About Turn!

View from a mountaintop

In a short space of time, Anglo-Saxon right wing politics has rotated 180 degrees. Where recently the figureheads of the right were social liberals and economic conservatives, there are now social conservatives and economic interventionists. It has happened pretty fast and will be very meaningful if it is sustained. Why does it matter? The Great Prosperity we have lived since 1980 has been anchored to starboard by economic conservatism. When the right goes economically interventionist, who knows?

Bush and then Cameron typified this compassionate conservatism – social liberals and economic conservatives. Indeed, a penetrating critic would note that the compassion was about extending social and political rights to minorities rather than redistributing social and economic power to the poor; it was very much social liberalism rather than economic intervention. And the penetrating critic would go on to note that it was the absence of redistribution that sired the quite divergent Trump, who is socially conservative and economically interventionist. He appeals to the economically disadvantaged to whom he promises to redistribute social and economic power, not by crude direct income redistribution, but by making America great again, by protecting local jobs for local people and making foreigners pay.

We hear this melody picked up in Europe. Theresa May talks of a Britain that works for all Britons (for which read locals) and promises to take control of our borders, laws and money. Angela Merkel is assailed from the socially conservative right. And on Europe’s eastern marches, we hear echoes of pre-war political dialogue about racial identity and the threat of the other. So far, so very Anglo-Saxon perhaps, and, curiously, la Francophonie is taking a different path. Both Macron and Trudeau espouse a socially liberal and reasonably economically conservative agenda. Are they the avant garde of a new consensus or Johnny Hallyday: the Anglophone yesterday in French?

Of course, it is not the case that social liberalism was always the norm on the right. Ronald Reagan and Margaret Thatcher were staunchly and proudly socially conservative. Remember Section 28: Thatcher’s policy to stem the spread of homosexuality? But both were economic conservatives and rewrote the economic manifesto of the right. We stopped caring about producers and employees, and started caring about shareholders and consumers. We went from pro-business to pro-market. Governments could not run businesses only regulate them. (It is an irony that the transition from old social and economic conservatism to economic conservatism and social liberalism was undertaken by the greatest Republican President the US never had: William Jefferson Clinton.)

What has been the norm since 1980 or so is that the dominant right wing economic narrative has been the conservative one. We are first and foremost consumers. Increases in GDP trump better

Gini co-efficients. Free trade is good. Jobs migrate to the location with highest marginal cost efficiency in that skill. Low tax is better than high tax. And inflation is a bad thing. Imagine what being an investor feels like when protecting companies is more important than protecting shareholders, when equality matters more than efficiency, when jobs should stay at home, when higher tax is ok and inflation, well, who cares?

Fashions in political economy run in long cycles. Let’s say the fashion for economic conservatism on the right ran from c.1980 to c.2015, well, that’s 35 years. Interestingly, or perhaps alarmingly, that mirrors the 35 years from the end of war to c.1980 when the fashion was more interventionist. Is a new cycle beginning?

Why this volte-face? No surprises here: it is free trade and mass migration. Trade and migration are where society and economy intersect. If you are ok with free trade and migration, you are both socially liberal and economically conservative. You don’t care where stuff comes from and are happy to have folk with different values and practices in your midst, and you are cool with the economic upheaval of locals being competed out of low skill jobs in manufacturing by foreigners abroad and by low skill jobs in services by foreigners in your own country.

You heard it here first but one of these has to give: either free trade or mass migration. Based on the evidence before us, Western democracies simply cannot cope with both; free movement of goods and services, and mass migration of people are just too much. And the fear is that if we do not choose one over the other, both will give. Trump’s narrative is anti both. Build the wall. Make foreigners pay.

Which to choose? Well, if you sit in the West, it feels easy. Push come to shove, we choose free trade over migration. We’ll be fine. We tell the world, sorry folks, we tried this mass migration thing but the peeps just won’t wear it. Our problem, however, is that this looks less compelling seen from the non-West. For the poor of Latin America, the Middle East and Africa, it’s going to take a long while for free trade to make their lives better. Moving to the US and Europe, however, well, now we’re talking. And that feels like our challenge. If we duck choosing either free trade or mass migration, we get Trump. The problem is how and whether we can control migration.

View from a desktop

The VIX - the index of market volatility often referred to as the fear index – has appeared abnormally quiescent recently with volatility significantly lower than average over the past year or so. In fact, of all the days since the year 2000, 80 out of the top 100 lowest volatility days occurred in 2017. This eerie calm is needs some explanation – particularly when the world at large feels full of uncertainty. It seems that the VIX is no longer telling us anything about general uncertainty and another index - the Economic Policy Uncertainty Index – is perhaps more useful in this regard.

Simply put the Economic Policy Uncertainty Index measures the frequency of newspaper articles that contain certain terms pertaining to the economy, policy matters and uncertainty. In the US, for example, the Index incorporates coverage of fiscal policy, health care, national security, entitlement programmes, regulation and so on. It’s a useful way to see how things feel on Main Street as opposed to Wall Street – neatly illustrated in this chart. Clearly volatility has drifted down since 2008 whilst Global Policy Uncertainty has drifted up.

About turn

There are many explanations for this mismatch between general uncertainty and market uncertainty. Quantitative easing and the stabilising impact of consistently low interest rates have had an effect on the VIX. In addition, the growth of passive and algorithmic trading has dampened the effects of volatility or at least facilitated faster digestion of market movements. And although economic policy uncertainty is high, macroeconomic conditions appear relatively benign. When considering responses to economic conditions, the VIX may give us insights as to the behaviour of the markets but the Economic Policy Index casts useful light on how Main Street will react.

Snapshot for the quarter

  • In 1979, 40% of Britons lived in council housing. Today it’s 8%.

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