Has democracy become too expensive for capitalism? Part 1

This article is going viral, having been shared on Xenosystems, Slate Star Codex, and elsewhere: Has Western-style democracy become too expensive for capitalism?

This short article offers a lot to unpack.

The central reason why Western democracy is in decline is that its capitalist bedfellow can no longer afford the financial demands that full-blown democracy is placing upon it. History has shown that capitalism can adapt, consorting with a variety of political systems in the past 5,000 years. Looking ahead, it will probably find another political host to aid its survival. Democracy — capitalism’s host over the past century — is far more brittle. …

Much ink has been spilled on the significance of 2016’s one-two populist punches as thrown by Brexit then Trump. What does it mean for the West? Most analysis concludes that parts of the West are having second thoughts about globalisation, and there is undoubted — if only partial — merit in this assessment.

Donald Trump won the US presidential election by convincing disgruntled former factory workers in the critical swing Rust Belt states of Michigan, Wisconsin, Ohio and Pennsylvania that factories translocated from the US to Mexico and China had “stolen” middle class jobs from Middle America. A few factories have migrated, though the main effect of Asian and Mexican competition has been to limit wage increases much more than “steal” jobs.

There is a trend these days for authors on supposedly reputable sites (Bloomberg, Financial Times, and The Economist) to make these grand proclamations but with scarcely any proof to support them. Technically, all you need are two data points to call something a trend, which in this case is Brexit and Trump. The Financial Times, purportedly reputable newspaper, is going down the same path as Zero Hedge and Rolling Stone by using sensationalism and over-generalizations for cheap ad clicks at the cost of accuracy and journalistic integrity.

Anther possibly, as I discuss here, is that these results don’t signify anything significant, due to the high degree of randomness. Half the county is going to vote ‘left’, the other ‘right’, so it comes down to a small number of undecided voters. The author ignores the French and Dutch elections and how Theresa May lost seats, all of which puts a dent in the thesis.

There is growing anti-democratic sentiment online, but it will longer for this to manifest in real life.

The second is that the centre of economic gravity is shifting back from West to East. The connection between these two mega trends is that, although the East has flirted with democracy, its new champions are not democratic nor are there indications that they are likely to be, at least in the sense that the West regards the concept. Only India’s ascendancy might yet give Western-style democracy a second chance and a new lease on life.

Again with the overgeneralizing and baseless suppositions. According to what evidence? There is scant evidence of such a shift. Of the 2000 largest companies, 540 of them are based in the US, whereas only 200 are in China. The biggest and most influential companies in the world–Google, Facebook, Apple, Amazon, Exxon, Tesla, and Walmart–were all founded in America. Maybe the author is referring to China’s manufacturing, which has long since eclipsed that of the United States.

What does the author mean by ‘too expensive’? This can mean two things: costs of living being to expensive for Americans, which for things such as rent, healthcare, and tuition, costs have exceeded inflation, and or, it can mean ‘expensive’ in terms of excessive entitlement spending due to ill-conceived social and immigration policies.

As McKinsey has noted, almost 70 per cent of households in the 25 most advanced economies — some 560m people — have seen their real incomes stay flat or fall since 2005.

Yet despite stagnant real wages for most workers, Americans have a lot of purchasing power, especially compared to the United Kingdom. (Related: Stagnant Inflation-Adjusted US Wages: Putting Things in Perspective) Americans, even the poorest, have a lot of purchasing power. In most counties, standards of living for the poor and middle class are much worse. Look at Walmart and how much cheap stuff there is there–a week’s worth of an American’s paycheck buys more economic utility than for someone living in Britain. The British pay a higher percentage of their income for heating, utilities, transportation, and other essential goods.

In fact, these surpluses have been insufficient since before WWII. But the stop-gap measures of Keynesian-inspired budget deficits — the real glue of democratic capitalist cohabitation — have made up the necessary differences even if these debt-financed transfers inexorably added to overall national debt.

