The New Politics: Neoliberal Decline and Authoritarian Rise ft. Gary Gerstle

[00:00:07] Gary

We are living through a technological revolution of a magnitude certainly not seen since the industrial revolution of the 18th and 19th century, and in terms of information, maybe not since the invention of the printing press in the 1400s. So this technological revolution is extraordinary. The innovation has been extraordinary. The way in which our lives have been changed by media is extraordinary and it’s going to take us 100 years to work through all these changes in terms of living patterns and adjustments that we have to make in light of that.

[00:00:47] Intro

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Here’s your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

[00:01:43] Niels

Welcome and welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. This is the series that I not only find incredibly interesting, as well as intellectually challenging, but also very important given where we are in the global economy and the geopolitical cycle.

We want to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macro-driven world may look like. We want to explore their perspectives on a host of game-changing issues, and hopefully dig out nuances in their work through meaningful conversations. Please enjoy today’s episode hosted by Alan Dunne.

[00:02:27] Alan

Thanks for that introduction, Niels. Today, I’m joined by Gary Gerstle. Gary is the Paul Mellon Professor of American history and fellow of Sidney Sussex College at the University of Cambridge. He is a historian of 20th-century America. He speaks and writes on issues of American politics, immigration and inequality. He received his BA from Brown University and MA and PhD from Harvard University. He is also the author of “The Rise and Fall of the Neoliberal Order.” Gary, great to have you with us today. How are you?

[00:02:56] Gary

I’m very good. It’s very good to be with you. Thank you for this invitation.

[00:03:00] Alan

Really looking forward to this one today. We always ask our guests to give a sense of their background before we get into the meat of the conversation. Obviously, you focus on US 20th-century history and political economy. What prompted your original interest in those areas?

[00:03:18] Gary

Well, I always loved history as a boy, reading history, although there were no historians in my family, no academics either. I’m first-gen. My parents didn’t go to college. I went to university at Brown, loved history, became a history major. I came to England in my junior year to study at the London School of Economics, and then my interest was labor history.

I wrote a lot on American workers across the 20th century. That got me interested in immigration, and that led me to an interest in government and the state, and America and how it works and how it doesn’t work. And then I had the experience of being an American in Britain in 2016. Thus, I had to deal with not a single shock but a double shock of that year. First came Brexit and then came the Trump election.

These were such phenomenal events. I don’t mean by phenomenal, great. I mean events of such consequence that I feel, as a historian, I had to try to make sense of them. Even though I had strayed from questions of labor and political economy for some time, I thought to understand Brexit and to understand what was going on in the United States. I had to come back to questions of political economy, political order, and how societies organize themselves in ways that structure society for a long period of time and then they begin to come apart.

Something was coming apart in 2016 and I thought the way to study this is not primarily first and foremost through culture but through political economy, the relationship of trends in the economic sphere with those in the political sphere, and that’s what brought me to this book.

[00:05:08] Alan

Great. You’ve written this book called “The Rise and Fall of the Neoliberal Order”. It’s certainly a theme you hear in markets that we’re in the midst potentially of a paradigm shift in the political order, I guess. Before we get into it, maybe a couple of definitional points. What is a political order? Secondly, the term neoliberalism is an interesting one itself. When people talk about neoliberalism, they could easily be thinking about conservative economics or conservative politics. So where does that term neoliberalism come from? What do you understand by it?

[00:05:46] Gary

Do you want me to start with neoliberalism or political order?

[00:05:49] Alan

Yeah. Let’s deal with that one first.

[00:05:50] Gary

My concept of political order is an effort to understand political trends that cannot be understood simply within the confines of normal electoral cycles. Elections are so important in democracies. They attract so much attention. I don’t have to say any more about that to any of your listeners. Sometimes they gather up all the oxygen in the room. But there are certain political developments that occur over a much longer period of time, and political order, for me, was a way of understanding those longer-term trends.

At the core of a political order, in my understanding, is a set of principles about how the economy ought to be governed. There was an older political order in the United States, what I call the New Deal order, whose core principle was that in order for capitalism to flourish, a strong state had to manage the chaotic system of capitalism in the public interest with heavy forms of regulation often associated with Keynesianism.

The argument about political order is that if a political order really becomes an order, it has the capacity to order political discussion across the entire political spectrum. Even though a set of ideas will be associated with one political party rather than another, if a political order is truly dominant, then it will compel the opposition to adopt those principles as their own.

So even though the New Deal order originated with the Democratic Party in America in the 1930s, and with Franklin Roosevelt, when Dwight D. Eisenhower becomes president in 1953, the first Republican President in 20 years, what does he do with what has transpired under democratic rule the previous 20 years? Is he going to dismantle the New Deal order? Is he going to free the markets from state regulation? Or is he going to acquiesce to what Roosevelt and the Democrats had done over that 20-year period?

He acquiesces, and to me, that’s the sign that there’s a political order because the opposition party has decided that its only route back to power is by acquiescing to its opponent’s core economic beliefs. So the New Deal order became dominant in the 1950s and ’60s. I do this in the book. It came apart because of economic crisis in the 1970s, which we can talk about later if you want to.

