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A friend I haven’t heard from in many years since he left the USA wrote me. He closed the letter in an unusual way, saying:

PS — USA has gone completely bonkers these days? or what the heck is going on over there? would love to pick your mind over a glass of wine. someday!

I’m not intending on writing on politics as a regular habit at Aleph Blog, and most of what I am going to say is economics-related, so please bear with me.  Hopefully this will get it out of my system.

To my friend,

There are a lot of frustrated people in the US.  Though you’ve been gone a long time, you used to know me pretty well; after all, I trained you on economic matters.

Let me give a list of reasons why I think people are frustrated, then explain how that affects their political calculations, and finally explain why they have mostly misdiagnosed the issues, and won’t get what they want regardless of who is elected.

The electorate is frustrated because:

• Living standards have declined for the lower 80% of society.
• Many people lost jobs, homes, pensions, etc., during the recent financial crisis… those assets are not coming back anytime soon.  Much of the fault was theirs, but they don’t recognize that, preferring to blame others for their problems.
• Many formerly attractive jobs are disappearing either due to technological change or offshoring (whether corporations or subsidiaries).
• The economy muddles along, and economic policies that average people don’t understand dominate discussion.  Many wonder if anyone is seriously trying to improve matters.  They generally distrust the Fed.
• It doesn’t seem to matter who gets elected, Democrat or Republican — the status quo remains because business interests support the Purple Party, which is the consensus of establishment Republicans and Democrats who duopolize politics in the USA.
• Nothing good seems to happen in DC, and what few significant pieces of legislation have occurred in the Obama years have turned out to be bad (Obamacare) or useless (Dodd-Frank to the average person who doesn’t get it).
• Immigration issues get short shrift, also trade issues.
• Moral issues have basically disappeared from the political agenda in any classical form.  Everything is pragmatic, geared to serve the Purple Party.
• In general, the candidates are pretty lousy, and the moral tone of the campaign has been poor.  That said, negative campaigning works, and the candidates that focus on being negative are doing better.

Now take a moment and think about what people do when they are desperate.  In short, they take longer-shot chances than they would ordinarily take.  They think:

“This person couldn’t be that much worse than what we have going now, and he sounds a lot different than the politicians that I have been hearing for so many years, ad nauseam.  He talks about issues that affect my situation, and is not willing to mince words.  He could be a LOT better than the status quo, which stinks.  

So, the downside is limited, and the upside could be significant.  I don’t care about the rough edges of this guy; the media always blows things out of proportion anyway, and helps foster the consensus candidates that never solve anything.  So, I’m just going to hold my nose and vote for (fill in the blank).”

In my opinion, that’s why politics is nuts over here right now.  Given the relative inability of the electorate to digest complex explanations, there are a lot of matters that they can’t understand, and as a result, regardless of who they elect, they won’t be happy.

Most of the economic and political problems stem from:

• Technological change
• Increasing returns to those that are smart versus those that are not
• Not enough productive children being born
• Attempts to improve the economy that don’t work
• Gerrymandering
• A diminishing consensus on what is right and wrong, and the proper role of government

The technological change is the most important factor, and explains why attempts to limit immigration or limit free trade won’t help.  As a result of the internet, businesses can set up in many areas and benefit from the different aspects of each area — labor here, capital there, taxes way over there.  Unless governments are willing to work together to limit this, and they compete, they don’t cooperate here, this can’t be solved.

Information technology can make lower skilled workers far more productive, leading to a diminution of jobs in many sectors.  This can happen anywhere — in banks, investment shops, factories, and restaurants.  It works anyplace where you can turn 80%+ of a job into a set of rules.  That can move jobs away from where they currently are to places where inexpensive labor can do the work.

In the short-run, this is a problem for many.  In the long run, it will release labor to more valuable pursuits.  That said, many older people will not be capable of retraining, and younger people will gain the opportunities if they are smart.  the “know nots” are becoming “have nots.”

Part of this is payback for not studying enough in school, and/or studying topics that would eventually valuable in college.  As I have said before, “Follow your bliss” is selfish and dumb.  Real value comes, and society improves, from facilitating the bliss of others.  The more people you make happy, the greater the rewards are.

Now, demographics are getting worse for most developing economies.  Most economies do better when the fertility rate is over 2.1 — i.e., that population is growing.  Typically that means that opportunities are growing.  When working populations shrink, social benefit plans begin to collapse, and when populations shrink, countries lose vitality and creativity.  We need youth to replenish its ranks to keep our societies healthy.

Note that efforts to fix fertility by offering tax incentives do not work.  Once women are convinced it is not valuable to have kids, no reasonable amount of effort will change that.

As for economic policy, we are still running policy off of a model that assumes that debts are not high on order for policy to work.  That is why continued deficit spending and abnormal monetary policy (QE & Zero or Negative Interest Rates) aren’t helping.  Helicopter money has its own issues.

Regardless of what happens to the presidency, Congress will remain the same because of gerrymandering.  There’s only so much that even a good President can do if Congress is occupied by ideologues from both sides of the political spectrum.

Finally, the sides of the political spectrum are further apart because there is less consensus on what is right and wrong, and the proper role of government.  In some ways the internet facilitates this because you can filter out the arguments of those who disagree with you more easily.  I set up my news sources so that I am always reading liberals and conservatives, as well as those that don’t fit well on the political map, but few others do.

And that, my friend, is why the political scene is nuts in the US now.  There are a lot of disappointed and desperate people who are willing to try anything to get their prosperity back, even though none of the politicians can do anything that will genuinely help the situation.

It is a recipe for disaster, and absent an act of God, I don’t see anything that will change the attitudes rapidly.  People across the political spectrum are happily believing their own myths; it will take a lot of pain to puncture them all.

PS — I’ve given up alcohol.  We’ll have to figure something else out if we get together.

Courtesy of Alephblog