Why economics has become political once again

Donald Trump

After decades apart, economics and politics have become inseparable once again. Growing numbers of voters are rejecting the long-held establishment consensus among economists that prosperity flows from broad free markets and free trade arrangements. Failing to secure political support for pro-growth policies will have deeply damaging consequences for economic prospects. For decades, politics has been something of a sideshow in terms of economics. No longer. Weak politics will lead to weak economies.

Brexit provides a vivid example. The entire UK establishment was in favor of remaining in the European Union. They were right: the economic arguments were compelling. The Bank of England has dramatically  just downgraded its 2017 growth forecast from 2.3% to 0.8%. Even that may prove optimistic. This may turn out to be optimistic.

But British voters, apparently oblivious to what seemed to be obvious economic facts, blew a collective raspberry. No amount of urging from experts, no number of Treasury white papers, no number of statements from the Governor of the Bank of England were going to change their mind.

I remember visiting the new Nissan factory in Sunderland in the early 1990s, shortly after the company became the largest-ever Japanese investor in the UK. Access to European markets was always part of the attraction, as post-Brexit communications from the firm have made clear. Nissan even wrote to its employees setting out the pro-EU case. Watching the town vote overwhelmingly for Brexit was therefore a deeply sobering moment.

The people of Sunderland, and the people of the UK, voted against their own long-run economic interests. That seems obvious to most of us: and by “us” I mean the upper middle class professionals filling up think-tanks and government departments. But there is a rage against the machine that too many of us inside it have failed to acknowledge and understand.

The trouble is that “the economy” doesn’t mean anything to normal people. Revisions to GDP growth forecasts leave them cold. Economic models may show that, on net and over time, immigration, competition and free trade are good. But “on net” isn’t very comforting to the person who is on the wrong side of that equation – whether they are a worker in an air-conditioning factory moving jobs to Mexico, or an unskilled Londoner seeing Eastern Europeans fill service sector jobs across their city. Nor is “over time” very attractive to people who haven’t felt a serious increase in their standard of living for a decade. These people don’t want net benefits for the economy as a whole in the future: they want more money, for themselves, now.

There is also a strongly cultural element to the anti-establishment surge that does not fit into rationalist paradigms of the technocrats. Immigration is one element.The number of foreign-born people living in the UK rose from 2.3 million in 1993, when Britain joined the EU, to 8.2 million in 2014. Many of us like living in highly mobile, ethnically diverse, vivid and dynamic society. But it is equally clear that many others are much less sure. The Brexit vote was about what it means to be British. For the cosmopolitan Remainers, it was obvious that this meant being European. For the Leavers, it did not.

It is widely assumed that it will be bad news if London loses some of its pre-eminence as a financial center, with banks moving operations across the Channel. It may be, in terms of simple economics. But the dislike of the Brits for Brussels bureaucracy is surpassed by their loathing of the banks, post-crisis. Ordinary citizens may then be less sorry to see some of them go, no matter what the economic models show.

These are challenges for the political class as a whole, rather than for left or right. The populism fueling Trump, Sanders, and Brexit challenges the political consensus that has stretched from Paul Ryan to Hillary Clinton for many decades. Indeed, for a brief moment in the last quarter of the 20th century, dubbed the “End of History” by Francis Fukayama, it seemed as if the Western centrist consensus around liberal democracy, free markets, and free trade would become a global one. Parties of the left, especially the Democrats in the U.S. and Labour in the UK, made peace with the market in order to make progress. Politics moved on to issues of personal identity, social policy reforms, and multilateralism. Economics became a matter of mathematical science rather than political art. Politicians still argued about economics, but within a tiny space between largely agreed parameters. With the end of the Cold War, economics seemed freed of ideological baggage, and then almost of political significance, too.

But now economics is deeply political again, and vice versa. But the skills of politicians in the field of economic persuasion have eroded in recent decades. Most were drawn to politics by social, rather than economic, issues. Meanwhile, economics became a more technical and technocratic field. Great oratorical energy and skill has been devoted to issues of racial justice, same-sex marriage, gender equality, and so on. The dry matters of productivity, growth, and labor market trends have typically been left to the tender mercies of Treasury secretaries, Economic Council members and Bank officials.

Let’s be blunt: the people who know their economics tend not to be very skilled when it comes to connecting with people at an emotional level. This makes sense. Economics is all about rational calculation of net social welfare, careful assessment of modeling results, and rigorous examination of trends in key indicators.

But the voice of reason is no longer the one that is heard. For people who are legitimately angry at the political-financial establishment, and still feeling the pinch from the recession and its aftermath, appeals to economic theory will not work. Indeed, they are likely to backfire. They’ve had enough of experts telling them what’s good for them. It is no good complaining that the experts are right: nobody’s listening.

Policy matters, still. And right now, there’s little on show from the America’s establishment candidate, Hillary Clinton, to make people feel like they will get more than just more of the same. But more important, the complacent assumption that voters will follow the establishment’s lead on economic matters has to be replaced with a concerted effort to win hearts, rather than minds, towards proven economic policies. This is not to say that reform is not required: few can think that the proceeds of growth have been shared equitably enough. But reform is one thing; retreat is quite another.

Looking around, the signs are not encouraging. The establishment GOP is too busy having a nervous breakdown over Trump to offer a voter-friendly alternative to his brash, nativist populism. The UK Labour Party is falling apart; the Conservatives just about holding it together and contemplating the extraordinary task of delivering on Brexit. Looking at political developments in France won’t cheer you up.

The central task of the political class of every major Western economy now is to sustain support for the outward-facing, market-based economic policies that have been the foundation of recent decades of prosperity. Are our politicians up to the job? We’re about to find out.