And then at that moment of political order being in crisis, ideas that had been there all along but really had no chance in influencing the mainstream, they had been marginal. They had been often ridiculed. They were not taken seriously. When a political order is breaking down, when its core economic principles are no longer delivering the goods to the economy; employment, low inflation, stability, when that is no longer happening, that’s an opportunity for ideas on the margins to flow into the mainstream.

One of the ideas on the margins in the 1970s was neoliberalism. Now, what is neoliberalism? It’s become more of a common term as a result of what I and others have been writing. The best way to understand neoliberalism is as a variant of classical liberalism, 18th-century liberalism. Adam Smith, the sense that an economy tied down by monarchs, aristocrats, mercantilism, too much control of trade, was not going to produce the greatest affluence for the greatest number. In order for capitalism to really flourish, it had to be freed from government controls.

Neoliberalism believes in free market. It believes in globalization of trade. It believes in comparative advantage. Every society should focus on what they’re good at. And if you let everyone truck, barter, and exchange, as Adam Smith once wrote, that will lead to the greatest economic growth and the greatest welfare for all. So what you see in the 1970s is a desire to dismantle the New Deal, to discard Keynesian ideas, to free markets from constraints.

The term often used at the time and since is deregulation; free the economy from all the state controls that had been imposed on it. Now, you might ask, why then not just call this liberalism in the 18th-century sense? That’s because in America, the Democrats and Roosevelt in particular stole the name liberalism from its rightful owners and made it into a light form of social democracy.

So, in America, if you are a liberal, you are progressive, you believe in Keynesianism, you believe in state regulation. So these classical liberals of the 1970s like Milton Friedman and Friedrich Hayek, they can’t call themselves liberals because it is utterly confounding in the American scene. So neoliberal is the preferred term. New liberalism meant to hark back to classical liberalism.

Reagan is the key political figure. He is a key political architect of this during his two terms in office in the 1980s. And then just as Eisenhower came into office after a long period of democratic rule, Bill Clinton comes into office after a long period of Republican rule. The question for him is the same as the question for Eisenhower. Is he going to dismantle this laissez-faire economy that Reagan and the Republicans have tried to build, or is he going to acquiesce to it, seeing it as the only route back to political power for the Democratic Party?

He largely acquiescence. He deregulates arguably even more so than Reagan had done in the 1980s. So neoliberalism at that point in the 1990s becomes something more than an ideology. It becomes another political order that structures the entire political terrain really until the financial crash of 2008-2009, which ushers in another economic crisis that is going to rattle and upset the dominant neoliberal order.

[00:12:05] Alan

Good stuff. The book is called “The Rise and Fall”, and obviously, the suggestion from the book is that the neoliberal order is close to its end. It sounds like the financial crisis, reading the book, the financial crisis is maybe the first major blow to the neoliberal order. But I guess more recently, we’ve had challenges with COVID and obviously the war between Ukraine and Russia, which have prompted a shift in policy as well. I suppose, how important are the economic and the non-economic variables do you think in dismantling the neoliberal order?

[00:12:50] Gary

In my conception of political order, economic principles are fundamental. For a political order of this sort to crack up, it means that questions are being raised about the adequacy of those economic principles that had sustained the political order. In the case of neoliberalism, the selling point was that there was an acknowledgment that if you have free trade and free markets and not much restraint on capital, there was an acknowledgment that inequality in societies would become more severe. The gap between the rich and the poor would widen.

But the defense of that was that neoliberalism would raise all boats. All boats would rise. The poor would be having more than they had before, and so the gap between them and the ultra-rich would matter less. So inequality would exist, but it wouldn’t really matter because everyone’s life chances and economic security was improving. What the financial crash did of 2008-2009 was to reveal that as a kind of fantasy that wasn’t true. There were clearly winners and losers in neoliberalism and the and the globalization.

The recovery strategies favored by governments deepened that divide between rich and poor. For example, most governments decided they had to stabilize the banks first. If I had been a governor of the bank or charged Chancellor of the Exchequer with maintaining the integrity of an entire economic system, who knows? I might have tried to save the banks first. I mean, we were close to financial Armageddon in 2008. We were very close to the entire financial system of the world freezing up.

So maybe saving the banks first was defensible just in terms of injecting some stability into the system. But the effect of that was to widen the gap between rich and poor and to make people acutely conscious of winners and losers in this globalized neoliberal order. So if you had assets, if your wealth was tied up in the stock market, you had largely recovered from the crash of 2008 and 2009 by 2011 and 2012. From 2012 to 2020, you had one of the greatest runs of stock market asset increase in history.

If you were not invested in the stock market, the recovery was much slower, much more painful. Wages, job levels, wage levels did not really recover to their pre-financial crash levels to 2018-2019. So people became much more acutely aware of not just the inequality of the economic system, but the inequality embedded in government programs. So the government was doing much more for the folks who seemed to need it least, and this is what cracked the legitimacy of the neoliberal order.

