Dramatic election upheavals are transforming the US and the UK and are likely to sweep through Continental Europe in 2017 and Mexico in 2018. The results will vary from good to bad, because there are big differences among the systems of government, the leaders and their ability to change course.
Adding to the risk is the fact that political change is coming at a time of financial weakness for many governments. Private sectors have held back on investment and new business formation because of bad macro policies. As a result, productivity is weak, and prospects for growth in small businesses and tax receipts have been severely diminished. Rather than change, governments have tended to borrow and spend without much to show for it other than very high national debt.
The UK is a parliamentary system in which the majority party can make fast changes. The Conservatives kept their majority in Parliament, but their new leaders will focus on immigration and exiting from the EU, while following through with most of the planned corporate tax cut that’s critical to growth.
The US is going through a bigger political change. The people instructed the government to conduct a sweeping upheaval of the status quo, the topic of many of these columns. The urgency of change was clear in the election results. Mr Trump identified deep grievances against the party in power—for poor results in terms of prosperity, the inner cities, security and freedom—and also nailed big government for the rigged system. It permeates the US with special interests and cronyism, especially in the blue states and in Washington.
Many of the President-elect’s proposed policy improvements are likely to be fulfilled quickly. Some will take more time than they would in the UK because the House and Senate play important constitutional roles. Aiding policy change, they face mid-term elections in 2018 that encourage progress in working with the new Administration.
Continental Europe’s coming elections may also be profound in policy terms, with the extra wild card of multiple countries using the same currency, the euro. The results of Italy’s recent vote may give rise to a movement to exit the euro. If that happens, Italy’s already weak financial condition would likely worsen. At its core, the election is about years of weak government, a stagnant economy and the surrender of sovereignty to globalism, all issues that were part of the US and UK elections.
Democracies in upheaval face two challenges: Quickly implementing sensible, sweeping change that benefits the society as a whole, and institutionalising a better system so that future governments and politicians are restrained by law from future power grabs.
The goals of the new US government are clear: To ensure peace through strength; enforce the laws; secure the borders; rebuild the inner cities through jobs and education; lower tax rates to encourage investment, productivity and higher wages; improve infrastructure; seek 4 percent growth and 25 million new jobs; make the dollar trustworthy; slow the growth in national debt through better spending and tax decisions; create better trade relationships that benefit American workers; reform the failures of the education system; stop global government; improve care for veterans; reverse the ObamaCare mistake and set a useful course for medical insurance.
Each goal is achievable but complicated, especially since voters also demanded an upending of the current system in a way that creates better outcomes for many decades. My December 2012 column, ‘Constitution Eroding’, described the gradual loss of US constitutional checks and balances. The debt limit doesn’t control spending or debt. The federal budget process doesn’t allocate spending effectively. Government agencies and programmes are almost never closed, regardless of poor performance. The Federal Reserve has acquired such massive power that it owns $4.2 trillion in government debt on its own say-so, pays banks billions of dollars in interest with no oversight and has taken control of many parts of the banking industry.
Elections are signalling a giant change in the world’s policy direction. Structural improvements will need to come quickly in order to lift growth. For some countries stagnation may be too deep to reverse—political upheaval may be coming too late. Many other countries will prosper mightily on their new paths.
David Malpass, global economist, president of Encima Global LLC