Last week in Boston I passed by a place I used to work cleaning dishes in the 1980s. The restaurant/bar, on Boston’s fancy Newbury Street, is still there — which is quite an achievement in a fast-changing industry. As is now the norm in many American bars, the TV is always on. I stuck my head in nostalgically, only to be met by Donald Trump’s angry face on a big screen.
As the Presidential campaign grinds on, the TV networks want to put on anything that grabs the attention of the punter, however fleetingly. As a result, there appears to be an exclusive diet of incessant fear-mongering from morning to night, highlighting horror stories, imagined and real, of what is about to befall the US.
It’s extraordinary to behold.
But, like all fears, there’s an element of truth to the rumours.
So when the networks play Trump’s tune of American workers losing out to Mexico and China, it is not without some validity. Workers have lost out and, as a result, inequality has increased in the US. This inequality is driving some of the anger that is propelling Trump.
Whether this propulsion fades away after his lamentable performance in the TV debate is a matter of speculation. However, Trump is more the consequence than the cause of America’s travails. He has managed to clothe himself in the overalls of the working man, despite being about as far from the working man as one can imagine. Irrespective of the messenger, the message is accurate. Blue-collar America has suffered in the past 20 years.
What the establishment in the US should do, rather than dismissing the allegations that the working man has not got his fair share, is admit that lowering wages was all part of policy. Inequality is policy-driven — and that’s the bold fact.
One of the consequences of this election, even if Hillary Clinton wins, is that the labourer will seek to get their share of the American pie — and the same is likely to happen here in Ireland. But before we look forward, let’s look back a bit to see how it all came about.
In the 1980s, when I was toiling away in those Boston kitchens earning expensive dollars to bring back home to Ireland, the Federal Reserve was right in the middle of its war on inflation. The strong dollar was an essential part of this offensive.
Beginning with Paul Volker in 1981 and for two decades thereafter, the Fed fought a campaign against inflation called “opportunistic disinflation”.
The Fed welcomed recessions when they inevitably happened, because the downturn would compress wages and prices through unemployment. A corollary of this thesis was that the Fed should pre-emptively tighten in recoveries, prompted by leading indicators of rising inflation, rather than rising inflation itself.
Such pre-emptive strikes would “lock in” the cyclical disinflationary gains wrought by the preceding recession. Each recession squeezed relative wages downwards, so that when workers finally got back up following a recession, they started each new upswing at lower wages.
Therefore, each recession was seen by the Fed as an opportunity to squeeze a little bit more inflation out of the system. All the while, the working man lost out as wages fell and the corporate man gained as profits rose. Such a massive switch from labour to capital underpinned the extraordinary bull run we have seen in asset prices over the past 25-odd years.
The cyclical disinflation process was boosted by two huge secular events that drove inflation permanently lower and stocks higher: the emergence of China and The North American Free Trade Agreement (NAFTA) — now two rallying calls of the Trump campaign.
Both the emergence of China and the implementation of NAFTA pitted the American worker not against the American capitalist, but against poor third-world workers as US companies outsourced.
The political cost of these developments has been the gradual erosion of the working man’s wages and the marked amplification of inequality. With workers’ incomes held down by China and Mexico, a much bigger percentage of American value added went to profit, not wages, rewarding asset owners as opposed to wage earners. Only through increased personal indebtedness could US consumption be maintained, which is what happened.
Ultimately, the Fed won its 20-year war on inflation, but at a cost of greater social inequality — which would come back to dominate this Presidential campaign. A Clinton victory needs to address this issue. Although Clinton promises more of the same, more of the same will not stem the groundswell of American public opinion that has driven the Trump phenomenon, and she knows this.
But the plight of workers is not limited to the US.
All over the Western world, the spilt in national output between profits and wages has increasingly been going to profits. In countries like Italy, this is now reaching crisis proportions. In fact, Italy is due to have a significant referendum in November on the way the country is governed and its relationship with the EU. Expect Italian workers who have seen their incomes stagnate in recent years to be extremely vocal in this campaign.
Back here we are seeing something similar with the strikes in the transport sector. This is natural. It is what happens after a long period of stagnation. One way to look at things is to view high wages as a sign of success. They can be taken as a sign that the economy is healthy and moving in the right direction. Low wages, on the other hand, signal all sorts of problems.
Obviously, management and workers will see things differently — but what is being played out is nothing more than the ebb and flow of modern economics. In the US the pendulum has swung far too much in favour of owners of assets as opposed to wage earners. It will swing backwards.
If it doesn’t, there will be more Trumps — emerging from both the Left and the Right — and eventually one of these outsiders will win, if not this time then the next time. That alone should be enough to jolt the American establishment out of its slumber.