The Bear’s Lair: The helplessness of politicians

George W. Bush and Barack Obama have proved themselves helpless since 2001 to reverse an inexorable relative decline in U.S. power and U.S. living standards. Similarly, prime ministers from Clem Attlee through Jim Callaghan, including Winston Churchill, failed to reverse a similar period of decline in Britain. Neville Chamberlain, good-willed, capable and experienced as he was, proved unable either to do a deal with Hitler or to avoid the inevitable global conflict. Faced with major long-term economic, social or political trends, most politicians prove utterly hopeless. Only a few appear to achieve success, but was their success in any case inevitable, due to a trend reversal they had no hand in causing?

Flip the question round the other way: the most successful period in British history was undoubtedly the premiership of Lord Liverpool, when a 20-year war was brought to a triumphant conclusion and the country embarked on industrialization, a new economic paradigm that would revolutionize global living standards. Liverpool provided the key strategic insight that defeated Napoleon, and was far ahead of his contemporaries and most of his successors in understanding the economic forces that were transforming Britain and the world. Yet Napoleon’s Retreat from Moscow and the technological advances in power generation and textiles were far more responsible for the successes of Liverpool’s premiership than anything Liverpool or his government did.

Liverpool, of course would have responded that he would not have expected anything different; government should not be expected to make a positive difference in the workings of the economy, but merely to provide sound administration and financial management, and keep down its spending (something at which Liverpool was an expert). The economy should be left to manage itself; government meddling would only make things worse. Liverpool could have quoted you endless examples of that, notably the period of monopolies under Elizabeth through Charles I, when by interfering corruptly in the free market to provide monopolies for favored courtiers, government had made an already unpleasant economic situation, with secularly declining wage rates, very much worse.

In the British postwar period, politicians abandoned altogether Liverpool’s skepticism about government direction of the economy, and believed in it wholeheartedly. The results were not encouraging. Government after government promised faster growth and lower inflation, to be produced by low interest rates and government “stimulus” spending, but instead inflation ratcheted steadily upwards to a maximum of 25% while growth came in notably below that of Britain’s competitors. Two Chancellors of the Exchequer attempted to break out of the trap, R.A. Butler in 1952 with his “ROBOT” scheme to float the pound and R.A. Thorneycroft, who in 1957 made the only serious attempt to prevent the ever-upward ratchet of government spending. However in both cases they were quelled by their Keynesian colleagues, and in Thorneycroft’s case forced to resign.

The interesting question is whether the great resurgence in British and American fortunes that occurred after the elections of Margaret Thatcher in 1979 and Ronald Reagan was due to those great people themselves, or to outside factors. In at least one respect, they were very lucky: the Soviet Union, which during the 1970s had been expanding rapidly, taking over new countries at the rate of about one a year, bogged down in a quagmire in Afghanistan while its leadership suffered severe instability, with three Presidents dying in three years, before a “reformer” Mikhail Gorbachev, came to power.

One can also imagine a darker alternate reality in which instead of the rather gentle Gorbachev, the “reformer” was Vladimir Putin, arriving 15 years earlier. Putin might well have moved the Soviet Union towards capitalism, but he would certainly not have ended the Cold War, or allowed the U.S. to have achieved geopolitical supremacy. Thus to a large extent the successes of Reagan and Thatcher were nothing short of dumb luck.

However there was a little more to them than this. In the United States, Reagan’s freeing of domestic oil prices, contrary to the advice of Keynesian economists, caused the apparently inexorable rise in prices to reverse, bringing a surge in the power and prosperity of the United States, at that date a massive importer of oil. He also twice in 1981 and 1986 slashed the top marginal rates of tax, causing a flow of money back into productive investment from the gimmicks and tax shelters that had been typical of the 1970s.

In Britain, Thatcherism suffered in its early years from the excessive strength of sterling caused by high oil prices, which caused manufacturing to collapse and unemployment to soar. Her “reforms” of the City of London were botched, although the decline in British financial supremacy was caused mostly by outside factors, plus the appalling macroeconomic and taxation policies of previous decades. She didn’t cut taxes properly until 1988, but her trade union reforms, decades overdue, finally made it possible to run a business and revived the sclerotic U.K. economy.