It didn’t mean that neoliberal practices or institutions vanished. It just meant that neoliberalism in terms of a creed that had the ability to command the entirety of the political spectrum, all major political players had to get on board with its core principles. That authority, that legitimacy was gone. That enabled Brexit, it enabled Trump, it enabled the rise of ethno-nationalists in many countries in the world, people who were expressing unhappiness with the global order that neoliberalism had generated. That was now in crisis, and the search for alternatives began.

Now, the most interesting part of the search for alternatives is an effort to understand the relationship of markets to governments in a different way. If neoliberalism had been the default, as always, you go to the market first because the market is the best sorter of capital investments. Over time, it yields the greatest and the most efficient economic growth. People began to rethink that and began to say, if we’re going to address issues of inequality, we have to have greater state intervention in the marketplace.

I think the Ukraine war and COVID both pushed governments in a non-neoliberal direction in terms of more state management. What did the Ukraine war mean? Among other things, it meant that Europe might suddenly be stripped of its oil and natural gas. What did COVID mean? It meant all kinds of materials that were vital to the society coming from China could no longer come, and governments began to think differently about the economy in this way.

Not that they suddenly became much more progressive or socially democratic, but for the sake of national security, they began to say, “What commodities do we need plentiful supplies of for food and oil, petroleum, protective gear, rare minerals, computer chips, and how can we ensure that our society can withstand the next Ukraine war, or the current Ukraine war, or the next global virus catastrophe?” Well, we can’t rely on markets. We can’t rely on global supply chains. We, meaning the government, has to intervene in the marketplace to assure that certain basic goods that our people need are going to be available in times of global crisis.

So I think, at least initially, the Ukraine war and the COVID experience deepened the turn away from neoliberalism. Now, some of that urgency is fading. I think that COVID has been conquered, the Ukraine war is far from settled, there is more restoration of global supply chains. But the rupture means that the praise bestowed on the incredible yield that free markets can bring, it’s going to be a while before that comes back. We have a political arena that is much more crowded in terms of different policies that people are proposing in search of another political order that might include neoliberal elements but won’t be the pure kind of neoliberalism that existed before.

[00:20:09] Alan

You mentioned the rise of the New Deal order, the importance of Keynesian economics. There was an obvious economic underpinning to it in terms of an economic viewpoint that was different from classical economics, which was obviously a belief in free markets. And then obviously, as you got the neoliberal period, I guess initially, you had monetarism, then you had rational expectations, but they kind of fell by the wayside. But obviously, underpinning everything was a belief in free markets.

At the moment, when you look at this possible transition into a new political order, is there an obvious economic ideology out there that people are talking about that might drive that new political order? Obviously, you might have said modern monetary theory is the most radical thing out there, but that’s been arguably somewhat discredited, particularly with the spike in inflation.

Do you see an economic ideology that is grabbing hold or is it more just a refinement of the free market thinking as we transition into this new period?

[00:21:17] Gary

Well, I think we’re living in a really volatile period. So I think the clear direction of travel, in terms of economics, has not yet been established. If we were having this conversation in five years, what would that be? 2029. That’s scary to think about how old I’ll be then. But I think we’d have a clearer sense of the direction of travel. I think you’ll find different things in different places.

In the United States, there’s been a clear departure from neoliberalism and a desire to recover a relationship of state to society that to me closely resembles the New Deal. They only have partially adopted the New Deal terminology in terms of the Green New Deal. But if you think of Biden’s major legislative accomplishments during his first term, a trillion-dollar infrastructure bill government sponsored and paid for, the biggest infrastructure bill in America since Eisenhower in the 1950s, and arguably, since the 1930s. In other words, almost 100 years.

The massive reshoring of chips manufacture. The biggest green energy investment in any period of American history, a $400 billion so-called Inflation Reduction Act. The title is ridiculous. It’s not inflation reduction. It’s about the promotion of green energy. The US has a very robust industrial policy under Biden. Biden is deeply committed to it. It emerged from discussions between the center and the left of the Democratic Party, and all kinds of investments, programs, initiatives are underway, most of which are not known about either to Americans or outside the United States.

I have a trivia question I like to ask, so I’ll ask it of you. For the trillion-dollar infrastructure bill, how many different projects have been funded? This is a trillion-dollar bill passed by Congress in 2021, so it’s almost been three years since then. What would your guess be about the number of projects?

[00:23:35] Alan

I think I came across the stats doing some research for this. So I think it’s like 15,000 or something.

[00:23:40] Gary

Well, you’re closer than anyone else, but you’re not nearly close. Right now, it’s somewhere between 55,000 and 57,000 discrete projects. Most people say 5, 10. If they’re feeling in a generous mood, they say 500. Seriously, 15,000 is the highest I’ve heard. This is all government money in investment. Infrastructure is not directly about directing markets. It’s about facilitating markets; infrastructure, communication, and transportation.

But the $400 billion IRA bill is about influencing private decisions that firms make to build battery plants and solar facilities in the United States and other things of that sort. Chip manufacture also is meant to stimulate very deeply certain kinds of investments by private corporations. The United States has not seen anything like this at least since Eisenhower and arguably since the New Deal, and it’s a product of discussions between the center and the left of the Democratic Party.

