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WHY AMERICA IS RICH, AT LEAST FOR NOW

Monday, November 7, 2016 10:22
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(Before It's News)

The monthly U.S. jobs report, released by the Labor Department on Friday morning, struck an oddly cheery note at the near end of this ugly election season. A hundred and sixty-one thousand new jobs were created in October, the unemployment rate fell to 4.9 per cent, and wages grew faster than at any point since the financial crisis. Combined with last week’s report of strong G.D.P. growth, this is evidence that our economy is healthy and growing—and that growth is being reasonably widely shared. While this doesn’t mean that America’s growth is as robust as we might wish, or that we don’t face deep challenges, these numbers are incompatible with a view that America is in a profound economic crisis. Yet many people believe it is.

This discordance between economic data and political rhetoric is familiar, or should be. Every four years, Republicans argue that they, alone, can help the economy grow, while Democrats argue that they will make sure that economic growth doesn’t just help the rich. If either argument were true, we might expect to see growth and inequality rise and fall in four- or eight-year cycles. The data we have, though, contradict this basic story. Growth is actually notably higher during Democratic Administrations. The graph of economic performance since the Second World War shows growth averaging 4.33 per cent a year under Democratic Presidencies, while growing at 2.54 per cent under Republican ones. There was a chance that this trend would break this term, because the economy has slowed down quite a bit and we do, of course, have a Democratic President. But the recent good economic news suggests that the pattern will hold for President Obama’s second term.

Alan Blinder and Mark Watson, two economists at Princeton, published an influential study of the relationship between a President’s party and economic growth. They concluded that a lot about the economy is beyond the President’s control, but, on balance, as Blinder told me, the economy grows faster under Democrats because “Democrats have better policies.” (Blinder, who served on President Bill Clinton’s Council of Economic Advisers, and Watson are both Democrats). Republican economists caution against taking this data as proof that their party is lousy at economic policy. Kevin Hassett, of the American Enterprise Institute, who advised every Republican Presidential candidate between 2000 and 2012, sees the cause and effect differently: American voters choose Democrats when they believe the economy is about to take off, because they want the government to spend a lot of money; then, when Democrats damage the economy and things turn south, voters choose Republicans to sort out the mess. The data doesn’t seem to conform to this description, because the economy does quite well during the second terms of Democratic Presidents, but there are nonetheless reasons to question Blinder’s reading of the data, too. For one thing, Presidents have to deal with Congress, which is not always so willing to pass laws that support a President’s policies. But, more important, the effects of many economic policies are not felt for years, even decades or centuries. Glenn Hubbard, who served as the chief economic adviser to President George W. Bush and to Mitt Romney’s Presidential campaign, cautioned me to take an even longer view of the impact of good policies. “I don’t know what G.D.P. growth was during the Washington and Lincoln Administrations, but the institutional developments in those terms had large and long-lasting effects.”

Hubbard’s point is that the difference between economic performance during Democratic and Republican Administrations is miniscule when compared to the difference between the economy of the U.S. and that of much of the rest of the world. The U.S., along with a handful of European nations, has had solid, fairly consistent economic growth for more than two centuries (with, of course, some notable dark times), and for most of that period economic growth has benefitted poor and rich alike. That growth is best understood by pulling the focus far back from the narrow lens of one election. What matters most are those things that endure for decades and centuries: democracy, rule of law, a civilian-led military, political stability, and freedom of speech and movement. America is a rich country not because of what the Democrats or the Republicans did separately. It is successful because of those things that the parties share, national values and institutions.

Institutions are significant to economists, who have come to see that countries become prosperous not because they have bounteous natural resources or an educated population or the most advanced technology but because they have good institutions. Crucially, formal structures are supported by informal, often unstated, social agreements. A nation not only needs courts; its people need to believe that those courts can be fair. An army needs to be legally under civil command, but, just as important, its generals, as well as its privates, must obey that authority.

Over most of history, a small élite confiscated wealth from the poor. Subsistence farmers lived under rules designed to tax them so that the rulers could live in palaces and pay for soldiers to maintain their power. Every now and then, though, a system appeared in which leaders were forced to accommodate the needs of at least some of their citizens. This happened in ancient Athens, the Roman Republic, Venice during the Middle Ages, England after the Glorious Revolution of 1688, and, later, the U.S. and much of continental Europe. The societies with the most robust systems for forcing the powerful to accommodate some of the needs of the powerless became wealthier and more peaceful. Good rules persuaded people with ambition and ideas to invest in the future, trusting that stability and rule of law would protect them. Most nations without institutions to check the worst impulses of the rich and powerful stay stuck in poverty and dysfunction. (A few, such as the Soviet Union and Spain in the sixteenth century, were able to get rich for a while but eventually collapsed). This explains why America’s quadrennial fights over tax rates and government spending are meaningful in the short term and to many individuals, but, over a longer arc, it’s the institutions we’ve built and respect that allow for a trajectory of growth.

This year’s Presidential election has alarmed economists for several reasons. No economist, save one, supports Donald J. Trump’s stated economic plans, but an even larger concern is that, were he elected, Trump would attack the very institutions that have provided our economic stability. In his campaign, Trump has shown outright contempt for courts, free speech, international treaties, and many other pillars of the American way of life. There is little reason to think that, if granted the Presidency, Trump would soften his stand. To calibrate where to place the significance of what is at stake in Tuesday’s vote, I called two economists, Daron Acemoglu, of M.I.T., and Jim Robinson, of the University of Chicago. They have published a series of influential academic studies comparing the successes and failures of different sorts of economic institutions, as well as a popular account of their ideas, “Why Nations Fail.” I suppose I was hoping to hear that this election is a mere blip and that American institutions can easily withstand Trump’s assault on their formal and informal rules.

Acemoglu told me that he has been thinking lately about ancient Rome, and, while he acknowledged that such a comparison is “usually spurious,” he has been unable to shake off the story of how Rome stopped being a quasi-democratic republic and became a dictatorship. Specifically, he sees parallels between the potential to elect Trump and a moment, in 81 B.C.E., when Lucius Cornelius Sulla Felix, a general, marched into Rome and declared himself dictator. There are more differences between Sulla and Trump, Rome and the U.S., than there are similarities, but that doesn’t discredit the resemblances. Sulla, a wealthy and powerful élitist, was able to take advantage of anger among the less privileged to suggest that existing societal rules were keeping Rome from reclaiming its greatness. He steadily eroded custom, by, for example, encouraging soldiers to pledge allegiance to him rather than to the state, and to suggest that the Senate was sclerotic and corrupt. His attacks on the institutions seemed like minor tweaks at first, but, over time, Rome sank into autocracy.

Acemoglu’s co-author, Robinson, has been thinking of a more recent example: Argentina in 1943. Juan Perón, supported by the populace, consolidated power over a wealthy country with a perfectly functional, if far from perfect, government, and proceeded to destroy its institutions, starting with the Supreme Court. Robinson said that it’s easy to imagine a President Trump refusing to heed our own highest court, which, as President Andrew Jackson observed, has no way, other than respect of institutions, to enforce its decisions. No one knows what Trump would do as President, but, based on his statements on the campaign trail, it’s possible to imagine a nation where people have less confidence in the courts, the military, and their rights to free speech and assembly. When this happens, history tells us, people stop dreaming about what they could have if they invest in education, new businesses, and new ideas. They focus, instead, on taking from others and holding tightly to what they’ve already amassed. Those societies, without the institutions that protect us from our worst impulses, become poorer, uglier, more violent. That is how nations fail.

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