Thus in the 1980s, you can see the effect of Reagan-Thatcher policies on their respective countries’ economic and geopolitical positions, but there is no doubt that outside factors were more important. If this is true for two greatest statesmen of the last half century, whose policies were so far outside the mainstream of contemporary thought, it must be even more deeply true of contemporary statesmen whose policies are more conventional and less bold.

After Thatcher and Reagan, John Major and George H.W. Bush presided over eras of poor policy but little relative decline. The Cold War and the Gulf War were won during this period, and in Britain economic performance continued to be far better than before 1979 in spite of the futile Exchange Rate Mechanism entry and exit in 1990-2 and the soggy and inept centrism of Kenneth Clarke thereafter. In the United States, Bush managed the extraordinary feat of wasting the entire peace dividend on social programs and introducing (aided by a leftist Democrat Congress) a huge new wave of economically damaging, indeed crippling regulation through the 1990 Clean Air Act and the Americans with Disabilities Act. Nevertheless, after a mild recession, the U.S. economy went into a massive takeoff which was to lead to a period of huge boom in the late 1990s.

It’s extremely difficult to perceive any effect Bill Clinton had on U.S. economic or geopolitical strength, in either direction. The economy went into a massive bubble, caused primarily by Alan Greenspan’s 1995 abandonment of generally accepted tenets of sound monetary policy, which allowed the budget to be balanced, albeit briefly. On the other hand, the nascent liberal democracy in Russia was allowed to degenerate into kleptocracy and economic collapse, a failure that future historians will weigh more heavily against Clinton than his failure to knock off Osama bin Laden.

The last fifteen years, of George W. Bush and Barack Obama, have seen the apotheosis of the helpless presidency. Bush reversed his previous sensible and modest foreign policy stance to declare war on international terrorism, then failed to win it, while Islamic and terrorist forces gained strength as policy failure succeeded policy failure in the U.S. military industrial complex. Meanwhile the U.S. economy, which had been flattered by the gigantic stock market bubble of the late 1990s, performed increasingly feebly, with productivity growth steadily declining. Monetary policy was used to pump up a succession of asset bubbles that have hopelessly distorted the investment process and left the U.S., and world economies horribly vulnerable to the collapse of the global malinvestment that has been created.

Certainly monetary policy has had an effect over the past 15 years. It has preserved the illusion of economic progress, while allowing a gigantic tower of misguided investment that will weigh on us for decades to come. But in a sense it has distorted our destiny, but hasn’t changed it. Regulatory policy has certainly changed the trajectory of the U.S. economy since Obama’s advent in 2009, but only by intensifying the slowdown that has taken place since the 1970s. But one feels that, whatever Presidents might have been elected from the alternatives reasonably available (i.e. that the Republican primary system might have deigned to select), the overall U.S. trajectory since 2000, of gradual but accelerating economic and geopolitical decline, with the skies darkening year by year, would have been more or less unchanged.

That should make us appropriately humble about what can be achieved in the 2016 election. It is most unlikely that the Republican primary system will throw up a Reagan – it has shown itself remarkably skilled over the last half dozen elections in weeding out the better candidates. If the system’s candidate ceiling is low, as it appears to be, its floor is also fairly high; neither Hillary Clinton nor Bernie Sanders is Hugo Chavez, and Donald Trump, who does indeed bear many stylistic resemblances to Chavez, is at least moderately better than Chavez in his economic approach.

Thus the U.S. trajectory in 2017-24 seems likely to be one of continued uncomfortable and worrying decline. Even the best policies would find it difficult to change this, and the best policies are most unlikely to be pursued. China will continue rising as a geopolitical threat and economic superpower, while U.S. living standards and productivity will continue to decline towards the global average, making the country less and less distinctive. Far from being a “shining city on a hill” the country will increasingly resemble an extended and dilapidated slum, barely distinguishable on its eroded tumulus above the bleak disorderly post-industrial countryside around it.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)