If Biden gets reelected, and we don’t know if he’s going to be reelected or not, the impact of this initiative will be huge. I am intrigued as an American working in Britain. The impact of the IRA is felt much more keenly in Europe than it is in the United States as a kind of game changer in terms of compelling many other countries to also begin thinking about industrial policy. So if Biden is reelected, this initiative is going to magnify by a factor of 4, 8, 12. It’s going to really mushroom and may well structure the new political order.

The question is, if Trump wins, what’s going to happen, because I don’t think he really has an economic philosophy. Rhetorically, he’s an economic populist, but I don’t think he’s really got to pass legislation to help the little guy. There are many traditional Republicans who want the restoration of markets, the government out of their private enterprise. It’ll be really interesting to see if Trump wins, how much of the Biden initiatives continue and persist under a Republican administration.

I think quite a lot of it will. I think infrastructure will persist. I think the reshoring of chips manufacture will persist. The green energy program might be cut back. But the next three or four years, the next presidency is going to reveal a lot. I think if the US becomes a leader in this, it’s going to influence the direction of travel in other parts of the world.

I also think that if we’re going to save the planet from climate catastrophe, governments have to become more deeply involved in shaping decisions that private economic actors make. I don’t think the climate and the planet can be saved solely by private actors making their own decisions. But there are strong other elements in the world, economic developments.

I think if you think of where Silicon Valley social media companies are, they are in despair about San Francisco and what’s happened to that urban environment. Their interpretation of that is that it shows the failure of government because San Francisco is governed by Democrats. So their reaction to the last few years has to become arch-libertarian, government out of everything. They have a lot of power and influence.

Also, if the Biden administration wins another term, the Biden administration may seriously consider breaking up some of these big social media companies. So they have gone in an arch-libertarian direction. Then you have the case of China. China is not communist, but it’s an economy run by a Leninist state that is using market principles. But all power ultimately resides in one central political party that has no opposition.

There’s a lot of authoritarianism in the world right now, and because China is no longer communist, other countries that are authoritarian can imagine themselves following a Chinese model. So there’s the arch-libertarian outcry from the social media world, there’s the progressive social democratic initiatives embodied in the Biden administration, and then there’s the thoroughly state-centered Chinese model that because China is no longer really communist, other authoritarians, I’m thinking Modi in India, for example, can imagine as a model for themselves.

These, I think, may well be the three directions of travel. I can tell you which one I’d like to win. You probably have guessed that already. But what does my like mean in this world? It means really nothing. So it’s the next five or six years. We may come out of this with two or three models in the world. If we think of global order, it’s quite likely we’re moving to a multipolar world where four or five countries are the heavyweights. The world can certainly exist that way, but we haven’t existed that way since sometime before the First World War.

[00:29:04] Alan

Just going back to China, one of the tenets of the neoliberal order would probably have been the belief that economic development would naturally lead to democracy in places like China. The blueprint for China was expected to be places like Taiwan or Singapore that naturally you would get greater calls for economic political freedoms as the economy developed, and that obviously hasn’t happened. For a while, it was on that track.

Do you think that dream has gone? Because the fact that it hasn’t gone in that direction is very much informing policy as you say. Bidenomics, to jetpacks, etc., it’s very much about the security of supply chains and certainly of supply chains now given what we’re seeing elsewhere in the world. Is China’s experience largely driven by President Xi or do you think it’s fundamentally not going to go down that path of greater economic freedom over time?

[00:30:08] Gary

Well, it depends what time span we’re talking about. I’m thinking of China as a very old civilization and they probably think in century-long blocks, which has advantages at this moment because Xi certainly has his eye on the long term. The change in the approach to China in the West has been really stunning, because as you say, the belief in the 1990s and first decade of the 21st century, and this was a core neoliberal belief that if you gave people economic freedom, they would want political freedom.

The expectation of China and all the controversy centering around whether it should be admitted as a full-fledged member of the WTO would clinch that argument among the skeptics, was that if we welcome China into the free trading family of nations, they will have no choice but to liberalize their politics and begin to democratize. Now, it was not fully wrong. The Tiananmen Square happened in 1989, and this was a cry on the part of Chinese people for political freedom, but it was brutally wiped out by the Chinese government.

While there have been periodic protests by Chinese groups and individuals, it’s still a very perilous route. What we’ve seen in China is not the erosion of the power and control of the Communist Party but a hardening of the power and control of the Communist Party. So I cannot see any time in the near future when China will democratize. So I think the turn in thinking of the West was necessary, and the expectation that political freedom would follow automatically economic freedom has been exploded as a myth.

This is where the authoritarians elsewhere, who are watching China carefully, become important because they now believe that they can- this is Modi’s plan, I think. In India, they now believe that they can have a certain kind of market freedom but still keep political freedom at the margin. So I think it’s got to be some time before the belief that political freedom inevitably follows economic freedom comes back.

