Labor’s Jeremy Corbyn has promised to keep the steel works open with government money, in much the same way as Sanders or the CTU or California would mandate increases to solve the downward mobility problem, perhaps enough people are beginning to realize this no longer works if ever it did.  The parties are selling merchandise that is no longer in production.

Enough disillusionment on both sides of the political divide can lead to an erosion of established two party political systems.  This has already occurred to some extent in the UK where the Lib-Lab-Con party monopoly is shattering. The London School of Economics is tracing the ongoing emergence of a British multi-party system.  Will a similar development occur in the U.S.? It seems reasonably certain Herbert Stein’s law will eventually kick in. “If something cannot go on forever, it will stop.” What replaces it? That’s the question.

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