This passage alluding to socialism via democracy, the result being an increasing amount of debt to pay for entitlement spending–due to politicians supporting more immigration to expand the electorate, but also due to politicians buying votes via promising more social programs. Now here’s where things get kinda weird and is an example of how economics is counterintuitive. In the earlier post Why Socialism for the Rich, Capitalism for the Poor?, I give five common definitions of socialism:

1. Partial or total government ownership and influence of otherwise private firms

2. Worker ownership of the means of production

3. A system of government (social democracy) and or policy characterized by a very large social safety net (welfare state); significant presence of unions

4. Used interchangeably with ‘crony capitalism’ in which the government ‘picks and chooses winners and losers’, and or an economic system or policy that favors the wealthy and or large corporations

5. Wealth confiscation and or wealth caps; massive wealth redistribution

Provided it isn’t 1 (total ownership), 2, or 5, socialism can technically coexist with a strong economy and may even be a tailwind, but this may only work for countries, such as the United States, that have reserve currency status and hence cheap borrowing ability. Obamacare, for example, although it has added to the national debt and can be seen as a form of crony capitalism, is a boon for health insurance companies, biotechnology, and hospitals. Increased immigration and increased welfare spending also adds to the national debt. However, despite surging national debt, the interest paid on the national debt relative to GDP is very low. Likewise, income tax rates are at near multi-decade lows, and inflation as measured by CPI is also at near multi-decade lows. So despite all this all this debt, no one is really paying for it, nor are there any inflationary consequences. It’s free money essentially. But immigrants, even if they consume resources such as public healthcare, are great for consumer spending stocks such as McDonald’s, Target, and Walmart. If if increased social welfare spending grows inflation and the national debt at 2% a year but boosts S&P 500 earnings by 10%, that’s a net-win for the stock market and investors. All this immigration and welfare spending is pure top-line growth for multinationals, and the debt can be postponed indefinitely.

Crony capitalism can work if it represents an optimal allocation of capital that may have not otherwise occurred in a free market. Socialism in terms of funding high-IQ initiatives such as Tesla, biotechnology, and Space-X, could also be a tailwind because the profits and equity are still privatized. In the case of welfare, it’s sub-optimal, but it’s still pure top-line growth for companies that benefit from consumer spending.

Socialism is terms of wealth confiscation and total government ownership is always bad, except possibly for 2008, in which partial federal ownership of some banks staved off crisis by infusing cash in the weakest parts of the economy (housing, banking) so the healthier parts (web 2.0, technology, retail, etc.) could thrive, could be seen as a success despite all the howls of outrage about moral hazard. As a consequence of the crisis, only a handful of companies out of thousands were socialized, and the ownership was not total. Considering that thousands of businesses fail every year, the government is hardly ‘preventing failure’, which is the most common criticism of the bank bailouts. In the case of 2008, such asset seizure only occurred after the banks were effectively insolvent and all the shareholder equity had been destroyed, so it’s not like wealth was actually confiscated, because there was nothing left to confiscate. Rather, the government acquired the debt and the worthless shares. Regarding Freddie Mac and Fannie May, both are in much stronger financial shape than even in 2006 and have long since paid back their debts, so an argument can be made for relinquishing the conservatorship.

Fundamentally, the surpluses furnished by GDP growth are the product of just two inputs: the number of hours worked — a function of demographics — and the quality of work done in each of those hours — a function of labour productivity. Both demographic and productivity contributions to GDP growth are, in the West, now gravitating towards zero and, in some countries, are even below it. Even in the US, the structural underpins of GDP growth are now waning.

Again with the baseless suppositions. US inflation-adjusted GDP growth (and a bunch of other data), especially compared to the rest of the developed world, is actually quite strong. You can see how for eight consecutive years, US GDP has risen without even a hiccup, whereas most countries, such as Russia, Brazil, and France, have been struggling. And profits & earnings for S&P 500 companies are even stronger. (Related: Slow Economic Growth Not a Big Deal). Growth is growth. The author is falling for the fallacy of composition by choosing the weakest part of GDP and using such weakness to generalize for the entire economy. You cannot do that. To form an accurate picture, you have to look at the totality of data, both the strong and weak data, not just the weak.

Continued Part 2