We are also living in a world where political freedom is in retreat. Democracy is in retreat. Democracy is on the defensive. So many people in different parts of the world are voting for people with authoritarian instincts: Trump in the United States, Orban in Hungary, Erdogan in Turkey, Putin in Russia, although you can’t really call that voting because that’s completely rigged. Netanyahu in Israel, Modi in India, Bolsonaro in Brazil.

This is a global trend. So it has encouraged authoritarian political leaders or leaders with authoritarian aspirations to begin to think that they can marry elements of a free market with an authoritarian political structure. And here the success of China in showing that this can be done is absolutely essential. I think the key question is, can it be done by a non-Leninist state? These other countries are not going to become Leninist in the Chinese sense.

What I mean by Leninist is one party organization penetrating every part of Chinese society down to the smallest unit, down to the smallest village. It’s really a remarkable feat of political organization. So I don’t think that’s going to happen. But what about a modified form of Chinese rule that allows some combination of authoritarianism with free market politics?

The leaders proposing this in various parts of the world are quite popular and have shown a great deal of success. A very revealing comment that Trump made when he did an interview with Time Magazine two weeks ago, he said in December that if he gets reelected, he’s going to be a dictator on day one. Of course, there’s a lot of people in America where people take their democratic heritage pretty seriously.

So the interviewer said, “Did you really mean this? A lot of people are troubled by the way in which you toss off democracy in the constitution.” And Trump’s answer was swift and unequivocal. He simply said, “I think a lot of people like it.” Ponder that. He may not be entirely wrong. Part of why we’re experiencing democratic backsliding is a loss of confidence on the part of voting citizens in the world that democracies can solve the problems that need to be solved.

The skepticism about democracy is much stronger among the young than among the old. If you think of how democracies or governments have managed the economy in the last 20 years, during their lifetime, it’s not been a story of roaring success. It’s been a story of avoiding the worst, recovering from financial Armageddon in 2008, recovering from COVID in 2020 and 2021.

But this is a very troubled world we live in, and a lot of people doubt the ability of democracies to solve the problems of the world that have to be solved. That’s the reality we (and by we, I mean the world) faces. I’m not speaking as an American here or as someone working in Britain. I’m speaking for the world here.

[00:36:21] Alan

Interesting. We might come back to that one, but one thing I wanted to ask about was, obviously, on this podcast, we have a healthy interest in global macro and geopolitics, but always from the perspective of financial markets. I’m just thinking in terms of monetary policy and central bank independence and how that evolved during the course of the New Deal and then the neoliberal order.

During the neoliberal order, one of the big themes was central bank independence and inflation targeting. You had a tailwind of disinflationary forces that worked out well for them. But central bank independence was very much a core tenet I would have said, but that started to come under question a little bit recently. Even to your point about Trump, I think last week or a couple of weeks ago, he said he wanted the Fed to consult with him on rates if he came back into power.

So, have you any thoughts on how that might evolve? Obviously, in an authoritarian regime, the central bank wouldn’t be independent. But as you trace the rise and fall of those two orders, anything to say on the conduct of monetary policy and central bank independence?

[00:37:37] Gary

Well, because monetarism and central bank independence were so closely associated with the neoliberal order, I think it’s at this point being questioned in ways it had not been before. If we think about the ease with which central banks wanted to bail out the banks first after the financial crash of 2008-2009, look first and foremost for financial stability.

They were successful in the short-term in doing that, but it raised questions in a lot of people’s minds about whether banks should have this kind of power or whether they should be subject more to some kind of democratic referendum or veto. There were interesting developments during COVID for the Fed in the United States because the Fed at that moment rightly recognized that this was such an extraordinary crisis, that they had to expand their use of tools beyond the ordinary monetary means, and they had to experiment with much greater distribution of funds into the society.

They had to find ways to save the economy at a time when it was an extraordinary moment. Governments shut the economy down. So the Fed recognized they had to not just control inflation, they had to save jobs. So there was an expansion of the remit of the Fed. But then they also aired and it’s not hard to understand that they couldn’t control everything. They ended up pumping too much money into the economy and waited too long to apply the brakes and that led to the inflationary surge.

Because the inflationary surge has been so severe and because no one under the age of 50 has experienced an inflationary surge of this sort, the snap back to an orthodox kind of monetarism has been pretty severe. This is where someone like Trump, who doesn’t really have an overall philosophy, but because he doesn’t have an overall philosophy, he’s much more impulsive. He doesn’t really think things through. But part of his role in not thinking things through is to throw out ideas that more considered opinion would just write off as unacceptable.

So if he gets elected again, he might well interfere with the autonomy of the Fed, not necessarily formally, but by browbeating them in various kinds of ways or making it impossible for the Chairman of the Fed who is supposed to be an independent figure and not bound to either political party. It’s not unheard of that a president could force a Fed chair out of office.

Trump is interested in loyalty first and foremost. What about if he wants to install someone who wants to expand the money supply far more than the current Fed chair is willing to do? That’s going to be a challenge from the right. There are people on the left in American society who have always been uncomfortable with the degree of independence that this banking sector has gained.

