March 30, 2023

Bernanke explains Trump

Ben Bernanke, the former president of the Federal Reserve, has analyzed at the ECB Forum of Central Banking how economic trends in the USA have contributed to inequality, and how this might have contributed to the arrival of Donald Trump.

While his analysis and descriptions are correct in many parts, he gets lost in details and misses the most important conclusion to be made. As such he misses the answers to what causes populism and how to dispel it.

Bernanke lists four reasons why Americans are dissatisfied. In reality there is one overriding reason which is conditioning the other three:

1. Stagnant earnings for the median worker.

Since 1979, real output per capita in the United States has expanded by a cumulative 80 percent, and yet during that time, median weekly earnings of full-time workers have grown by only about 7 percent in real terms.

In other words: The increased income and wealth inequality, and the shrinking middle class are cause for other effects that make life difficult for many and reduce opportunities.

2. Declining economic and social mobility

3. Increasing social dysfunction associated with economically distressed areas and demographic groups.

This is better described by reduced economic and social well-being, by excess mortality among wider demographic groups, by increased levels of opioid addition, alcoholism, and suicide. This is now even affecting the white working class, key voters for Trump.

4. Political alienation and distrust of institutions, both public and private.

Bernanke’s analysis for a distrust of institutions

Traditional American values of self-reliance rather than relying on the government.

[Since the 1970s,] Europe and Japan recovered and … accounted for increasingly larger shares of global output and trade.

The emergence of China as a global trading power was particularly disruptive, with adverse effects on the wages and employment opportunities of many American workers of moderate or lower skills.

In contrast, high-skilled workers tended to be favored by global economic integration, particularly those whose talents were scalable to the size of the market, such as managers of internationally active firms or of global hedge funds.

is not completely wrong, but falls short. All these trends have not kept the USA from growing at a high rate (see first quote above) and to now present the lowest unemployment rate for many years.

Bernanke’s apparently fires a broadside on globalization but misses the point to criticize specific abuses of globalization.

What is most surprising for him as a former central banker and leading expert in finance is that he does not pinpoint the role of finance and its central cause for growing inequality.

The fast income growth of managers of international firms or of global hedge funds over the past decades is only seemingly the reason for growing inequality but in reality it is a logical consequence and it reveals the root cause:

The Groundhog Day of wealth shift to investors

Created wealth is usually shared among business owners, employees and government through dividends, salaries and taxes. The stagnated earnings of the median worker and repeated tax cuts for business and investors, and tax optimization and evasion of multinationals and investors caused repeated, recurrent shifts of wealth to investors. Year after year, decade after decade. Like Groundhog Day.

When such a shift happens once or twice, it will barely be discernible.

If it happens continuously, over 40 years’ time, its effect of rising inequality will touch wide parts of society, many communities, and the government’s budget and policies.

The Groundhog Day of increasing wealth shift repeats itself and worsens also because businesses and investors want to do better from one year to the next.

The income growth of managers in such a system is therefore simply a fall-out. A symptom and not the cause of rising inequality. Many people consider limiting salaries of managers but ignore that this is just a symptom. Such discussion must not distract from the underlying cause of increasing wealth shift to investors.

Does populism protect against inequality?

Bernanke laments the arrival of Trump and populism. While populist politicians distrust experts, Bernanke fails to properly analyze his field of expertise in finance and banking. He scratches only the surface and does not provide a clear problem description and solutions where they exist. He leaves the audience without direction or vision. This is exactly why populists criticize experts. This is why populists provide simple solutions and recipes.

Populists have answers for everything. Especially for citizens who feel left behind. Who are being told that they are treated unfairly.

Populists aggravate inequality

Populists pretend to have the solution for their audience’s grievances and anger. In reality, their agenda could not be further from these objectives. Their policies aim to accelerate inequality, split communities and smother opposition.

These policies include:

  • Attacking democratic institutions to stifle democracy
  • Reducing and weakening the government’s role and responsibilities in favor of rogue investors
  • Attacking the media and freedom of press to undermine citizen rights and a positive and constructive public life
  • Misrepresenting the importance resp. dismantling of regulation for health, environment, security, finance, fairness, and equality to increase competitiveness and profit of reckless business, monopolies and oligopolies
  • Distorting the positive role of free trade and globalization
  • Tax cuts for individuals and corporations
  • Defining enemies within other communities, minorities or foreign countries to distract and create secondary battlefields and scapegoats. When taken literally, this will result in divisions, hatred and hurt between people and communities.

You can stop populists by calling a spade a spade, and by deflating simplistic arguments.

Populists want to appear like strongmen but often are aligned to the cause they are pretending to fight. Strong? Not.