Terms of Trade: The economics behind the demise of ‘it’s the economy, stupid’

Almost the entire world is watching whether or not the US will re-elect Donald Trump as its president. Many commentators agree that the good old polling models might not be of use anymore to capture the state of play in what is anyway a polity with extremely skewed consequential pockets. This column has no intention, nor the intellectual wherewithal, of weighing in on what could happen in the US elections.

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China’s export-led growth has been the defining feature of global capitalism in the last four decades. While China became the world’s second largest economy as a result of this dynamic, it also played an important role in stabilising the global economic system by one, providing cheap consumption goods to the consumers in western economies and profits to their capitalists, and also financing a large part of the advanced country, especially US deficits by holding large dollar reserves.

Goods, to be sure, were not the only things which saw a large increase in cross-border mobility. Both in Europe and North America, there has also been a lot of in-migration, both of the blue-collar and white-collar variety, which has helped keep unskilled labour costs in check and allowed these countries to reinvent their comparative advantage in cutting edge and high value manufacturing and service sector enterprises. Minus immigration, countries such as US would have been a demographic and hence economic decline by now.

Both of these developments seemed like non-zero-sum games where no side had to end up as the loser for a long time. It could very well have been, if the political leadership of the advanced capitalist world had some foresight and tried a sincere redistribution of the surpluses generated by such trade-off in goods and labour markets. But this was not to be.

The politics backing this economic consensus started to fracture in the aftermath of the growth haemorrhage which followed the global financial crisis of 2008 and eventually gave way because of a tone-deaf elite failing to appreciate the economic precarity and pessimism of the local underclass in the advanced countries. 2016 victories for Trump and Brexit were the first warning shots that the ground was shifting on this front.

One could very well argue that 2016 Brexit and Trump victories have had very different results.

In England, the Labour Party managed one of its best ever victories in the elections held this year as the economy continues to struggle and the Conservative Party is held responsible for it. Whether Labour can clear the mess and get growth going once again, is a much more difficult question.

In the US, however, because Trump lost in 2020, he has been able to exploit the inflation-triggered discontent and managed to get within striking distance of winning the election again. Whether the huge fiscal spending (and deficit) driven stimulus to the economy can save the Democrats (like it did in the mid-term) remains to be seen.

What is the larger point here?

Politicians across the spectrum now understand that there is no going back to the pre-2016 political economy arrangement in the advanced capitalist world. The economic pain is real and they must be seen as doing something to reverse it. But nobody knows what is the best way to solve this problem. The fiscal conservatism, especially around sustainable debt, seems to be giving way. There is a resurrection of industrial policy and even economic nativism at the cost of what used to be a rules-based multilateral trading order. Even the absolutely necessary consensus on reducing carbon emissions seems to be the most fragile it has been in many years.

However, the problem is none of these policy departures will go very far in alleviating the growth and economic precarity problems. It is this economic policy defeatism which is leading to an overreliance on the civic and the social rather than economic in the political discourse of the players who would still want to keep things as close as possible to the pre-2016 economic order and also those who want to gain the most from its failure to protect, let alone, enhance, mass economic well-being. One side likes to call the other fascist, and the other attacks its adversary as being too weak to undo the damages of trade and immigration to the local population’s material interests. The irony is, neither of these accusations are true.

Fascism, in its purest form, as it existed in places like Nazi Germany was not just bigotry and violence against a certain social class. It was as much about a complete realignment of economic order in preparing for a war and, with that stimulus, taking the economy close to full employment levels. Its biggest USP was it did this without letting the working class — relatively free of unemployment — threaten capital’s dominance. Legendary Polish economist Michal Kalecki talked about in his celebrated essay The Political Economy of Full Employment and contemporary economic historians such as Clara Mattei have discussed this in detail in an excellent book The Capital Order: How Economists Invented Austerity and Paved the Way to Fascism.

Despite today’s inequality and economic precarity, the underclass in advanced capitalist countries do not face the economic hardship, which would have them even entertain the idea of a fascist realignment of the economy, which historian Adam Tooze has shown in his book The Wages of Destruction: The Making and Breaking of the Nazi Economy, came at a great cost and created huge scarcities, even before the destruction the war brought, for the local population in Nazi Germany. In fact, people like Trump are actually calling for lowering rather than raising the military obligations of the US. That is the exact opposite of what the fascists did.

Similarly, decoupling the US economy with global flows of commodities and labour, which is what the likes of Trump argue is the best way forward, will actually make things worse rather than better. Inflation will worsen, the dollar and US’s position as the global hegemon might come under threat and worst of all, US’s position as the leading country in innovation might be jeopardised. The only problem with this justified criticism of Trump is , there is nothing in the status-quo for the have-notes in the advanced capitalist countries. The economic opulence, which the existing political order has generated in these countries is extremely skewed and has made things worse for the underclass.

What we have, as a result, is a fundamental asymmetry between the winners and the losers of the existing economic order. The losers in today’s economy will like things to change but they are unwilling to make the kind of sacrifices or adjustments which people had to make in the only two alternatives liberal capitalism has had in modern history: fascism and communism. The winners would like to maintain the status quo but they do not want to do enough to rectify the inequality which this so-called meritocratic and free for all political economy regime has created. Doing this, to be sure, will require some purge within the ranks of the rich.

Many of our readers might feel that by overemphasising the economic, this column is trivialising the critical social and institutional implications of the political battle being fought. They might have a point. But they should also ask how many of them believed in the ‘it’s always the economy stupid’ theory in the pre-2008 era when things were good on the economic front. Unless either of the two sides figures out a way to deliver the economy which wins elections, politics will continue to become more and more socially unhinged.

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