For a long time, it was about constraining the power of the Fed. But more recently, there have been some thinkers on the left who said, well, the power is too great to be constrained. Let’s socialize that power. Let’s put that power under a different jurisdiction so it’s more responsive to political will and thus more responsive to the will of the people. Let’s democratize the work of the Fed in some meaningful way.

So even though we’re in this period of what I would call monetarist snapback, the crisis of COVID and the perception that banks were acting too much in the interests of financial institutions has led to a much broader discussion of appropriate ways forward than we’ve seen for a very long period of time. I think that period of questioning and exploring is going to continue.

Watching the United States, there are some political alliances taking shape which I find very surprising, and they may never get off the ground. But J.D. Vance, a Republican is working with Elizabeth Warren to rein in the power of the banks. Elizabeth Warren, the progressive Democrat, is working with Lindsey Graham, a very conservative Republican to rein in social media power. So there is, at different points of the political spectrum, anti-corporate, anti-financial sentiment in the American polity.

It hasn’t cohered and it may never cohere into a powerful political force, but one can see the elements of a different coalition taking shape. If it takes shape, the targets will be Wall Street on the one hand, and Silicon Valley on the other as centers of power that are perceived to have become too powerful in society. So you can see the outlines of a different politics, but I can’t tell you now that it’s going to cohere because Republicans and Democrats disagree on all sorts of basic issues. It may be impossible to bring the two parts of the electorate together in a way that will threaten the power of Silicon Valley and the banks.

[00:43:38] Alan

You talk on Bidenomics and the success Biden has had and the nature of the program, obviously, subsidies, spending, industrial policy, and likely, it sounded likely to continue on under Trump. The US has been running a huge deficit. Debt to GDP levels are over 100%. Is that a constraint going forward, or do you think the ideology will override those concerns? That’s what I’ve been thinking.

Is that potentially where the Fed is called upon to accommodate higher deficits either via quantitative easing or whatever? It’s interesting when you look back to the neoliberal order, it came in as you say with Reagan, who was a high deficit politician. But then as we went through to the 2010s, obviously, it was much more about fiscal consolidation. So there didn’t seem to be consistency. In terms of debt and deficits, would you say at the moment, we’re at that point in time where there is that tolerance for greater deficit spending?

[00:44:46] Gary

Well, I think we’re living through a moment where the Fed now is desperately trying to apply the brakes and certainly take measures to ease off private consumer spending for the sake of managing inflation. Clearly, there’s an anti-inflation lobby in the United States which has a lot of power and has been raising the specter of deficits that seem large and are large and gargantuan.

So I think there’s certainly going to be scrutiny. I think a lot depends on whether inflation can be stabilized at somewhere between 2% and 3%. I think if it’s stabilized at between 2% and 3% and that enables a degree of growth, that might yield enough tax revenue to ease some of these deficits. I think there may be a soft landing. But certainly, people have to fund the debt and they have to buy treasuries.

Also, there’s a reckless element to the Republican Party, and Trump has elements of this recklessness. The Republican Party has repeatedly driven the American government to shutdown or the edge of shutdown by refusing to fund new budgets. I think there’s a belief, within Wall Street and large sections of the Republican Party in the United States, that a lot of this is performative and it’s a game of bluster and people know where the limits are.

But I think there could be a moment where the bluster breaks through and becomes uncontrolled and some reckless elements of the Republican Party do something to call into question the financial probity and integrity of the US government. When I talk to people on Wall Street about this, they just tell me with great assurance, this is not going to happen. But there’s an awful lot of saber rattling that has gone on and that will continue to go on. There’s so much passion out there in politics right now that I wouldn’t rule this out as a possibility in the future.

[00:47:28] Alan

The other policy that’s very synonymous with Trump is obviously tariffs. Again, there’s a lot of bluster around that in terms of the 60% tariff on Chinese goods he is proposing. Obviously, he did raise tariffs, but they were by and large sustained by Biden. People were concerned about protectionism when Trump came in, in 2016-2017, and drew parallels with the 1930s. It never really got that bad, but obviously, that was the direction of travel.

Is that another factor that you see? You mentioned this shift to a multipolar world. That fragmentation of the global trading system, is that potentially part of that where people trade within their own bloc but not with other blocs?

[00:48:21] Gary

I think it’s happening as we speak, and it’s just a question of how far it will go. I have a shorthand for thinking about neoliberalism. I call them the four freedoms of neoliberalism. It’s a useful, handy way of understanding the world that neoliberalism aspired to, and you can keep these elements on one hand. It’s free trade, it’s free movement of people, it’s free movement of information, and it’s free movement of capital.

At the heyday of the neoliberal order, none of these freedoms are ever honored perfectly. We live in a very complex world. But these freedoms were held up as the way of the future. If people who believed in neoliberalism could have designed the perfect world, these freedoms would have been at the core. If you said the word protectionism in politics in the 1990s in the West or in Europe and the United States, you were out of politics really quickly.

