The Best of Times

Yesterday, in the US, the S&P 500 and the Nasdaq indices hit record highs. And the Dow Jones Industrial Average is not far behind. Financial markets are doing well.

In the real economy, for weeks now I have suggested that the signs of slowing at the beginning of the year were just a blip. And indeed, real-time econometric nowcast models like the Atlanta Fed’s GDPNow indicator show Q1 growth estimates in the US rising from 0.3% when it began to 2.8%. Even if the quarter ends around 2.0%, that’s a lot better than we were expecting a couple of months ago. Meanwhile, the unemployment rate and initial jobless claims remain near multi-decade lows. As I wrote recently, I am a true believer in the economic re-acceleration thesis now.

Of course, this is just the US. But after a decade-long global expansion, I reckon you could still call this ‘the best of times’ – at least on a relative basis. Think back to 2007 or to the European sovereign debt crisis. Things were much worse economically.

The psychological disconnect

So, the obvious question, then, is: why am I writing dark posts about “Division and Divisiveness in the 21st Century“? And why are economic writers in the FT like Martin Wolf writing under headlines proclaiming “The Age of the Despot is Here“?

Now, one interpretation you could make is that this is partisan. And by that I mean left-wing bellyaching about the rise of the right. If you look at most of the populists that have come to power recently, they are right-wing populists, not left-wing populists. So what we could be seeing is the kind of psychological despair on the left that we saw on the right during the Obama Administration in the US.

Polls have shown a massive reversal in how Republicans and Democrats view the economy in the US since Trump took office, when, in fact, the economy continues to hum along. Polling data show Republicans now see the economy in much more positive terms where as Democrats see them in more negative terms.

That’s plausible. However, I would argue that a lot of the psychological disconnect from these best of times comes from a lingering sense that institutions have failed us – a fear that we are headed back into recession before the bounty of economic expansion has been widely shared.

What happens when the economy turns down?

It may just be a fixation on the negative due to the trauma of the Great Recession. But, the sense I get is that many people are asking, “if this is the economic and political climate in the best of times, what will things look like when the economy turns down?”.

For example, look at public pensions. I wrote about this in February of 2018, saying one expert “is talking about dire state and municipal finances during the best economic conditions of this business cycle. What happens when the economy turns down?” I think the answer is that underfunded pensions present us with a state and municipal funding crisis.

In France, you have the ‘Yellow Vests’ on the street every weekend. And most recently, there was outrage that millionaires were willing to fund the rebuilding of Notre Dame but not willing to make reforms that benefitted the working class. If that sort of anger lasts into the next business and election cycle, we could see Marine Le Pen as President.

The discontent

The Martin Wolf article focused on ‘strongmen’ leaders usurping the organs of power in democratically-elected Western countries and railing against elites. But, their actions have strong grass roots support.

In Germany, the Alternative for Germany “has emerged as the most popular party in the east of the country, overtaking Angela Merkel’s conservatives before finely balanced elections.” And this part is what I would highlight:

The AfD has deftly mobilised disgruntled voters whose earning power and average life expectancy still lag behind those in the west nearly three decades after the fall of the Berlin wall.

The same is true about Brexit, in my view. There is a sense amongst many outside of London that the ‘elites’ are winning – and that the muddle in parliament is an attempt to stop Brexit illegitimately. I suspect we will see an enormous win for Nigel Farage’s new party and for anti-EU candidates in next month’s European elections. Again, the issue is economics as much as anything else.

So, not only is the discontent non-partisan, it is widespread across the globe in advanced economies. And this is where the whole sham of economics as a science presents itself. For years, economists have positioned the profession as a technocratic, scientific, math-based discipline that examined data and spit out facts. After we were blindsided by the Great Recession, the economics profession took a hit along with other institutions considered elite. And it continues to suffer due to the continued – and growing – lack of trust of institutions.

My view

I would call this a crisis. What concerns me is the widespread disavowal of the legitimacy of institutions because that disavowal undermines democracy.

For example, in the US, Donald Trump made three calls yesterday on that score. He ordered staff to boycott the White House Correspondents’ Dinner. His Treasury department refused to release his tax returns to Congress as mandated by law. And he ordered his staff not to testify before Congress regarding the Mueller probe. He did this under the guise of resisting the ‘illegitimate’ authority of US institutions because they are ostensibly being used for partisan purposes. That’s where we are.

But where do we go from here? What does this disavowal of institutions mean going forward? I certainly don’t have the answers. In one scenario I can think of, eventually, after a long struggle, our institutions win back enough of their legitimacy for democracy to function as normal. In another scenario, recession takes hold first and they lose even more legitimacy, giving cover for a future political group to ‘suspend’ existing laws as Erdogan has done in Turkey. And where things go from there is anybody’s guess.

Remember, these are supposed to be the best of times.

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