In other words, people immediately assaulted you with the ’30s autarky, the collapse of the global system, dictatorship, poverty, immiseration. Protectionism is now a perfectly legitimate word. We can use better words to describe it. Let’s pursue fair trade rather than free trade. It’s also the case if we reach back beyond the ’30s, if we think of how the United States developed in the 19th century, it developed behind profound protectionist walls to protect its industry from the dominant role that British industry played in the world.

So there are plenty of examples, in earlier periods, of countries flourishing behind protectionism. So free trade is no longer the gospel. It was. There are people saying unless we restore free trade, we’re dooming the world. What about free movement of people? Well, walls are going up everywhere, right? Around the EU, US southern border, Australia, Hungary, wherever you look in the world, walls have now become a way of organizing society and politics.

The climate crisis is only going to intensify this because in the next 20 or 30 years, there are going to be another 50 to 100 million additional people who have been turned into refugees by the climate crisis. One of the critical questions that the privileged nations are going to be asking is, who among these 50 to 100 million are we going to let into our countries and who are we going to keep out? Let’s look at the free flow of information.

Critical to the neoliberal order was the perfection of markets, or the belief in the perfection of markets, which was made possible by the technological revolution of the computer age. So no matter where you were in the world, you could get reliable information instantaneously and you had a fullness of information never available to you before instantaneously in any part of the world.

Multiple countries now are trying to establish walls around their countries, most clearly China, but other countries are aspiring to do this. You can only enter through certain portals, which are in this case carefully controlled by the Communist Party. So walls are going up there. The movement of capital has been the freest in the form of the freedom that has been most fully honored. But the sanctions imposed on Russia have been among the most severe in the last 50 years.

So we’re living in a world where suddenly, what was sacred and unimpeachable is being challenged everywhere. We are now living in a world where not just Trump, but many countries are beginning to think of what are the ways in which states should act to protect their country’s interests, which in some cases may mean raising tariff walls. The notion that the best way to prosperity in the world is to make the world simply a global marketplace, that is no longer a universal belief.

If you’re asking, could this at some point in the future tip us into a kind of autarkic situation where we really damage economic development in the world, yes, that’s a possibility of the future. This is what makes politics so important, because how do you move into a different world than the world we have been living in without destroying the positive aspects that the neoliberal world has engendered?

[00:53:38] Alan

You touched on technology there a couple of times as we’ve spoken. Obviously, again, from a market perspective, we’ve seen this rise of the Magnificent Seven. I think the US equity index accounts for say 60% to 70% of the global index. Within the US, it was seven stocks, maybe less now, hugely influential in terms of stock market performance, but then obviously, these companies themselves have market caps that are bigger than many countries.

Great innovation has been a positive for the US, but the growth of these companies has been a side effect of the neoliberal order. You touched on a possible move to curtail their growth. Would that be fair to say? How do you see that playing out over the next number of years?

[00:54:34] Gary

It is and it’s going to continue to be a big issue. We are living through a technological revolution of a magnitude certainly not seen since the industrial revolution of the 18th and 19th century, and in terms of information, maybe not since the invention of the printing press in the 1400s. So this technological revolution is extraordinary. The innovation has been extraordinary.

The way in which our lives have been changed by media is extraordinary. It’s going to take us 100 years to work through all these changes in terms of living patterns and adjustments that we have to make in light of that. One of these side effects, a decision was made in the United States to insulate this world of innovation and technology for many serious government controls.

Because in the 1990s, when the Telecommunications Act was passed, people glimpsed the things that could be done, but what they also glimpsed was so many things that are going to be done that are currently unimaginable. That if you put a government in charge and give that government a charge of arranging a set of deliverables, known deliverables, you might squeeze out what is the unknown deliverable that might be the greatest product of this era of technological innovation.

So the decision was made in the Telecommunications Act of 1996 to pretty much give these technology companies free rein, let 100 flowers bloom, and they have been extraordinarily successful and then they have become extraordinarily concentrated. Now they are bigger. Their size makes them larger than many countries’ GDP, as you have suggested. Who is going to regulate them in the public interest when they need regulating?

Part of the crisis in democracy is that they are now perceived as outstripping the ability of national governments to control them. They are global in their character. They are mobile. They have so much cash. They have the ability to influence politics through lobbying. What set of political institutions is capable of putting them under regulation when they need it?

The great heyday of democracy in the West was arguably the 1940s to the 1970s. The instrument of that democratic heyday was the national legislature. It was Westminster, it was Congress, it was the National Assembly in France, it was the Bundestag in Germany. It’s not clear that national legislatures can control these global companies. What we really need, arguably, is a system of international governance.

But what kind of international governance would be workable? If you look at the trouble the EU has among its member states in terms of giving up power to a European Parliament, how can we imagine this on a global scale? Certainly, the United Nations is not an effective system of global government. No one would want to give them more power than they have.

So we have a situation where concentrations of corporate power have become so great that they may not be controllable by the instruments that past political systems have used to control earlier concentrations of political power. While the private sector might relish this autonomy and independence, the history of capitalism is full of instances where too much power concentrated in too few hands or too much power with too little regulation over it has led to crises, economic crises and catastrophe in the past. There are many, many examples of that.

So I can pose the question, but I don’t have the answer for you. But this is part of what’s fueling anti-monopoly sentiment in the United States. This is pertinent to the neoliberal moment, and this is another way in which thinking is changing. There was a time when any concentration of power in a corporation whenever it reached a certain size or level of consolidation in the industry that they were in was thought to be too great, and they had to be broken up.

So this was the era of the US Steel Corporation or the Rockefeller concentrated wealth. There were efforts, serious efforts made to break those institutions up or put them under some kind of serious control. Part of the neoliberal order was a new set of legal doctrines in the United States associated with the legal thinking of Robert Bork who said bigness is not bad. The only question that we should demand of large corporations is, are they delivering consumer goods to consumers efficiently and for a low cost?

If they are doing that, they are fulfilling their mission and they shouldn’t be challenged on their size or their concentrated power in the industry no matter how large it gets. That became the philosophy governing anti-trust in the United States really from Reagan through Trump. Biden has broken from that, and he has appointed to the head of the Federal Trade Commission a woman by the name of Lina Kahn, who is at most 35 now, and her signature fame is writing an article for a law review about why Amazon should be broken up.

Her argument reverts to the earlier understanding of anti-trust and anti-monopoly in the United States, that it’s not simply a matter of efficiency, delivering goods at a cheap price. If we’re concerned only about efficiency and delivering goods to people quickly and efficiently, then Amazon is the greatest innovation in the world, right? Even if you oppose Amazon, in principle, you’re ordering from them because the efficiency is so extraordinary.

But there’s also worry that Amazon is crowding out competitors, buying them out, ruining independent bookstores, getting to the point where it will have so much power and wealth that it will distort people’s lives and experiences. And Lina Khan at the FTC is saying institutions like Amazon are too big and too powerful and need to be broken up. So that represents a very serious reorientation of thinking about what is legitimate for corporate power and what is not.

Again, here, the election of 2024 is critical, because if Biden is reelected, this attitude will deepen. I think Trump doesn’t really care about this and he will appoint a head of the FTC very different than Lina Khan. But this is another way in which thinking and economic policy in the United States is moving in a very different direction than it has for 50 years.

Just as any American under 50 has not experienced a surge of inflation that we’ve been experiencing, no one under 50 understands this older attitude toward monopoly of power, but it’s under active discussion in the United States right now.

[01:02:21] Alan

Very good. Before we wrap up, we’ve touched on the elections a few times, the 2024 elections. The betting markets have had pretty much a coin flip. Have you any insight over and above that? What do you think the key swing factor will be in determining the outcome?

[01:02:38] Gary

I have no magic ball, no crystal ball. So any of your investors trying to get crucial tips from me today, I would advise you to disregard what I say. It is a toss-up. It’s very close. It’s going to be decided very likely by a very slim margin. Both candidates have notable weaknesses. Trump has been arraigned on 91 counts in four separate criminal trials. I don’t think this will affect his base, which is a solid 30% of the electorate.

But if he were to be convicted in this New York case, which is the only case where the trial is going to be complete before the election, and this is where he’s accused of disguising campaign money as his own in order to shut up a porn star who was going to tell her story about her tryst with Trump. If he’s convicted on that, I think that’s going to hurt him with independent voters.

His polling is better than Biden’s. Given how strong most economic indicators in the US are other than the inflation rate, whether you look at economic growth, unemployment, number of manufacturing jobs being created, in a lot of the world, the US economy is regarded as a marvel. If you spend time in the United States, you will experience its robustness, and yet 66% of the American people who are polled give Biden very poor marks for the economy.

If he is going to win, he’s got to turn that around. Not radically, but that 66%, if that is that level in October, he’s not going to win the election. He’s got to turn that toward something close to a majority of the American people thinking he’s doing a good job on the economy. Some of the consumer confidence indicators are tracking up, but there are international issues that may weigh in on this.

The Democratic base is deeply split over the Israel-Gaza war, and if there is no resolution to that war made in ways that allow the Democratic base to come back together, that’s going to hurt Biden. Putin clearly wants Trump back in the White House. Because if Trump is back in the White House, the support for Ukraine is over tomorrow and he is going to have a free hand in Ukraine to do what he’s always wanted to do.

So his interest is going to be to elongate that war and not make any concessions until the November election is over. is vulnerable on these foreign policy grounds. I give a slight nod to Trump right now. But the elections probably going to be determined ultimately by how successful each political party is in turning out their base in very large numbers.

There are only six or seven states where the outcome of the election is really in play. So it’s going to be real concentrated efforts on a very few states deciding an election of great, great importance.

[01:06:26] Alan

Good stuff. Well, maybe we’ll have you back on again sometime around that to get further insight. Gary, thank you very much. It’s been a great conversation.

Make sure to follow Gary’s work because as you can tell from today’s conversation, we are living in a truly global macro driven world and it’s more important than ever to stay well-informed. From all of us here at Top Traders Unplugged, thank you for tuning in. We’ll be back soon with more exciting episodes, so stay tuned.

[01:06:52] Ending

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